Brazil: Mass Reform

Last Updated: 28 January 2010
Article by André De Melo Ribeiro

In February this year, Brazilian aircraft manufacturer Embraer suddenly announced the dismissal of over 4,300 employees - around 20% of its entire workforce. The legal cases arising from the move and the subsequent court decisions suggest a tendency towards the likely reform of the nature in which mass dismissals are approached and handled in Brazil.

Embraer is the world's third largest manufacturer of commercial jet aircraft, but the company's recent financial reports showed a 3.2% drop in orders during the fourth quarter of 2008.

With an already inflated headcount due to significant growth in recent years together with the difficulties of hiring qualified professionals for its specialized market, the company took the step of dismissing around 4,300 workers from across its different plants in São Paulo State, explaining that the move had been brought about as a consequence of the global financial crisis.

With 90% of Embraer's orders originating from overseas where the recession has had more of a direct effect than on the Brazilian domestic market, the company felt it could not maintain a workforce based upon orders which did not exist for economies which, according to the President of Embraer, Frederico Curado, are in "clear recession".

Wider involvement

Brazilian President, Luiz Inácio Lula da Silva, a long-time advocate of labor rights and a former union leader, reacted quickly to the dismissals, which include a clear reference to the period in which Embraer was a government company.

"The President was extremely angry about [the dismissals] and feels that the company capitalized upon public resources and made no previous notice that it would be taking such a measure," explained Artur Henrique, President of CUT, one of the national labor union organizations.

Embraer is partly financed by the Brazilian National Economic and Social Development Bank (BNDES), 40% of the resources of which are drawn from the 'FAT' (Workers' Support Fund), which is, in turn, made up of contributions from the PIS tax on workers' salaries.

Following the dismissals, Embraer was called to task on the issue and the case was taken to the Regional Court of Campinas and the Superior Labor Court. The first of these forums determined the suspension of such dismissals and, after unsuccessful negotiations between the company and the labor unions representing its employees, the Regional Court ordered the company to pay out additional severance benefits which were to include reference to the period in which the dismissals were suspended.

However the Superior Labor Court later granted a motion from Embraer to recognize that the lay offs were effective as from the dismissal date established by the company and there was an absence of employer obligation to previously negotiate "mass" dismissals with the labor union, since Brazilian Labor Law still recognizes dismissal at will and does not establish any concept of mass dismissal.


Due to such precedent, in a country where the labor laws largely favor the worker, the lack of regulation concerning mass termination procedures, especially in cases involving public funds (albeit indirect) has become an issue of intense discussion within business and legal circles. Indeed, the legacy of the events which unfolded during the dispute has started to lay a new framework for management/labor relations in Brazil.

Firstly, the suspension of mass dismissals, as determined by the Regional Court of Campinas, although overturned at a later date, is an important precedent – which had already influenced a number of similar decisions by the Regional Court of São Paulo - and cannot be ignored by companies considering redundancies due to a reduction in orders from overseas. Secondly, the final decision of the Superior Labor Court maintaining the motion granted to Embraer, indicated an important stance: from now on the Supreme Labor Court recognized that collective negotiations shall be promoted, in order to avoid significant workforce reductions as much as possible.

Such precedent increases the leverage of case law suggesting that if a company arrives at the point where it feels that mass redundancy is necessary, it should now negotiate with the labor union before an announcement is made with a view to the implementation of other alternatives (i.e. salary reduction, suspension of contracts, reduction of overtime, or voluntary dismissal programs). If such measures prove impractical, the company must then negotiate additional benefits for the employees being dismissed.

Change is at hand

Solid evidence of the changes occurring in the marketplace has already been seen in the activities of the Labor Law Department at Felsberg e Associados.

"Although a number of our clients have had to downsize operations in Brazil over the past months, we have been able to either successfully negotiate significant cost reduction measures with the labor unions involved or, in drastic scenarios, negotiate the closing of certain operations either definitively or through restructuring procedures," explained Dr. André de Melo Ribeiro of the Felsberg Labor Law Department.

"Reviewing such cases, the cornerstone of the majority of successful deals is our close relationship with our clients and our recognition of the importance of fully understanding their operations and needs. This allows us to take a clear picture of the operation to the negotiating table and thereby present the most efficient arguments in the negotiations," Ribeiro concluded.

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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