Brazil: Understanding Brazil's Labor Reform

Last Updated: 22 September 2017
Article by Marco Sottovia

The labor reform proposed by the Brazilian federal government was sanctioned by President Michel Temer back in July. The changes will go into effect in November this year, providing a new feature to employee/employer relations.

Like any change of this magnitude, Brazil's labor reform has faced resistance and caused heated debates between those who approve and those who don't. But, bottom line, the reform is happening. The reform will enter in effect this November and, if well implemented and correctly interpreted, it should benefit everyone involved. On one hand, by significantly reducing labor charges and risks, which ultimately can bring economic gains to companies. On the other hand, it should significantly boost the creation of jobs.

For this to occur, organizations need to adjust their people management practices under the new law - and relying on the support of specialized providers can make the difference.

Understanding the changes

One of the main pillars of the new law is modernization. With flexibilities such as allowing corporations to hire freelance workers, companies should see a reduction in labor costs, as well as a large decrease in labor risks.

Another important aspect of the new law is the possibility it gives to protect workers who currently work informally. It is necessary to remember that less than 50 million of Brazilians are currently under the Consolidation of Labor Laws regime (CLT), which places all others outside the business and labor laws. This informal labor market situation has reduced formal employment opportunities.

Also regarding informality, the possibility of splitting the employee's paid vacation period into up to three periods hadn't been provided for by law yet. This will also end in November, when the practice becomes legal, provided that the first part of the paid vacation period contemplates at least 14 days and the other two with at least five days each.

This flexibility should also bring home-office professionals and those jobs with flexible schedules under the protection of the law. In the latter case, companies will be able to keep their staff working for less hours, if needed. It will also help to avoid layoffs during low seasons.

A controversial point was that the labor reform will bring the compulsory union contribution to an end. The controversy was mainly due to the high number of unions that exist in Brazil since most of them will have to disappear. Why? Because the amount is excessive - there are over 15,000 unions in Brazil that received, only in 2013, R$ 2.4 billion in compulsory fees. In comparison, the United Kingdom has 168 unions, Denmark has 164 and neighbor Argentina has only 91 unions.

In addition to the aforementioned, we list other aspects in the below table that require attention and understanding on the impact they will have on both companies and employees.

How it used to be How it will be
Agreements and Laws The Law had more weight than collective agreements signed between unions, workers and employees. Certain issues regulated by the CLT can be negotiated between employers and employees and will prevail over the law; preponderance of the rules established through Collective Agreements over those provided in Collective Bargaining Agreements, with the rule that Collective Agreements would be only preponderant in what is more favorable no longer being applicable.
Ratification The termination of an employment contract of over a year is only considered valid, according to the CLT, if it is ratified by the union or Ministry of Labor authority. Repealed condition. The ratification of the termination of employment contract can be done at the company in the presence of the employer and the employee.
Redemption of the FGTS When the employee quits or is dismissed for just cause, he/she is not entitled to the 40% fine over the FGTS balance or entitled to the withdrawal from the employment security fund. As to the prior notice, the employer can give notice to the employee about his/her dismissal 30 days in advance or pay the salary for the month without the employee having to work during that period. The termination of an employment contract will be permitted when there is a "mutual agreement" between the employee and the employer. In this case, the employee is entitled to receive half the amount of the prior notice and of the 40% fine over the FGTS balance. The employee can also operate up to 80% of the FGTS, but will not receive unemployment insurance.
Work Hours Daily hours: 8 hours; Weekly hours: 44 hours; and Monthly hours: 220 hours. Daily working hours can be of 12 hours, with 36 hours of rest. The limits of 44 hours a week and 220 hours a month remain.

It is also expected the law will allow a reduction in labor lawsuits. Due to the intricacies of the laws, Brazil currently operates with 11,000 labor lawsuits a day. In comparison, the average in France is 60,000 lawsuits a year; in Chile there are 40,000 and in Japan, 10,000 lawsuits a year.

In a nutshell

The labor reform will provide access to jobs and benefits to a large mass of professionals – but it will require adjustments from both employees and employers. Companies are expected to manage to dilute costs and keep their employees. During times of economic depression, the alternative to layoffs can be, for example, a reduction in hours worked, thus keeping good professionals on the job.

This means employers should be able to transfer these savings to employees and to the final cost of their products and services, increasing the country's competitiveness. And why is this important? It's simple: Brazil's labor productivity currently corresponds to less than a fifth of the United States', approximately a fourth of Germany's and less than a third of South Korea's. It is also lower than Russia's, Mexico's, Argentina's and South Africa's, although slightly higher than China's and practically twice as India's. By improving these indices Brazil expands opportunities for companies in the international market.

Changes are coming very soon, and companies will have to adjust to them. In order to do so, TMF Group is prepared to support in understanding how to benefit of the changes and how to review their people management in the face of the new rules, among other things.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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