October, 2002
This Memorandum discusses the basic Brazilian labor rules and regulations applicable to Brazilian employees and foreign employees working in Brazil on a permanent basis.
1. Applicable Legislation
The basic legislation governing the legal relationship between an employer and an employee in Brazil is the Brazilian Labor Code (Consolidação das Leis do Trabalho - "CLT"), enacted on May 1, 1943, pursuant to Decree-Law 5452. The CLT is complemented by other federal Brazilian labor legislation, the Federal Constitution and jurisprudence, as well as by the Collective Bargaining Arrangements (Acordos ou Convenções Coletivas de Trabalho) entered into by and between the employees' unions and the employers or their business sector's representatives. The provisions contained in the CLT, as well as in the Federal Constitution and in the Collective Bargaining Arrangements, are "public order" rules as far as the benefits granted to the employees are concerned. Thus, they shall prevail in the case of conflict with provisions included in employment agreements that are less favorable to the employees.
1.1 Collective Bargaining Arrangements
Collective Bargaining Arrangements are negotiated between the specific employees' labor union and the employers’ business sector representatives (or the employers themselves). Affiliation to the unions is not mandatory to employees and affiliation to representative entities is not mandatory to employers either. However, their legitimacy to represent employees and employers is enforced by the law according to territory criterion. Therefore, Collective Bargaining Arrangements bind even non-affiliated employees and employers.
In the event parties do not reach an agreement, any of them may file a specific lawsuit before the Labor Appellate Court to request the judgment of the controversial issues.
2. Scope of Application of the Labor Law
The CLT and other Brazilian labor legislation and jurisprudence, as well as the Collective Bargaining Arrangements, are applicable to employees working in Brazil for Brazilian or foreign employers (companies, associations, sole proprietorships and the like organized or existing under Brazilian or foreign laws).
Employees working in Brazil, regardless of citizenship or residency, are generally entitled to all Brazilian labor law benefits and rights. Pursuant to Decree-Law 691 of July 18, 1969, foreign technicians resident or domiciled abroad, who are transferred to work in Brazil under a contract of up to two (2) years are not entitled to certain benefits provided for in the CLT and in specific federal legislation, nor in the Collective Bargaining Arrangements.
3. Interpretation of Labor Legislation
Brazilian labor courts often have taken the position that employees are at an economic and bargaining disadvantage as compared to their employers, and that, hence, the courts should favor employees as compared to employers.
Under Brazilian law, distinctions between white-collar and blue-collar employees, as well as between union and non-union members, are prohibited. Thus, the CLT provisions are applicable without distinction to management employees and to unskilled workers.
4. Employment Relationship
The CLT defines an employee as (i) a person who works or performs services for an employer, (ii) on a regular and continuous basis, (iii) is "subordinated" to (i.e., is subject to orders from and works under supervision of) the employer, and (iv) is compensated for such work or service. Technically, if a person occupies a high managerial position in a corporation, has been elected to this position by the competent corporate body, and has broad powers and functions, he/she might not be deemed subordinated to the company. In such case, the relationship between such person and the company would be subject to general Brazilian civil and commercial contract rules. Nevertheless, throughout the years, labor courts have tended to presume the existence of subordination whenever a person who occupies a managerial position asserts an employment relationship.
5. Employment Contracts
Brazilian laws do not require that employees and employers execute a formal employment contract. Employers are required to simply register the basics of the employment relationship in the employees' Labor and Social Security Card (Carteira de Trabalho e Previdência Social - "CTPS") and to keep in its premises a record containing this basic information. (The CTPS is a document that belongs to the employee and remains in his/her possession.)
It is advisable, however, that employees and employers enter into written employment contracts (in addition to complying with the mandatory registration requirements) whenever the employment relationship contains certain peculiarities that must be made clear and known to the employee since the beginning (e.g., work in alternating shifts, provision allowing the employee's transfer to work in a different location, payment of fringe benefits and/or bonuses, etc.)
In practice, employers usually enter into written employment agreements with: (i) employees who will occupy managerial positions (these employment agreements aim at defining the benefits and obligations resulting from the employment relationship that are generally included in these agreements in addition to those provided by law); and (ii) employees who, although applying for lower positions, due to the scope of their duties, must have certain provisions expressly included in their employment agreements.
6. Economic Group Concept
Under Brazilian law, if an employee works or has worked for one or more companies of the same economic group (the "Group") within or outside Brazil, all companies of the Group are liable for obligations any of them may have to the employee, regardless of whether the company against which satisfaction is sought has or had any direct relationship with the employee. Also, in this case, the employment agreements between the employee and companies of the Group shall be deemed a sole employment agreement for all purposes, except if such an employee is terminated and received the severance-related payment according to the applicable laws before being transferred to work for a company of the Group in Brazil.
7. Salary and Remuneration
The CLT distinguishes between remuneration ("remuneração") and salary ("salário"). Salary is the fixed monthly base compensation paid by an employer to an employee. Remuneration includes salary, commissions, fringe benefits, voluntary and obligatory bonuses, indirect benefits granted to the employee by reason of his employment and the like. The "Guaranteed Severance Fund" (Fundo de Garantia por Tempo de Serviço -"FGTS") account deposits referred to in item 12 below, and other labor rights and benefits, must be based on the total remuneration received by the employee from its employer.
In the case of split payroll, i.e., in the event an employee also receives payments or benefits outside of Brazil, then the basis for calculating such employee's FGTS deposits and other labor rights and benefits must be the remuneration received both in Brazil and abroad.
8. Salary Adjustment for Inflation
According to the Brazilian law, collective salaries adjustment corresponding to the yearly inflation, whenever granted, must be negotiated between the specific employees' labor union and the employers’ business sector representatives (or the employers themselves) through the appropriate Collective Bargaining Arrangements.
9. Labor and Related Charges on Payroll
The basic cost of an employee in Brazil, in addition to his remuneration, is: (i) Guaranteed Severance Fund Contribution (Fundo de Garantia por Tempo de Serviço - "FGTS") equal to 8% per month (please refer to item 12 below), plus 3.2% (40% of 8%) in case of termination without cause by initiative of the employer, or termination for cause due to an act of the employer (please refer to item 13.3 below); (ii) social security contribution of approximately 27% (iii) vacation bonus of 1/3 of a monthly remuneration per year, corresponding to 3.88% (FGTS and social security contributions included); (iv) annual Christmas bonus (or thirteenth salary) corresponding to 11.64% (FGTS and social security contributions included), and (v) a special social contribution, which will be due until September 2006, equal to 0,5% per month of the employee’s remuneration, plus an additional 10% calculated on the balance of the employee’s FGTS account in case of termination without cause by initiative of the employer, totaling approximately 56%.
10. Vacation
After twelve months of continuous employment, employees are entitled to a calendar thirty-day vacation period. The employee is entitled to receive his/her regular monthly remuneration while he/she is on vacation. In addition, the employer must pay to the employee a "vacation bonus" equal to 1/3 (one third) of the employee's monthly remuneration. The employer must cause the employee to take a vacation within twelve months as of accrual of the right to vacation. Otherwise, the employee becomes entitled to twice his/her vacation pay (monthly remuneration plus the 1/3 vacation bonus).
11. Christmas Bonus (13th Salary)
Employees are entitled to receive an annual Christmas bonus equal to his/her highest monthly remuneration (if remuneration is fixed, the one corresponding to the last month, if variable, the average received during the preceding twelve months). The employer must pay the Christmas bonus to its employees as follows: 50% between February and November of each year, or at the time the employee goes on vacation, if he/she so requires during the month of January; and the remaining 50% up to December 20 of each year.
12. Severance System; Termination
Brazil had two severance systems: (i) the "Guaranteed Severance Fund (Fundo de Garantia por Tempo de Serviço - "FGTS") system, or "new" system, created in 1966; and (ii) the "CLT" or "old" system, which is contained in the CLT. Prior to the enactment of the new Brazilian Federal Constitution on October 5, 1988, employees could opt for either system within 365 days after commencement of an employment relationship. The "old" system was revoked by the new Federal Constitution, and since October 5, 1988, the only severance indemnity system in effect in Brazil is the FGTS system.
Under the FGTS system, an employer must make monthly deposits into a blocked bank account opened in the name and on behalf of the employee (the "FGTS account"). Each such deposit is in an amount equal to 8% of the employee's monthly remuneration. The employee's FGTS account is made part of a specific fund managed by a Brazilian government agency, earns interest and is subject to monetary correction. The employee has access to his/her FGTS account only under limited circumstances.
Furthermore, based on Complementary Law No. 110/2001, until September of 2006, the employers are also required to deposit the special social contribution on the employee’s FGTS account, calculated at the rate of 0,5% of the employee’s remuneration. This money goes to the government and not to the employee.
12.1 Employer's Termination of the Relationship
If an employer unilaterally terminates an employment relationship without "just cause" (as defined in the CLT; see Section 13 below), the employer must pay to the employee severance indemnity in an amount equal to 40% of the total amount deposited in the employee's FGTS account, plus the special social contribution which is due until September 2006, of 10% of the total amount deposited in the employee’s FGTS account. (Any amounts eventually withdrawn from the FGTS account during the employment relationship must also be taken into account for purposes of calculating the 40% severance indemnity, as well as the 10% social contribution.) Payment must be deposited in the employee’s FGTS account together with any other FGTS severance related payments. If an employer unilaterally terminates an employee for just cause, the employer will not be liable for any severance indemnity payment to the employee.
12.2. Employee's Termination of the Relationship
If an employee unilaterally terminates an employment relationship without just cause, the employer will not be liable for any severance indemnity payment to the employee. If the employee terminates the employment relationship for cause, he/she can unblock the FGTS account and withdraw the deposited funds plus interest and monetary correction. Also, the employer must pay severance indemnity to the employee in an amount equal to 50% of the total amount deposited in the employee's FGTS account.
12.3. Termination of the Relationship by Mutual Fault or by Force Majeure
If termination results from the employer's and the employee's mutual fault or force majeure, and provided a labor court recognizes either of these two as the cause for terminating the relationship, the employer must pay severance indemnity to the employee equal to 20% (rather than 50%) of the total amount deposited in the employee's FGTS account.
13. Just Cause for Termination
The general terms and conditions of an employment relationship (e.g., working hours, remuneration, working position, functions) can be changed only by means of an agreement between employer and employee. Nevertheless, even in the case of an agreement, any change may be considered null and void if it is deemed "detrimental" to the employee. Brazilian labor courts have held that an amendment to an employment contract is void if it results in a detriment to the employee, even when the employee has expressly agreed thereto. If a change to an employment agreement is deemed harmful to the employee, it constitutes just cause for the employee to terminate the employment relationship.
13.1. Salary Reduction
If the employer reduces an employee's salary, the employee can take the position that a detrimental amendment has been made to his/her employment agreement. As such, if an employer reduces its employee's salary, a Brazilian labor court would consider such a reduction just cause for the employee to terminate the employment relationship.
13.2. Non-Detrimental Change of Duties
An employer is entitled to change the duties of an employee, provided such change is not "detrimental" to the employee. Brazilian case law and jurisprudence have consistently recognized that an employer is entitled to change an employee's duties if the scope of the new assignment is within the employee's competence and ability to discharge such assignment. Also, the scope of assignment must fall within the parameters of the employment relationship (job description).
13.3. Employer's Actions that Constitute Just Cause for Termination by the Employee
An employee is entitled to terminate an employment relationship for cause whenever:
(i) the employer seeks to impose on the employee the execution of services beyond the scope of the employment contract, or beyond the employee's physical capacity, or that constitute legally prohibited or morally degrading acts; or
(ii) the employee is subject to excessive disciplinary action; or
(iii) the employee is exposed to considerable hazards; or
(iv) the employer fails to perform its obligations (e.g., payment of salary) under the employment contract; or
(v) the employer or its agents engage in acts against the employee's honor or reputation; or
(vi) the employer physically attacks the employee, except in self defense or in the defense of third parties; or
(vii) the employer reduces the employee's workload, thereby reducing the employee's salary.
13.4. Employee Acts that Constitute Just Cause for Termination by the Employer
As discussed in Section 12 above, if an employer terminates an employee without cause, the employee is entitled to severance compensation under the FGTS system. The following is a list of acts or conducts that, if engaged in by an employee, can constitute just cause for the employer's termination of the employment relationship, in which case the severance compensation under the FGTS system would not be due:
(i) dishonest acts; or
(ii) misconduct; or
(iii) conduct of business for the employee's benefit or for the benefit of third parties without the employer's approval, provided, however, that the business activity is in direct conflict with the employer's business or has detrimental effects thereon (e.g., the employee spends employer's time to conduct the employee's business); or
(iv) conviction of a crime; or
(v) habitual drunkenness or drunkenness during working hours; or
(vi) unauthorized disclosure of the employer's trade secrets; or
(vii) insubordination; or
(viii) acts harmful to the employer's honor or reputation; or
(ix) acts within the scope and during the course of employment resulting in unjustified physical harm to another person; or
(x) habitual gambling; or
(xi) negligence in the performance of the employee's duties; or
(xii) abandonment of the job.
Some of the foregoing activities may be difficult to prove to the satisfaction of a Brazilian labor court.
14. Termination Notice
An employer is required to give an employee a thirty-day termination notice. The employer also must make the FGTS deposit related to such thirty-day notice. In lieu of the notice, the employer may pay to the employee an amount equal to the remuneration the employee would have received during the thirty-day period.
15. Other Payments Upon Termination
Upon termination of an employment relationship, regardless of cause, an employer also must pay:
(i) salary up to the termination date; and
(ii) accrued vacation corresponding to a full-year period which has not been taken before the termination date; and
(iii) vacation bonus equal to one-third of the accrued vacation pay referred to in item (ii) above.
Upon termination of an employment relationship without cause, or if by the employee's initiative for cause (please refer to item 13.3 above), the employer must also pay:
(i) accrued vacation equal to one-twelfth of the employee's monthly remuneration multiplied by the number of months (or fraction thereof of 15 days or more) between the first day of the last vacation accrual period and the termination date;
(ii) vacation bonus equal to one-third of the accrued vacation pay referred to in item (i) above; and
(iii) accrued Christmas bonus equal to one-twelfth of the employee's monthly remuneration multiplied by the number of months (or fraction thereof of 15 days or more) between the beginning of the calendar year and the termination date.
16. Labor Litigation
It is common that employees file labor claims against their former employers upon being terminated either with or without cause. This is basically a result of several factors, among which are: (i) the complexity of the employment rules in Brazil and (ii) the court's tendency to favor employees as compared to employers. In addition to that, individuals are not required to pay court costs to file labor claims and not required to pay the other party's attorneys' fees if they loose the claim (differently than in civil, commercial and tax litigation.)
17. Profit Sharing Plan
The profit sharing plan is provided for in the new Federal Constitution, article 7th, item XI, and regulated by Law 10.101/2000. The profit sharing plan consists of the distribution to the employees of a certain amount annually or every six months according to the achievement of pre-determined criteria goals. The amount attributed as profit sharing may be deducted from the same year's income tax, being considered as operational expenses, and assumes no salary nature [i.e., it should not be considered as part of the employees compensation for any purpose (taxes or mandatory benefits)].
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We will be glad to discuss in more detail any of the matters described in this memorandum.
Respectfully submitted,
Veirano Advogados
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