Sunday, February 1, 2009


Last changes in Peruvian Labor legislation 2008 

By Luis Ore, ORASI Consulting Group, Inc
and Miguel Lopez, TOP Tributarios SAC

Peru recently signed a free trade agreement with United States (FTA). Consequently, Peruvian laws had to undergo fundamental changes in order to comply with the FTA and to enable Peruvians to optimally benefit from the flow of good, services and foreign investment as of January 2009. 

As a consequence of the FTA, labor legislation was changed. The private sector hopes the changes will not result in raising costs. Thereby, it is important to note that in countries like Peru there is a high degree of economic informality (about 70% of businesses are informal) because being "formal" in Peru is very costly. It is no secret that most companies found ways to legally circumvent the law to optimize profits.

For instance, by the law an employee must be on the payroll of employer, and if the employee keeps working for one year, the employer has to make deposits to a financial institution twice a year, which will pay out such deposits to the employee upon termination. Further, the employer has to pay additional bonuses under the Bonus Actin July and December. Consequently, many companies avoid having employees on their payroll and rather prefer to outsource the workforce to service providers which are, very obviously, not compliant with the applicable laws and regulations. Very often, the companies even set of special purpose vehicles (SPV) employing the employees and provide the respective services in order to optimize labor costs and reduce potential legal risks.

Although such SPVs in fact act as mere recruiting agencies that lend employees to companies, such arrangements do not qualify as prohibited outsourcing because under the respective law only the provision of employees without equipment qualifies as prohibited outsourcing and the parties obviously set up the service agreements including the provision of equipment.

Under the new law, the respective “equipment clause” was removed and the Labor Management Authority is empowered to order that workers in such SPVs are immediately transferred onto payroll of the company benefitting from the services. The new law also implements a joint liability between the using company and the SPV for the payment of wages and social benefits of the employees. Consequently, there is the benefitting company may not avoid labor costs by, for instance, letting the SPV going into bankruptcy.

There is much more to assess and analyze, and there is a lot of work to do and improvement to make in the Peruvian labor legislation. In general, lawyers, consultants and advisors hope that the law changes will not substantially increase the cost for businesses.