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Wage ‘Dollarisation’: balancing inflation and talent retention 

With both the Argentinean and Venezuelan economies tackling high inflation, employers are taking novel steps to promote talent retention.

The Argentinian Way

Argentina has a long history of inflation that can be traced back to the 19th century. However, it was in the 1970s that the country experienced its first inflationary peak, reaching a 335% increase in the Consumer Price Index of prices for household goods and services. This trend continued into the 1980s with the so-called ‘Rodrigazo’ economic measures, which set the basis for Argentine hyperinflation that reached a staggering 3,000% in 1989. Thirty-five years later, Argentina is experiencing another inflationary spike, with the 2023 inflation rate around 200%. 

In this context, employers are finding it extremely difficult to maintain their employees’ purchasing power, which in turn leads to problems regarding staff retention and turnover. 

For employees under the umbrella of collective bargaining agreements, salaries are regularly updated (mostly aligned with the cost of living) due to frequent negotiation between unions and employers. These negotiations can take place every three months and may include non-wage benefits. In contrast, employees who are outside the scope of collective agreements and are subject to at-will, market wage augmentations present a particular retention challenge. 

Faced with this challenge, many employers (especially foreign ones) have turned to compensating employees with wages denominated in US dollars in an effort to maintain their purchasing power. It should be noted that American dollars in Argentina are not freely acquirable, due to exchange regulations. It is therefore mainly multinational companies with access to dollars who have been able to do this. The current Argentinean administration has started to relax some of those restrictions, and a deregulation of the currency market may be expected in the medium term, matching the intention of the President to ‘dollarise’ the Argentinean economy. 

At present, Argentinean law considers payments in foreign currency as payments in kind. However, a recent presidential decree provides that an obligation contracted in foreign currency should be paid in that currency. The decree has been subject to judicial actions suspending its legal validity. If enforced in the future, the decree will have an impact on the interpretation of the limits on foreign payments. 

Currently, labour legislation requires that salaries must be paid mostly in local currency; only up to 20% of the monthly wage can be paid in foreign currency. Non-compliance with that limit may subject employers to sanctions. Payments in foreign currency can be made to a local or foreign bank account, or in cash. The payments must be duly displayed in the payment sheets in local currency (using the official exchange rate) and are subject to income tax and social security contributions in Argentina, even if they are made abroad. 

The decree referenced above provides that wages owed to the employee must be paid in cash, check, or deposited into an account in a bank, official savings institution, or ‘other categories of entities’ that are considered suitable, secure, interoperable and competitive. Although the decree is currently suspended, it is expected that detailed regulations will allow ‘other categories of entities’ to include payments into foreign bank accounts or even digital currency. 

Some changes in the system may occur shortly, considering the administration’s commitment to opening the currency market and proceeding with the dollarisation of the economy. Deregulation of the policy of payments in general will have consequences in the permissible methods for wage payments. 

The Venezuelan Experience

Venezuela has an accrued inflation of 15 billion % from 1999 to 2022. Rapidly increasing inflation rates have impacted the local-currency-based statutory minimum monthly wage: once the equivalent of USD 30 back in 2022, it is now equivalent to just USD 3.  

Unlike Argentina, there are no present currency exchange restrictions in Venezuela, and labour law does not prevent employers from setting salaries partly or solely in US dollars. Case law has clarified that the provision in the labour law that prohibits salary payments ‘in kind’, which used to be interpreted as prohibiting payments in foreign currency, was intended only to prohibit the Colonial-era practice of making salary payment in tokens or vouchers that could only be used in the employer’s undertaking. As a result, there has been a de facto dollarisation; 80% of employers in the private sector now pay salaries in US dollars.  

This change happened gradually. Initially, employers resorted to applying regular salary increases in Bolivars (the local currency), but they soon found it impossible to match rising inflation rates. Employers were making salary increases up to six times in one year. As a result, employers started paying bonuses in dollars, auxiliary to the employees’ main income. This posed the advantage for employers that it did not impact fixed costs, and the further advantage that the bonuses were not taxable. But this practice did not hold when claims reached the Supreme Court, which issued rulings ordering salary treatment of such bonuses. Employers are therefore now redefining their compensation structures and even including payment in dollars as part of the employee’s main income and as a base currency for the payment of other statutory benefits such as vacation bonus, severance and profit sharing.  

Similarly to Argentina, employers in Venezuela have also resorted to offering perks such as flexible working hours, meal vouchers, private health insurance and professional development opportunities to weather inflation with the minimum labour cost impact. 

Nevertheless, paying wages in foreign currency remains for both countries an interesting tool for compensation tactics to retain and promote employee loyalty without associated risks, and a means for many employers to stay competitive in the labour market. 

Discover more about compensation and benefits on our Global HR Law Guide

The view from other places.

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Verónica Eva Puerta Basaldúa
Partner - Argentina
Bruchou & Funes de Rioja
Biba Arciniegas
Partner - Venezuela