Furlough or flounder? LatAm's government subsidy schemes

Furlough or flounder? LatAm's government subsidy schemes Credit: shutterstock/Cryptographer

It is an old egalitarian principle to leave no one behind. But structural inequalities, lack of political will and a huge percentage of informal workers in Latin America means that not everyone is legally protected by government furlough schemes during the covid-19 pandemic.

Our global health crisis has left many businesses across the world floundering. Millions of employees are wondering when they will next get paid. The word “furlough” – commonly used in the US to describe the temporary leave of employees due to special needs of a company or employer – has spread like wildfire, and is now commonplace in countries across the world, including the UK. There, 80% of an employee’s salary can be subsidised by a government-backed furlough scheme, provided workers take temporary leave for the duration of the pandemic.

Some multinational companies operating in Latin America but whose headquarters are outside the region introduced their own private furlough schemes early in the pandemic. US automotive company General Motors announced back in March that it would furlough all its employees in Brazil for at least three weeks because of the slowdown in production there. Given the fact that General Motors is headquartered in the US, the company was able to come to an agreement with Brazilian unions – bar one – to shut down all their factories in the country and reduce salaries by up to 25%.

But there are issues with private and government-backed furlough schemes. Not all countries can offer the same support to workers by subsidising their pay to the same level as in the UK, particularly low-income countries like Guatemala. Equally, not all businesses can reach an agreement with labour unions to furlough staff or cover the cost of wages when employees are unable to work. Some countries are offering support through bank loans, while other governments are only supporting companies, not their employees. Income inequality and the overwhelming presence of the informal economy also means that not all workers in Latin America are protected from the economic onslaught of the covid-19 pandemic.  

Subsidising salaries

Lockdown measures to prevent the spread of covid-19 have damaged companies – with economic slowdown, it is hard to generate the revenue needed to keep the company afloat and pay employees. In Peru, the Reactiva Peru furlough scheme has been met with open arms. The liquidity relief programme, launched by the Central Reserve Bank of Peru (BCRP), injected 60 billion soles (US$17.5 billion) into the local economy. The amount initially served as a guarantee for new loans to pay for the working capital (paying employees and suppliers) of companies strapped for cash. The BCRP recently boosted the scheme with an extra 800 million soles (US$228 million) injected through the government’s business support fund (FAE-MYPE).

“The government has implemented programmes to give financial support to SME employers. Part of this has been to subsidise the payroll of medium companies, which has benefited around 215,000 companies so far in Peru,” says Pablo Arturo Okumura, head of legal and regulatory at the National Interconnected System Financial Operation Committee (COES).

Okumura notes that such programmes are particularly beneficial for the working class in Peru, who have seen their industries virtually shut down because of covid-19. Industries such as mining, manufacturing and fishing are the backbone of the Peruvian economy. “These programmes have a positive impact on the economy of the lower classes of society because these kinds of companies give most job opportunities in the country,” he says.

In Chile, the focus is more on helping companies. To face the pandemic, the government has implemented an emergency public policy called the Employment Protection Act. The law allows employers to maintain labour contracts with employees without any obligation to pay wages while a company is not operating to avoid making redundancies. This can be the result of an order from a public authority, a collective bargaining agreement, or reasonable barriers stopping either party (employee and employer) from fulfilling their obligations.

Under the agreement, Chilean companies are under no obligation to pay the wages of furloughed employees. Instead, those on temporary leave from work can be remunerated from a state unemployment insurance fund, which is co-financed by employers, the employees, and the State. “One of the main obligations for companies [in normal times] is to pay wages to their workers, which is difficult – if not impossible – if the company has been closed for a while,” says Rodrigo Ugarte, partner and head of the labour department at Aninat Abogados. “This law allows employers to maintain the labour relationship, but without having to pay wages during the pandemic and therefore avoid the loss of jobs.”

Like in Chile, the region’s largest jurisdiction – Brazil –  is also trying to protect companies from going under. In early April, the Brazilian government implemented a provisional measure which allowed companies to proportionally reduce employee hours and salaries while still paying them an income. The measure also gave a green light for businesses to suspend employment contracts of workers they were unable to pay. Like their Chilean counterparts, these furloughed workers can receive an unemployment benefit from the federal government.

The amount of unemployment insurance an individual can get is determined by how much their workload has been reduced (percentage of hours) and by the annual gross revenue of their employer. “The main goals of the provisional measure is to preserve jobs and income; to maintain the performance of economic activities; and to reduce the social impact brought about by the spread of covid-19,” says partner Aline Fidelis, partner at Tauil & Chequer Advogados in association with Mayer Brown. “Being able to reduce workloads and salaries proportionally, while preserving the employee's income through the granting of an emergency federal benefit, mitigates the pandemic's economic effects while also ensuring minimum living conditions for employees.”

Although government-backed furlough schemes can lift a financial burden from companies, they can leave workers feeling a little in the dark or neglected. Ginny Castillo, head of legal for Central America at security company Prosegur, urges businesses to communicate effectively with their employees, so they do not become disillusioned with both the company and the scheme itself. “With suspension of labour contracts and everybody at home, there may be lack of communication,” she says. “Companies have to be very smart and have prompt and effective communication with their employees to assure them that the company cares for their health and security, and that this is only a temporary measure.”

Pocket money

Guatemala – one of the poorest countries in Central and Latin America, has taken a slightly different tack. Lockdown measures have affected over 90,000 of Guatemala’s employees who have been suspended from their jobs and are now asking for government help. In early May, Guatemala’s ministry of economy and the National Mortgage Credit (CHN) signed an agreement authorising the ministry of finance to make a payment of 75 quetzals (approximately US$9.75) per day to each citizen who had been furloughed by their employers during the covid-19 pandemic. Only those with the authorisation of Guatemala’s ministry of labour can access this financial benefit.

To get authorisation, companies have to submit items such as their legal representative’s ID, a certificate of good standing – which is used to prove that a company is incorporated and authorised to undertake business in a particular state – a tax ID, a list of employees which the company wants to temporarily furlough, and a copy of the legal agreement between the employee and employer in which both accept the terms and conditions to suspend the contract.

Most of the requirements are out of employees’ hands. “It is up to the company in charge to fulfil requirements and provide the employee’s information,” says labour partner Diana Mendez from Mendez & Araujo, who also heads the legal department at the National Coffee Association of Guatemala. Whether or not Guatemalans have social security does not affect whether they can receive the grant itself. “This is a way to reduce the impact of the pandemic on companies and employers that have been hit hard by the crisis, and to help mitigate the social problems that the rising unemployment levels are bringing to a country,” says Andres Calderon, legal counsel at Puma Energy in Guatemala.

There are other issues too. Seventy-five quetzals is an extremely small amount for citizens to live on each day, even in a country where the cost of living is comparatively low to others in Latin America. “Other than the fact that companies don’t need to pay their employee’s salaries, there are more negatives than positives,” says Andres Castillo, head of legal at Guatemalan brewery Cervecería Centro Americana. “The disadvantages are that companies are closed and can’t do business and, for employees– the minimum wage is around 95 - 100 quetzals per day.”

Leave none behind

The structure of government furlough schemes does sideline some sectors and those arguably most in need. They do not offer full wage coverage – this is the case even in developed economies like the UK and the US, but in Latin American countries, the effect is much more pronounced.

The main issue is the prevalence of the informal economy in Latin America. A study by the World Economic Forum shows that a huge proportion of the employment market is still informal: nearly 140 million Latin Americans – about 55% of the working population – are informal workers (they are not regulated or protected by the state). They may be paid informally in jobs seen as “low skilled”, like street vendors, cleaners and other cash-in-hand roles.

According to Cervecería Centro’s Castillo, around 80% of Guatemala’s population works within the informal economy. A study by Guatemala’s National Statistics Institute (INE) says the country has a long tradition of grassroots activism helping those working in informal sectors, and market and street vendors have formed various local and national informal labour organisations. Despite this, the government’s quetzal scheme does not recognise these workers. “The formal part of the economy must deal with things like taxes, salaries, private transportation for employees, donations for hospitals and health and safety measures. But the informal economy is also suffering,” says Castillo.

The situation is similar in neighbouring El Salvador. The government approved a law in early May that created a subsidy worth US$1 billion in collaboration with the Banco de Desarrollo de El Salvador (BANDESAL) for furloughed employees. But some 75% of the population work in the informal economy, and so cannot access the subsidy.

A possible solution to this, says Carlos Miguel Rivas Carrillo, founding member of the Salvadorian fintech association AsaFintech, would be to effectively “formalise” the informal economy. “You need to be a registered company to access government benefits, but as 75% of the economy in El Salvador works in the informal economy sector, that restricts their access,” explains Carrillo. He points to the French simplified shares company (SAS) model which allows a company to formalise itself with relative ease.

This model has been in place in France since 1995, and countries such as Argentina, Brazil, Colombia, Ecuador, Mexico, and Uruguay have all adopted it. “The process is free and online in these countries – you can formalise your company easily and then get access to social and pension benefits, working capital at market interest rates and other things,” Carrillo says. This would include furlough support schemes. Teaming up with the Association of Entrepreneurs of El Salvador (AESAL), Carrillo has tried to advocate for such a model before government since 2018 – but with little success. “Due to a lack of vision and political will, it never came to fruition,” he says.

The price to pay

According to the International Monetary Fund, the world economy has collectively spent around US$10.7 trillion on fiscal policies as a result of covid-19, and nearly 95% of countries in the world are predicted to face negative GDP growth for the rest of 2020. Emerging markets like Latin America are expected to take an even bigger hit, and effectively reverse its progress on issues like poverty and income inequality reduction. Furlough schemes have their benefits but are not a long-term fix. “Everyone is being hit hard by the covid-19 pandemic: workers are not safe in their workplaces, employers are not generating profits. Everyone is just gaining debt – the effects will be huge,” says Luis Javier Ortiz, a Guatemala-based independent compliance and corporate affairs advisor.

The size of the informal economy remains one of the main issues barring all Latin American workers from accessing furlough aid. Even companies making use of government-backed schemes to support themselves and their employees know an end date is looming, and they must face the “new normal” at some point. What that looks like is still up for debate. “The biggest concerns right know is uncertainty,” concludes Castillo. “How long will this pandemic last, and what is the new normal? How can we protect everyone from the economic impact of covid-19?”