As we discussed last time, it’s pretty clear that one of the obstacles to Latin America developing into a mature sourcing destination like its counterparts in Asia, is the labor market inflexibilities. Companies do recognize the many advantages that the region provides such as proximity, specialized talent and cultural affinity. However they’re also afraid of being locked in to high labor costs and mandatory restrictions, when the main reason they come is for savings. This is especially important in the aftermath of the recession, since firms don’t have as much free capital to play with.
But it remains to be seen whether LatAm governments and investment promo agencies are starting to wise up. Some are trying to loosen the labor laws, while for others it’s just a matter of failure to enforce those laws. Here are some insights on Chile, Argentina and Peru from WorldTrade Executive’s May 2010 report titled “Recent Developments in South American Labor Law”. Take a look:
During the past Bachelet presidency, Chile adopted a new labor code that grants increased protection to workers called ‘tutela’. However according to this report, “Chilean courts have responded cautiously to these cases. For example, the right to damages in a labor relationship when termination has not occurred is stated in a very general manner, and it remains to be seen how courts will rule when these situations arise”.
In Chile, labor claims are mostly related to discriminatory employment offers and union status, and not so much to severance payments or termination issues. However outsourcing buyers do need to watch out for joint labor liability in Chile. This means that when a US firm acquires a third party provider or even receives services from it, that firm is often obligated to take on the provider’s labor liabilities.
Because of the Free Trade Agreement it has with the US now, Peru has been increasing the budget for labor inspection, and has granted labor unions greater standing in court disputes beginning in July of this year. However the country’s largest problem is still enforcement of these laws, since there are not enough resources or political will to deal effectively with claims. The most common type of labor claim in Peru is the equal pay claim. “These complaints often rise in the context of integrating companies that have recently completed a merger, whereby employees of one of the former companies earn lower salaries for a similar job, and seek to receive the same treatment as employees of the other company”.
Argentina has very strong labor unions, and any new legislation is deeply influenced by them. The country also entertains many claims for workers’ compensation, discrimination, overtime and joint liabilities. Since Argentina is so bureaucratic, “in any due diligence review, buyers should look beyond the formal papers and try to identify potential [labor] rights liabilities”.
We’ve been talking about Latin American labor laws in very general terms until now. In Part Three of this series, I’d like to drill down on what exactly those inflexibilities are, and why they’re detrimental to buy-side firms. Stay tuned!