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07. Termination of Employment Contracts
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07. Termination of Employment Contracts

Grounds for Termination

According to the Peruvian Labour Legislation in the Single Ordered Text of Legislative Decree N° 728, Labour Productivity and Competitiveness Law (Supreme Decree N° 003-97-TR) it indicates the causes of termination of the employment contract:

Article 16.- The following are causes of termination of the employment contract:

a) The death of the worker or the employer if he is a natural person;
b) The resignation or voluntary retirement of the worker;
c) The completion of the work or service, the fulfilment of the resolutory condition and the expiration of the term in contracts legally entered into under the modality;
d) Mutual disagreement between worker and employer;
e) Absolute permanent disability;
f) Retirement;
g) Dismissal, in the cases and manner permitted by law;
h) Termination of the employment relationship for objective reasons, in the cases and manner permitted by this Law.

Collective Dismissals

According to what is established by the Single Ordered Text of the “Law for the Promotion of Employment” (Supreme Decree No. 003-97-TR) and its Regulations, approved by Supreme Decree No. 001-96-TR, the collective dismissal for objective reasons or reduction of personnel can materialise at the initiative of the employer due to any situation of the company, duly supported and accredited, that deserves the approval of the Labour Administrative Authority.

The causes established by law are the following:

  1. Fortuitous event and force majeure.
  2. Economic, technological, structural or similar reasons. For initiate this procedure, the law requires as a requirement to understand a number of workers not less than 10% of the total staff of the business. Likewise, in the case of economic reasons, as established in Supreme Decree No. 013-2014-TR, the termination collective agreement of employment contracts for economic reasons implies a deterioration of income, understood as such to record when least three consecutive quarters of negative results in the operating profit of the Company, or in a situation in which, maintain the labour continuity of the total number of workers, implies losses for the company, a situation that must be supported with a report of an auditing company authorised by the Comptroller General of the Republic.
  3. Dissolution and liquidation of the company, and bankruptcy.

Individual Dismissals

The Law provides that for the dismissal of a worker subject to the private activity regime, who works four or more hours a day and who has passed the legal or conventional trial period, the existence of just cause contemplated in the law and duly verified.

The Law states that “just cause” may be related to the capacity or conduct of the worker and that the demonstration of the cause corresponds to the employer within the judicial process that the worker could file to challenge his dismissal.

The Law has a list of situations considered as serious misconduct, which, among others, are the following:

  1. misconduct or gross negligence in the performance of duties or wilful and continuous failure or refusal to perform any duties reasonably requested in the course of his employment;
  2. commission of fraud, embezzlement, theft, a felony or an act of dishonesty or other misconduct in the course of his employment;
  3. unauthorised disclosure of trade secrets or other confidential information of employer;
  4. breach of any non-competition duties;
  5. commission of acts of violence, gross indiscipline, slander or written or verbal grievance to the employer, their representatives, the senior staff or other workers, whether they were committed in the work establishment or outside it if the facts related to this fault are derived from the employment relationship;
  6. consummated or frustrated appropriation of goods or services from the employer or under the employee’s custody, or their retention or prohibited use for personal or third-party benefit, regardless of their value;
  7. repeated concurrence to the work establishment being intoxicated or under the influence of drugs or narcotics, and if not repeated, when the development of the function or work in that way implies a serious potential damage (the police must give their assistance in the verification of such facts and the worker’s refusal to submit to a test will be deemed as recognition of that state, which shall be entered in the police report);
  8. intentional damage to buildings, facilities, works, machinery, instruments, documents, materials, and other property owned by the company, or held by it,
  9. unjustified abandonment of work for more than three (3) consecutive days; unexcused absences for more than five (5) days in a period of thirty (30) calendar days or more than fifteen (15) days in a period of one hundred eighty (180) calendar days, previously punished or not; and the constant unpunctuality if it has been previously punished.

Is Severance Pay Required?

Dismissal without just cause, lawful or proven, may give rise to retributive measures in favour of the worker, such as compensation for arbitrary dismissal, in accordance with the following guidelines:

  • If the employment contract is for an indefinite term, severance pay is equivalent to one and a half remuneration per full year of service (or the proportional part);
  • If the employment contract is subject to modality (fixed-term), the compensation will be one and a half remuneration for each month left to work until the expiration of the contract (or the proportional part).

In both cases, compensation will be capped at twelve (12) payments. Said sum is exempt from social contributions and fifth category income tax.

Likewise, it should be noted that the base remuneration for calculating compensation for dismissal, whether for an indefinite or fixed-term worker, is that received by the worker at the time of dismissal. The variable or imprecise concepts (overtime, commissions) are integrated into the calculation base by dividing their sum by six, provided that they have been received for at least 3 months during the last semester of work.

Alternatively, employees could sue the employer to be reinstated at work and paid a compensation for damages arisen from dismissal. Notice that such reinstatement is not possible whether the employee holds a position of trust. In this case, company could terminate the employee due to a loss of confidence. Regarding this cause of termination, the Supreme Court stated that if an employee who began his labour relationship with the company occupying a position of trust is terminated arguing a loss of confidence, he will not be entitled to the severance payment. But if the was promoted to a position of trust having occupied a previous ordinary position, he will be entitled to indefinite term employees severance payment in case of an arbitrary dismissal.

Notice that, since this cause was established by the Supreme Court, as long as the Court does not modify its criteria, or it is modified by any law or legislative decree, employers could dismiss workers for loss of trust, having, in principle, to expect that, if such dismissals are judicially questioned, the Labour judges will respect such criteria and declare the lawsuits unfounded.

Separation Agreements

The employment relationship with a worker may be terminated by mutual agreement between the worker and his employer, provided that the agreement to terminate the employment relationship is in writing.

 a. Is a Separation Agreement required or considered best practice?

In practice, it is usually agreed in the mutual agreement signed between the parties the granting of an extraordinary gratification for termination, which is channelled through the liquidation of social benefits and its perception is conditioned to the scope of article 57 of the Supreme Decree No. 001-97-TR, Law on Compensation for Time of Service, which establishes that said sum paid by the employer as a liberality can be compensated with other sums that the judge may eventually order to pay for labour debts.  Companies prefer reaching such agreements to avoid trials.

b. What are the standard provisions of a Separation Agreement?

Although the requirement for the signing of the Mutual Dissent agreement is that it be celebrated by the parties in writing and there is no fraud or intimidation, labour jurisprudence has established guidelines so that the monetary amounts granted by the employer as acts of generosity produce their compensatory effects before any labour credit, they must meet certain requirements. These are:

1) be granted at the time or after the termination of the worker;

2) that the delivery be liberally and unconditionally; and

3) the economic amount is recorded in a document of a certain date.

c. Does the age of the employee make a difference?

No, the age of the employee makes no difference but notice that when an employee is 70, he loses labour stability, therefore company could dismiss him without severance payment unless they agreed in written that employee would continue working after such age.

d. Are there additional provisions to consider?

In some cases, the parties agree to i) the return of employer-provided work tools, company documents and property; ii) a confidentiality clause; and iii) a non-direct competition clause for a specified period.

Remedies for Employee Seeking to Challenge Wrongful Termination

The right of the worker to request judicial protection in case of being dissatisfied with the termination of the employment relationship is possible as mentioned before.

Whistleblower Laws

In Peru, the worker can denounce the company that carries out bad practices against its workers through the Ministry of Labour, through the National Superintendence of Labour Inspection – SUNAFIL. It is not necessary for the worker to identify himself, since the complaint can be anonymous.

Any questions

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