Volume 4, Number 26, Page 1

Labor Regulations Reformed

Venezuela's organic labor law amended

by Torres, Plaz & Araujo

Changes to the Organic Labor Law of Venezuela were approved last month, but debates about the amendments continue. The amendments were passed with 146 votes in favor, 45 against and 2 abstentions. Last week, two groups asked the Supreme Court to declare the law unconstitutional. The groups argue that the procedure followed to approve the law was inappropriate, and that the amendments contradict ILO treaties to which Venezuela is a signator.

The new legal provisions will affect all corporations doing business in Venezuela because several benefits for workers, such as seniority and severance payments, were modified.—Editor

The Partial Reform of the Organic Labor Law became effective June 19, 1997, with its publication in Extraordinary Official Gazette No. 5.152. The Reform modifies various articles of the former law and addresses important matters such as severance pay, unjust dismissal indemnification, monthly wages, non-salary social benefits, profit sharing and seniority payments. It also includes a new item, the “bonus” for transferring to the new regime. A summary of the Reform’s essential points follows.

Seniority Pay

The former seniority pay is substituted with a payment of 45 days’ wages for the first year of service, 60 days’ wages for the second year of service, and 60 days’ wages from the third year on, plus two additional days’ wages for each year, up to a maximum of 30 days (a total of 90 days of seniority payment).

The right to seniority pay exists regardless of the basis for termination of the employment relationship. The amount is calculated based on monthly wages corresponding to the amount deposited for the prospective purpose of the payment; such amounts are understood to have been credited in favor of the respective workers. For the purpose of calculating the payment, the amounts earned by workers in profit sharing must form part of monthly wages. The previous method of determining the amount owed to the worker is eliminated by the new legislation and is substituted by the sum of the amounts credited to the worker or deposited to the account each month, i.e., five days of wages for each month of service after the third month of continuous employment.

Seniority pay for workers with over six months of service is set at the equivalent of 60 days’ wages. Workers must have served continuous prior to the enactment of the Reform.

Severance Pay

At the choice of each worker, severance pay must be paid monthly or deposited in an individual trust, in the accounting records of the company, or in the severance pay fund, a new institution in the national labor arena (subject to future special legislation). The severance pay principal accrues interest as established in the reformed Organic Labor Law.

The worker is entitled to request advances of up to 75% of the accrued amount for various reasons, including housing, mortgage payments and other encumbrances, scholastic pensions and medical and hospital expenses, and request loans or credit support from the employer. The worker can use employer severance loans or credit supports or amounts deposited in a severance pay fund or financial entity to guarantee obligations contracted with third parties.

Unjust Dismissal Payment/Indemnification

Payment for unjust dismissal ranges from 10 days’ wages for service of three to six months, to 30 days’ wages, up to a maximum of 150 days’ wages, for every year of service or fraction of more than six months. Unlike the seniority pay formula, the basis of calculation for unjust dismissals consists of the wages earned during the month immediately preceding the date of termination of the employment relation.

Monthly Wages

The broad definition of “monthly wages” contained in the previous law is upheld, and is as follows: “any remuneration, profit or advantage, regardless of its denomination or method of the services rendered.”

The text of the respective article provides various concepts characterizing wages.

Although the monthly wages described above serve as the basis for the calculation of the aforementioned payments or indemnification, up to 20% thereof may be excluded. Such exclusion may be established through collective bargaining agreements entered into with unions, collective agreements, and individual employment agreements involving workers not affiliated with employee unions.

To stimulate and protect the integrity of the employee’s monthly wages, the law stipulates that pay increases and adjustments must be set by mutual agreement of the parties. Nonetheless, the law provides the executive branch with the power to order increases in employee remuneration in the event of disproportionate rises in the cost of living. However, institutions representing employers and workers, and economic entities of the State must first be consulted.

Non-Salary Social Benefits

Various social benefits, such as lunchrooms, food, day care centers, work clothes, school supplies, reimbursements for medical, pharmaceutical and other expenses, employer contributions to savings, and the selling of products at discount stores, are also excluded from the concept of monthly wages.

Profit Sharing

Profit sharing must be considered part of monthly wages for the purpose of payment of indemnification for unjust dismissal and for the determination of seniority pay. A period of 30 days is established for payment once profit-sharing figures are available.

Minimum Wages

The National Tripartite Commission is required to review minimum wages and make a wage recommendation to the executive branch at least once per year. The corresponding government ministry will publish a resolution establishing minimum wages.

Transfer Bonus

The workers subject to the Law are also entitled to a “bonus” for transferring to the new regime. This bonus is equivalent to 30 days’ wages for each year of service and is based on the normal wages earned by December 31, 1996.

Maximum and minimum limits are established with respect to the amount of base wages (no less than 15,000 bolivares and no more than 300,000 bolivares per month), the amount of the transfer bonus (no less than 45,000 bolivares per month) and seniority (up to 10 years in the private sector and up to 13 years in the public sector). The criteria for the application of the salary limits for the calculation of the transfer bonus (90,000 bolivares per month for small companies, 165,000 bolivares per month for midsize companies) must be established by a technical commission within 30 days.

In addition, workers subject to the new law are entitled to the seniority pay established in the preceding law (simple severance pay), calculated up to June 19, 1997.

The maximum period to make payment of the two aforementioned items is five years from the effective date of the Reform. Partial payments are established for both the transfer bonus and accumulated seniority pay. The balance and interest must be credited through five consecutive annual payments and deposited in a trust or severance pay fund at the election of the worker.

Failure to make the payments indicated within the established terms is penalized by the payment of interest at a lending rate set by the Venezuelan Central Bank. Should employment relations be extinguished prior to the payment of all items owed to the worker, payment will be deemed immediately due and payable.

Finally, based upon consideration of the cumulative application of matters established by the Law and its subsequent Reform, provisions that prove more favorable than those set forth by the Law will continue in effect.

The law firm Torres, Plaz & Araujo is located in Caracas, Venezuela. Its practice areas include taxes, corporations, foreign investment, labor, banking, securities and litigation.