Reforms would make labor among the most expensive in the region

Reforms would make labor among the most expensive in the region

The Government of Gustavo Petro is processing a package of reforms to the social security system (health, labor and pension). These are expected to bring several changes for both individuals and businesses. Daniela Lievano, Baker McKenzie Employment and Compensation Associateexplained some of the effects that they will bring to the companies and what issues the companies will have to adjust.

(Read: In Colombia, more than 90% of visa applications are approved).

What impact can the three joint projects have?

The three reforms proposed by the Government entail a structural reform of the Social Security System in Colombia. With the health reform, it seeks to turn the system 180 degrees. The resources would be concentrated and administered by the State, through the Adres, and the affiliation scheme would be modified, going from EPS to what in the project was called RIIS and CAPIRIS. We are concerned that with the dispersion of resources, efficiencies will be lost. And it is uncertain if the reform will be approved as proposed.

In the pension, the Government intends to create a system based on four pillars and strengthen Colpensiones, through the mandatory contribution to the entity of all affiliates who earn up to three minimum wages. The framework regulation of the health and pension subsystems is in Law 100 of 1993, its provisions are linked to each other and are guided by the same principles and objectives.

One of the main challenges facing the Government is that, by presenting two reforms separately and independently, the objectives and implementation mechanisms of both are reconciled in practice in a single social security system, and the guiding principles are preserved. . Finally, with the changes foreseen in the labor reform, there will be a representative increase in payroll costs that could lead to an increase in informality, with a correlative decrease in the number of contributors to the Social Security System. This would impact financial sustainability, affecting coverage.

What implications can the labor reform have on companies?

It has several implications. The first and main effect is the increase in costs associated with personnel. Modifications in day and night work, increases in percentages to settle surcharges for Sunday or holiday work; The reduction in working hours, the increase in compensation for unilateral dismissal and without just cause, and the protections against dismissal are just some of the regulations that the reform brings and that will have a significant impact on the personnel costs of companies.

Now, these regulations also bring hidden costs for organizations, since by limiting the possibility of hiring through fixed-term contracts and including protections against dismissal with broad and vague language, companies will have limitations on their turnover and the impossibility of organizing business productively and efficiently. Another important implication is the impact on the supply chains of companies with several levels in their production chain. Finally, the labor reform will strengthen unions, promoting their creation, bargaining abilities and their right to strike.

(See: Petro signed austerity plan decree: how will it reduce costs?).

Could the investment be affected?

Definitely. Increases in personnel costs will impact national and international investment. Around 75% of formal work in Colombia is generated by micro, small and medium-sized companies, which would have a structural impact on their cost system and their profit margin with the implementation of the measures established in the labor reform.

For its part, with the implementation of the reform, Colombia would become one of the countries with the most expensive labor in the region, which is why it is foreseeable that multinational companies will seek to establish their production hubs in other countries more friendly from the labor point of view and, in Colombia, maintain small operations that guarantee work strictly necessary for the offer or commercialization of their products and services.

How does what is proposed in the labor reform collide with the contributions to pensions in the system?

By dramatically increasing personnel costs, as proposed by the labor reform, it is likely that informal employment will increase, which is one of the structural problems facing the labor economy in Colombia. By increasing informality, there will be fewer affiliations and contributions to the pension subsystem, which will undoubtedly affect its financial viability and will not solve the problem of pension coverage for the elderly, which is also a structural social problem in Colombia.

(Read: ‘Controlling prices requires everyone’s effort’: Entrepreneurs).

What implications will the pension have on private funds?

Today, private pension fund managers play a key role in the Colombian economy, mainly due to their activism in the infrastructure sector. In fact, these administrators could make up more than half of the investors in 4G projects in Colombia.

More than 58% of workers in Colombia earn minimum wage or less, which shows that, with the reform, private pension fund administrators will only be able to affiliate and manage the contributions of a very small percentage of the population. This structural change in the flow of resources will negatively affect the financial viability of private pension fund managers and, with it, there will be a significant impact on other sectors, such as real estate and infrastructure.

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