Argentina’s Labor Reform Is a Step in the Right Direction
On February 27, following the House of Representatives’ vote last week, the Argentine Senate passed a new labor reform bill promoted by Javier Milei’s administration. In a country where labor costs exceed the OECD average by over 50 percent, and informality affects over 40 percent of workers, the new law is intended to lower the cost of formal employment.
To that end, Milei’s labor reform slashes taxes by 85 percent for employers who hire new workers formally, as long as the latter were previously unemployed or former public sector employees. This applies if the employer does the hiring within a year of the law’s effective date and for a maximum of four years. Until now, employers paid an extra 16.1 percent on top of an employee’s salary to social security and entitlement programs. From now on, that figure will fall to 2 percent.
Besides lowering the cost of hiring, the labor reform bill also reduces the cost of firing. Argentine law requires mandatory severance payments equal to one month’s salary for each year of service. The new law keeps this system in place but restricts calculations for these payments to include only the employee’s base salary, thus excluding unused time off and any bonuses, including the aguinaldo, a legally required extra month’s salary paid each year in two installments.
The new labor law also provides more certainty in the event of a court dispute over a severance payment, a phenomenon so widespread in Argentina that it is known as a “lawsuit industry” (industria del juicio). According to a 2025 estimate, there are 21 times as many lawsuits over terminations in Argentina as in Chile, and 15 times as many as in Spain. Until now, it was up to judges to decide how much interest would be paid once the dispute was settled, which, time and again, led to notorious rulings in which the assets of small business owners were frozen because severance payments exceeded their income. Now, the law determines that these payments will be indexed to inflation and an additional 3 percent of interest a year.
To help businesses manage severance payments, the new law also establishes an optional severance fund, the Fondo de Asistencia Laboral (FAL). The idea is that employers can opt into the system by paying monthly contributions to a FAL so they can use these funds in the event of a termination. If they choose to do so, they will pay lower payroll taxes to compensate. In this way, severance payments would not necessarily come out of operating revenue, and this would lessen the threat of going out of business for small businesses.
The new labor law also introduces changes in the workplace through which workers gain more autonomy and unions lose some of the legal privileges that provided them with bargaining power. For example, the new law allows employers and employees to negotiate salary increases at the individual level, thus bypassing collective agreements. It also lets employees who work overtime take that time off at a later date, as well as allowing salaries to be paid in US dollars instead of just pesos, all of which were outlawed prior to the reform. The bill also sets limits on the amount of company time that union activities can take.
The labor reform bill also deregulates specific occupations by repealing laws that mandated how people are supposed to work. These repealed laws applied to certain occupations, such as traveling salesmen. The Journalists’ Statutes, for example, not only licensed journalists but also mandated that no foreigner could run a media outlet, among other restrictions. Some of these laws also applied to all workers in specific scenarios, like the Telework Law in the case of virtual work, which imposed strict regulations that discouraged remote work adoption.
Last but not least, the new labor law includes some indirect tax cuts for businesses as well, the most significant of which is the Incentive Regime for Medium-Sized Investments. The law essentially allows accelerated depreciation for calculating income tax and faster VAT refunds on investments of over 150,000 dollars for small businesses. This is a limited extension of another law (known as RIGI by its initials in Spanish), which Congress passed in 2024 to provide tax incentives for two years for investments of over 200 million dollars, and which was recently extended for an additional year. So far, Argentina has secured over 25 billion dollars in investment through a total of ten projects through RIGI.
Argentina’s new law is a step in the right direction, even if more measures will be needed to fully liberalize the labor market. In that regard, the first draft of the bill originally included modifications that had to be dropped during negotiations, as Milei lacks a majority in either the House or the Senate. These included the elimination of mandatory contributions to unions and the implementation of a less onerous system for employers in the event of sick leave, both of which were abandoned after significant union and opposition pressure.
However, the passing of the labor reform bill, only a few months after Milei’s midterm victory in October, sends a positive message to investors. The Milei administration is now expected to push for tax reform and potentially social security reform. Negotiations are likely to be tough in both cases, but momentum is on Milei’s side.