Picking up where we left off, I want to discuss the specific aspects of Latin American labor laws that are most distasteful to US firms investing in the region. Put very simply, they result in higher labor related costs for the company, and decreased flexibility in scaling up and down according to market conditions or new contracts. That’s a cause for concern to a buyer whose main reasons for outsourcing are exactly those two factors. So what are these laws and why are they so problematic? I’ll discuss three broad groups:
- 13th Month Wage – Employers in most Latin American countries are obligated to pay a full month’s salary to each worker at the end of the year. This is a requirement that is government-mandated if the worker has at least a year of service, and represents a significant cost to companies that they do not find in other sourcing destinations.
- Severance – Most Latin American countries do not require compensation in the case of ‘just cause’ termination, however with the mountain of paperwork and legal approval you need to go through, it’s still quite difficult to remove workers. In terms of severance ‘without cause’, for example if a firm needs to scale down labor on a project, the rules for remuneration are very strict. Some countries require the full payment of an unemployment guarantee fund previously set up for each employee, while other countries require another month’s salary paid per year worked.
- Overtime restrictions – If you’re in the call center industry, this rule will hit you hard. LatAm time schedules are very rigid, and cannot be exceeded without paying hefty overtime wages. That drop in efficiency is compounded if your delivery center is not exactly the same time zone as your US clients. It’s often the case that employees themselves want to work the extra hours, but firms cannot allow them.
Consistently the worst LatAm offender in terms of inflexible labor laws is Brazil. Other countries like Chile and Colombia are also presenting problems for outsourcing buyers, while the strong presence of labor unions in Argentina and Mexico continues to be a barrier to any constructive change.
There’s no doubt that change must happen in order for these countries to continue evolving as sourcing destinations. But on a positive note for the time being, many buyers have told me that the labor laws are manageable, as long as you plan for them and include them in your due diligence, even as part of the necessary overhead costs. The important thing is that firms know what to expect before they set up a new location, and avoid nasty surprises later. Latin America still has a lot to offer in terms of cost savings; the region just has to work out a few kinks first.
For more detailed information on LatAm labor laws, take a look at a previous article of mine here.
Tarun George
