Covid-19’s worst case scenario for workforces: closures and mass layoffs
The covid-19 pandemic is throwing up a harsh reality for employers, which are having to consider an increasingly drastic set of options to handle the changes the crisis might make to their businesses and workforces. Closures and mass layoffs are looming large for many companies, but lawyers are advising businesses to consider these options with caution.
Latin American employers and employees are already seeing covid-19’s big impact on the labour market. In Brazil, General Motors announced layoffs starting on 13 April at all its plants across the country, affecting more than 15,000 workers. Following a recent deal with the unions, workers will see their net wages cut by between 10% and 25%, along with the suspension of benefits.
In neighbouring Argentina, Italian-Argentine construction company Techint laid off 1,500 people at the end of March. Similar examples are seen in Chile where Canadian miner Teck Resources suspended construction at a massive copper project to limit the transmission of covid-19, affecting roughly 15,000 workers.
In response to the crisis, governments across the region have enforced new laws to both protect employees and to help companies make savings. In Argentina, at a time of huge economic difficulty, President Alberto Fernández implemented an executive order on 1 April forbidding the “firing of workers with no proper justification” for a 60-day period. Companies can still make temporary layoffs on grounds of force majeure – unforeseen circumstances – until 30 May, as long as they are approved by the labour authority and unions. Any layoffs made without prior authorisation are invalid.
However, the Argentine government’s response comes with its own legal difficulties, particularly in relation to the “crisis prevention procedure” (Procedimiento Preventivo de Crisis). The procedure refers to a negotiation and agreement between parties, in which the state acts as a mediator, where companies take actions that affect employment – such as dismissals – related to force majeure circumstances. Drinks bottling company Coca-Cola FEMSA filed for crisis prevention last year after a sharp drop in profits and sales, enabling it to reduce costs and minimise its workforce through suspensions and dismissals. But such procedures can lead to heightened exposure for a company and increased friction with unions. “Because of this, we are advising that companies come to an agreement with unions before making a dismissal in order to avoid this procedure,” says Enrique Stile, partner at Marval O'Farrell Mairal in Argentina.
In Brazil – where the government has been criticised for how it handles the pandemic – a recently implemented provisional measure (PM 936) authorises companies to put their workers on furlough by suspending employment contracts or reducing the working day by up to 70%. In return, the government will pay part of employees’ lost salaries, based on the unemployment insurance the company has. How much a worker will be paid is determined by how much their workload is reduced, and whether they agree to the contractual changes through collective or individual bargaining agreements. Any and all employees are eligible to renegotiate their contracts through a collective bargaining agreement with a union.
Some Brazilian workers can negotiate new contracts through individual bargaining agreements, provided they earn up to 3,135 or above 12,202 reais per month and have a university degree; or earn between 3,135 and 12,202 reais per month or more without a university degree. “The government does this because they consider those workers qualified enough to negotiate their own deals,” said Gabriela Lima, partner at TozziniFreire Advogados, while speaking about the topic at a labour and employment law webinar (L&E Global) last week.
But the PM 936 brings challenges of its own, as it allows companies to reduce wages and working hours through an individual agreement with workers – which is forbidden by Brazil’s federal constitution. As a result, labour partners are advising clients to go through unions before implementing any measures to avoid further problems down the road – while companies, for their part, are looking to each other for advice. “I've been following up with other Brazilian companies and some of them have already decided to give collective vacations to employees, adopt hiring freezes to protect existing jobs and are requesting the government's support to avoid ending up in a deep crisis,” says Patricia Barbelli, GC for Brazil, Paraguay and Uruguay at drinks company Diageo.
Brazilian companies can also make temporary layoffs, which the country’s labour law calls “professional education purposes”. This allows an employment contract to be suspended via a collective bargaining agreement for a period of two to five months during which an employee attends a professional education programme offered by the employer. This is an alternative to outright dismissals. “We’re suggesting this to clients as an alternative, as it has several advantages – companies are exempt from having to pay wages to employees with a suspended contract, as employees undertaking a programme are entitled to financial support by the Workers’ Support Fund,” says Andrea Massei Rossi, partner at Brazilian firm Machado Meyer Advogados.
Under normal circumstances, temporary layoffs or salary reductions in Chile require a prior agreement with unions, except in cases of force majeure – such as a company being shut down by an authority. However, a special temporary law, which was enacted on 1 April, allows employees to rely on their unemployment insurance to get financial support if an employment contract is suspended by an authority; an employer and employee have agreed to suspend the contract; or if employees’ working hours are temporarily suspended by up to 50%. In addition, the law disallows employment contracts to be terminated because of force majeure stemming from covid-19 for a six-month period. “The pandemic is not a cause itself for employers to terminate labour contracts,” says partner Ricardo Tisi from Cariola, Díez, Pérez-Cotapos in Chile. “But employers remain allowed to terminate labour contracts based on economic, business or financial specifics and accurately described needs. That’s what we’re reminding clients of.”
While the Mexican government’s approach to the pandemic has been slow, labour lawyers are doing all they can to help clients adapt to new regulations in the face of uncertainty. On 30 March, the Mexican General Health Council declared a national state of sanitary emergency, with all activities deemed “non-essential” suspended the following day by the Ministry of Health. But, exactly what activities qualify as non-essential remains ambiguous. The ministry called for businesses to self-determine whether they qualify as an essential service, and the regulation itself lacks specifics as to how it is monitored by authorities.
Bernardo Martínez-Negrete, partner at Galicia Abogados in Mexico, says the firm is urging companies to self-determine the best they can, but clients should take some precautions. This includes gathering documents and reasons to support why a business might be deemed essential and protecting employees that are in an at risk group by making them work from home. “Clients should be aware that if the authorities disagree with their self-assessment, the sanctions could be fines, closure and arrest in the event of disobedience – and even criminal charges,” says Martínez-Negrete.
Companies that self-qualify as non-essential must suspend their labour contracts, while continuing to make compensation payments to employees equal to Mexico’s daily minimum wage. However, once the pandemic passes, companies may face claims filed by employees for the full payment of accrued wages over the course of their furlough.
Many Mexican labour unions have closed during the pandemic, as a result presenting obstacles to dialogue with them. Labour lawyers are concerned over the future of labour matters in the country. “We’re advising companies to avoid business closures, as that will trigger layoffs. To keep as many jobs as possible, we suggest companies design strategies to reduce wages and give temporary benefits to employees to avoid layoffs at all costs,” says Jorge De Presno, partner at Basham, Ringe y Correa.
Businesses considering laying off workers must contemplate the financial and legal consequences of such actions. “Those that are quick to cut employees will be remembered by competitors and future potential employees for years to come,” says one in-house counsel of an asset manager. “I remember some law firms that cut heavily in the early 90s, and again after the dot-com bubble crash, making them today’s second-tier law firms. They have had trouble attracting lawyers from top ten schools ever since – it’ll be the same for companies.”