Labor reform changes, next litigation between the Board and the Government

Last June, the Court of Appeals for the First Circuit issued an opinion in which it confirmed the decision of Judge Swain to paralyze the implementation of four laws approved by the Government of Puerto Rico. In its opinion, the Boston-based appellate court expressed that it was "disheartened" by the attitude of the Board and the Government of getting involved in epistolary fights and constant litigation. In addition, it expressed that “in the future, we hope that the Government and the Board will once again commit to working together in a non-adversarial manner so that this type of litigation can be avoided, in the best interest of the people of Puerto Rico.”

The ExSecretary of Labor, Carlos J. Saavedra. (Noticel)

A little over a month after these expressions, it seems almost inevitable that the Fiscal Oversight Board and the Government of Puerto Rico will face each other again in a lawsuit involving the validity of a recently approved law.

On this occasion, the axis of the controversy is Law 41. This legislation introduced a series of amendments to eight labor statutes of Puerto Rico. Although it has been called a "labor reform", the reality is that Law 41 is not a true reform and did not repeal the Labor Transformation and Flexibility Law (Law 4-2017) that was approved on January 26, 2017. However, even before the Governor signed Law 41, the Oversight Board had warned that it considered the law to be significantly inconsistent with the Fiscal Plan and that it violated the PROMESA Law. It is important to emphasize that in all the previous occasions in which the Board and the Government have faced a legal dispute regarding the validity of recently approved laws, the Board has prevailed. In sports jargon, the Supervisory Board is undefeated in its claims against the Government related to newly approved laws.

To understand the saga regarding Law 41, it is important to refer to the statutory text of the PROMESA Law. Section 204 of that federal statute requires that, for any new law, the Government submits to the Oversight Board a Certification that contains two elements. First, the Government must issue its conclusion as to whether or not the new law is materially inconsistent with the Fiscal Plan. Second, the Government must send a certificate in which it summarizes the impact that the new law will have on Government spending and revenue. Judge Swain has ruled that these are not mere superfluous requirements: the Government violates the PROMESA Law if it does not comply with these procedural requirements.

On the other hand, we must also analyze Section 108 of PROMESA. That section provides that the Government may not approve, implement or enforce a law that "affects or defeats the purposes of PROMESA." Federal courts have also interpreted Section 108 and concluded that once the Oversight Board concludes that a law is inconsistent with the Fiscal Plan and violates PROMESA, deference will be given to that conclusion unless that conclusion is shown to be “arbitrary and capricious”. This is an extremely deferential review standard for the Board and serves to explain why the Government, to date, has lost all lawsuits in which the validity of recently approved laws has been questioned.

Regarding Law 41, the Board has already written several letters to the Government in which it warns them that it has concluded that this new law is significantly inconsistent with the Fiscal Plan and violates PROMESA. However, the last letter issued on July 30 is much more extensive and worrying for the Government. From the outset, the Board appears to be preparing the way to argue that the Government has failed to comply with the procedural aspects of Section 204 of PROMESA. This is because – according to the Board – the Government has not specifically concluded whether or not Law 41 is inconsistent with the Fiscal Plan. In addition, the Board warned the Government that the information it has provided to date is incomplete because the Government - according to the Board - has not produced an estimate of the impact that Law 41 will have on treasury revenues. If the Board can prove that before Judge Swain, it will be very difficult for the Government to defend Law 41 since it would have failed to comply with the procedural aspects of the PROMESA Law.

But the problems for the Government do not end there. In the letter dated July 30, the Oversight Board attached an extensive study by economist Robert Triest in which the negative impacts that Law 41 would have on the economic development of Puerto Rico are summarized. In short, the economic study concludes that Law 41 discourages the hiring of new employees in the private sector and, therefore, Government revenues will be affected. Specifically, the study concludes that Law 41 will cause a decrease in Government revenues of $156 million in the short term and - in the long term - it will cause a reduction of $8.1 billion in revenues. Based on that study, the Board concludes that Law 41 is inconsistent with the Fiscal Plan and violates PROMESA.

Building on the First Circuit's decision, the Board has asked the Governor to halt the implementation of Law 41 while discussions between the parties continue. In addition, it asked the Government to correct the procedural deficiencies in the information it has submitted so far and to provide information that contradicts what was stated in Robert Triest's economic study. This appears to be an attempt by the Board to give the Government as many opportunities as possible before resorting to litigation.

However, in light of the Government's expressions, it seems that the implementation of Law 41 will not stop. Thus, litigation over Law 41 is inevitable. Although it is impossible to predict an outcome, the reality is that the Board has never lost this type of litigation. And in light of Robert Triest's economic study, it will be extremely difficult for the government to argue that the Board's decision to challenge the law is "arbitrary and capricious." The legal reality of Puerto Rico while the PROMESA Law is in force is that it is very difficult to defend laws that do not have economic studies prior to their approval or under the argument that the Government must be given an opportunity to implement the new laws by then See what the impact is on the economy.

But regardless of the merits of each side in this new battle between the Board and the Government, the reality is that this process has created uncertainty in Puerto Rico's economic outlook. Until a Court determines the nullity of Law 41 or orders the Government not to implement it, that statute is in force for many employers. In that sense, the private sector has already had to prepare and invest capital to enforce a law that now faces the uncertainty of litigation. There are no winners in this battle at the moment. It remains to be seen whether the Government will succeed in demonstrating that the Oversight Board has been “arbitrary and capricious” in its analysis of Law 41. The slope looks extremely steep for the Government.

This piece was originally published in Spanish in Noticel

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