ARGENTINA: a resume of the situation of the Argentine commercial distribution system and labour laws.

Osvaldo Jorge MARZORATI | ARGENTINA | 2006-05-19

Osvaldo Jorge MARZORATI

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However, the labour courts have always attempted to protect the employees of the distributors, agents, concessionaires and franchisees in case of bankruptcy of their employers by using a protective device contained in our labour laws. This protective device is section 30 of our labour Code (LCT) that establishes the joint liability of the principal in case of contracting or sub-contracting the normal and specific activity of the establishment in favour of third parties with respect to the labour and social security obligations of the sub-contractor with its own employees.

The labour Courts had an important tool but not very sharpened. What does it mean the normal and specific activity of an establishment, what does it mean by itself the concept of establishment?
At the outset establishment was constructed as the factory where the principal developed its activities. Of course this was very restrictive and created a big loophole. Then the factory was disassembled into different components on the basis that the industrial process would be performed in different places but the product was one. In such fashion the establishment was for labour law purposes a sort of mobile place, wherever the sub contractor performed its work for its principal or wherever the employee working for the sub-contractor performed the normal and specific activity of the principal under a contract or sub-contract it could be the joint liability created by section 30 (LCT).

The second step, guess what, was to enlarge the concept of normal and specific activity of the establishment. This was an easy job and the labour courts enthusiastically applied themselves to enlarge the concept of normal activity. For example the safety personnel of a company rendering custody and security to a Bank was deemed eligible for labour lawsuits against the Bank, under section 30, on grounds that the outsourcing by a bank of such services was intimately related to the Bank activity which is to give security to its clients that their funds are well protected.

All clubs: football, yacht, basketball or any other sport or simply any private association that outsourced the lunch or gastronomic services to independent companies follow suit and the employees of the outsourcing company could sue the outsourcer under section 30. Then all employees of independent contractors making repairs to building in joint ownership or condominiums were granted actions against the owners of the buildings being legal entities of different owners.
At this stage then section 30 (LCT) worked like a guarantee. The worker or his lawyer sued the employer and in the situations that the employer was a sub-contractor or contractor of the normal and specific activity of a principal sued jointly to the latter. If the direct employer was bankrupt or insolvent the employee could adress the enforcement of the judgement in his favour against the guarantor, the principal, who was indirectly but jointly liable of the judgement leaving the princial to verify its credit in the bankrupcy of his former employee.

But when this conception reached the level of commercial distribution the actions were rejected, on grounds that the companies were independent. The main test case was Roriguez vs Embotelladora, Pepsi Cola of Argentina and Others in which counsel of the employee, after having received a favourable decision against Embotelladora (the bottling company) Pepsi of Argentina and Pepsi Inernational, was reversed on certiorari by the Supreme Court of Argentina who declared that franchise agreements and distribution agreements were not reached by the labour laws on sub-contracting and section 30 was not applicable to such sort of relationships.

The main reason argued by the Court was that the activity of the distributorships or agents was not the activity of their principals. Principals manufacture, but agents promote sales and distributors buy and sell. For a while the concept was enough, but after the severe social and financial crisis of Argentina, the main idea behind the wording of section 30 of LCT creating joint liability to oursourcing the normal and specific activity of the establishment returned, when many employees of agents were fired in the telecommunication business and their employers vanished. Most of the agents were organized under the format of limited liability companies or hired by independent merchants, with no assets. Its main activity ws to sell cellulars and activate them in leased premises. The sale of the cellulars was deemed to be the specific activity of the principals, (telecommunication companies or cellular suppliers) and the outcome: telephone carriers were held liable for the salaries and social contributions of workers under section 30 of the LTC.

Then the lawyers of employees went for oil companies or Mac Donalds and franchisors but then of course they claimed that the activity of Coca Cola was not to produce the concentrate of coca that is being sold to independent parties but to use them to do the normal and specific activity of its establishements and so they did, which was for coca cola company to sell Cokes.

The members of the Supreme Court that held that principals and franchisors were not liable under section 30 of the LCT are not any longer in office. A new Court composed with different members has been appointed. In my opinion and based that the opinions of the Argentine Supreme Court are only valid and binding for the case in which the Court sits, a labour court of appeals condemned a multinational company under section 30. The subsidiary of the multinational company did no appeal to the Supreme Court and paid. Case closed.

The reasoning behind the decision of the Labour court of appeals was that circumstances have changed and that the decisions of the Supreme Court are not binding except for the case, which – as we anticipated -is a valid argument in Argentina. There was no elaboration of what circumstances have changed. The basis was weak, but since there were many cases to be decided along the same issues and different chamber of the Court of Appeals were dictating contradictory juegements, the Court of Appeals decided to unify the case law and call for a plenary decision binding to all members of the different chambers of the Labour court of appeals and to all first instance labour courts, within the city of Buenos Aires.

The decision came early this year and supported the application of section 30 with a new argument, presented by the fiscal to the Court and accepted by a majority of the members of the different Chambers. Said argument is derived from the civil law. Under civil law a joint obligation is the one that has many obligees and the same cause. Each of the obligees is bound to satisfy “ in totum “ the obligation. The Court reasoned that the creditor, labour employee may adress the legal claim against any of the obligees, having a direct action against any of them. In short they consider that the labour law has created a joint obligation between principal and outsourcers of any kind and since the terms of the joint liability are defined in the civil law and not in the labour code, they decided that any labour credit of an employee of an outsourced company could be addressed against its employer or the main contractor who outsourced the product or the service without suing their own employer directly.

In short the principal company had direct liability in full for the unpaid salaries and social contributions of an employee of its outsourced company.
The employee does not need to sue its employer as required in the past or to sue to both companies it order to select the most solvent at the end of the process to collect. Now with the plenary decision, counsel for the employee only needs to file the claim against the outsourcing company or guarantor which usually is the most solvent and the latter could sue its sub-contractor or contractor to discuss the liability between them.
This decision has been criticized by the doctrine in newspapers but I am not aware whether if the case that originated the doctrine has been appealed to the Supreme Court on grounds of arbitrariness of manifest deviation of the law or any other suitable ground.In the meantime the holding is obligatory and any pending or new case shall be decided accordingly, creating a serious problem to the distribution system in Argentina.

Osvaldo Marzorati, IDI country expert for Argentina.

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