Labor laws were made more flexible during the 90s. One of the main changes focused on compensation for arbitrary dismissal. It was established that if an employee was dismissed without cause or fraudulently, he/she could only request payment of compensation, subject to some specific limits, as reinstatement was only possible if the dismissal was null.

According to the new normative framework, employers were entitled to put an end to the employment relationship and were not obliged to reinstate dismissed employees; however, the Constitutional Court, analyzing the scope of the basic right to work, extended, during the 2000s, the compensatory effect of dismissals without grounds and fraudulent dismissals. The stance taken by the Constitutional

Court indirectly made the enforcement of an arbitrary dismissal resolution more costly, as it standardized and even exceeded on occasions the effect of the enforcement of a null dismissal resolution, which means that if an employee is reinstated, said employee can request, as compensation for loss of profit, the payment of remunerations and labor benefits not received during the course of the court proceeding, when he/she was not working, which results in the payment of compensation for an amount higher than the compensation initially contemplated in labor laws, which was subject to a maximum payment of twelve remunerations.

Bearing in mind the fact that labor proceedings last an average of twenty-four months, apart from reinstatement, the employee could get compensation for an amount equivalent to twenty four remunerations plus social benefits, with which dismissal costs in Peru increase in some cases by more than 100% of the maximum limit established in labor laws, without prejudice to the fact that if an employee believes that he/she has been affected, he/she can seek payment of additional compensation for moral pain and suffering, which is calculated on the basis of subjective criteria which can easily exceed twenty-four remunerations. Accordingly, the excessive protection afforded by labor laws limit the possibility – previously available to the employer – of dismissing an employee who is not aligned with the policies and vision of the organization. Therefore, the company will be obliged to reinstate the employee upon the issuance of a court order, besides being obliged to pay large amounts of money, which indirectly limits business freedom and generates excessive costs which are to be borne by the employer just because of the lack of accuracy of the dismissal procedure; notwithstanding, the law has not managed to discourage arbitrary dismissals.