Co-authored by Márcia Alyne Yoshida of Boccuzzi Advogados Associados
Under recent amendments to Brazilian labor laws, parties may enter into legally binding settlement agreements through a new process whereby labor courts can ratify settlement agreements between employers and employees. This change will give employers a useful means of reducing the risks that can arise from a termination of employment.
The new law, No. 13.467, came into effect at the end of 2017 and is aimed at modernizing labor laws that have been in effect since 1943. The new law caused much discussion regarding some of the amendments it made to the Brazilian Consolidation of Labor Laws. One such amendment was the provision that allows employers and employees to sign out-of-court settlement agreements with respect to employment rights and then submit these agreements for ratification by labor courts.
Prior to this amendment, labor courts deemed out-of-court settlement agreements between employers and employees void under Brazilian law. This reluctance to ratify settlement agreements increased instability in labor relations and even gave way to a strategy that became known as “casadinha” (Portuguese for “little combo”). As a result, prior to the change in law, parties would arrive at an out-of-court agreement regarding labor obligations between them. The employee would then bring a lawsuit alleging frivolous claims against the employer with the sole purpose of settling the initial dispute through an in-court agreement—which would reflect the terms of the parties’ out-of-court agreement. This gave the employer the peace of mind that comes with having a legally binding waiver, but it meant that a court action was commenced unnecessarily to achieve the agreement.
This new Brazilian labor reform is considered essential in order to give labor relations greater predictability and to lower settlement costs borne by both the parties and the court system in having to go through unnecessary litigation. The new rules require a labor court to ratify the out-of-court settlement agreements. The labor court is responsible for making sure that the agreement complies with applicable law and that the employee was not forced to execute the settlement. There is also a requirement that different attorneys represent the parties in court. Moreover, the out-of-court settlement agreements shall deal only with specific matters and may not discharge labor obligations in a general sense.
It remains to be seen how labor courts will deal with out-of-court settlement agreements submitted for ratification. On the one hand, there is the possibility that this ratification will become a mere formality, without any thorough analysis of the content of the agreements. On the other hand, it is possible that labor courts will seek greater involvement over this matter, even if it is only through the issuance of guidelines.
As for now, employers may want to consider the new labor legislation as an arising opportunity to isolate risks related to labor obligations at a low cost. Specifically, employers may seek legal counsel in order to make use of the reform’s new mechanisms, such as the aforementioned out-of-court settlement agreements.
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