Introduction
Multi-national companies with workers in Argentina are faced with difficult decisions due to the continued depreciating currency of Argentina, the peso.. US headquartered companies who have Argentine workers getting paid in pesos, a requirement for those employed in Argentina, have seen the buying power of their salaries tumble dramatically over the past several years, and even within the past year.
For companies who use Employer of Record services to pay their Argentine workers, there are creative options that include indexed salary of the Argentina peso to US dollar to keep both the worker and the employer happy and in compliance.
What are the Economic Forces Driving the Depreciating Currency of Argentina?
Inflation and employment rates were long considered a stable, reliable way to measure macroeconomic forces and how healthy an economy was at a given time.
Low unemployment usually meant high inflation and the opposite held true for decades. It wasn’t until the 1970s that this relationship was called into question due to the effects of “stagflation” (high unemployment, high inflation).
Fast forward to now and inflation is back in the conversation with the US and UK battling their highest inflation rates in decades at 7.7% and 5.4% percent, respectively.
As damaging as these inflation rates are to US and UK citizens, they pale in comparison to countries like Argentina where the rate topped out at a staggering 50.9% in December 2021.
In this post, we’ll explore the effects runaway inflation has on employees in countries, using current events in Argentina as a guide, and offer a possible solution as to how multinational companies can help their employees combat rising inflation while remaining in compliance.
Why There’s an Inflation Crisis in Argentina
From supply chain woes to energy crises, the continued effects of the COVID-19 pandemic have helped to drive inflation increases in many countries.
The situation in Argentina certainly hasn’t been improved by the pandemic but it stretches back far longer. As Bloomberg reports, the inflation crisis in Argentina stems from “decades of policy missteps that have destroyed confidence in the central bank.”
What Inflation Means for Argentinian Employees
There are two different “kinds” of wages: nominal wage (or what an employer agrees to pay you) and “real” wage which is wage adjusted for inflation.
When inflation is at about 2-3% (the global average in 2020), it can usually be offset by a yearly raise or bonus given to employees.
When inflation is constantly fluctuating as has been the case with the Argentinian peso (ARS), the effects are felt in every aspect of daily life, from the cost of gas to rent.
But the place all Argentinians are really feeling the effects is in the cost of food.
As Albert Canil reported for inews.co.uk, “Twenty years ago, a kilogram of meat cost around ARS$5, meaning ARS$100 would buy 20 kilograms. But by December 2021, a kilogram of meat had skyrocketed to ARS$880 (with prices varying for local butchers), meaning ARS$100 would buy more of a [thin slice of bacon] than a cut.”
What This Means for Multinational Companies with Employees Located in Argentina
Companies with full-time employees located in Argentina are trying their best to keep wages consistent in an effort to retain talent.
“Many companies are trying to pay bonuses or offering salary increases 3 to 4 times per year.” GoGlobal’s Director of Operations for the Americas, Ana Vizzotto notes, “They’re also having to calculate a bonus based on inflation. It can feel nearly impossible for companies headquartered outside of Argentina to keep up.”
It is not possible to simply pay employees in US dollars or Euros since labor laws in most Latin American countries require companies to pay local workers in local currencies. Companies have found out how serious these regulations are when they try to skirt these laws.
Some try paying employees in an offshore account from which the employee only transfers as many pesos as they need to survive. Their offshore account would be in a more stable currency and therefore would undergo a transfer into pesos at the current market rate.
Many workers are choosing to work as independent contractors for foreign employers to avoid getting paid in the volatile ARS. From the government’s perspective though, these independent contractors can be considered misclassified employees which creates a tax issue since employers must withhold taxes at the source for full-time employees.
The result of such end-arounds can create risks of audits and potential heavy fines for employers.
Luckily, there’s an alternative that can help companies remain compliant while also retaining employees and keeping their salaries more stable.
How Companies Can Leverage an Employer of Record Service to Help Employees
Let’s say an Argentinian worker is hired by a US company at $1000 USD per month in February 2020. This would equate to $83,958 in Argentinian currency (ARS).
Normally, from that point on, there would be no more discussion of USD and all future raises and bonuses would be calculated based on that $83,958 ARS salary.
In 2022, the effects of inflation on that same salary will have reduced the worker’s buying power by more than half.
GoGlobal is helping its Argentinian client workers mitigate these effects of inflation by calculating the indexed salary of the Argentina peso to the US dollar indexing the salary to USD and calculating pay in ARS based on the monthly market rate.
That way, the worker’s salary will be affected less by inflation and depreciating currency than it would be if it were a fixed salary in Argentinian currency.
The result is positive for all parties involved. Companies get to retain their employees located in Argentina at the rate they intended to pay while remaining compliant, and employees feel more secure in their income since it’s an indexed salary against a more stable currency.
Conclusion
Across the globe, inflation is predicted to get worse before it gets better, according to IHS Markit.
While using an indexed salary solution won’t solve the larger issues of inflation or increased cost of living, using an EOR service to pay stability to your Argentinian employees can help improve stability in their quality of life.
If you have employees in Argentina or are interested in expanding there and want to remove the risk of depreciating currency, contact a GoGlobal expert to discuss your options.