I INTRODUCTION

Basic employment rights in Brazil are provided for in the Federal Constitution of 1988.

The Consolidation of Labour Laws (CLT), enacted in 1943, is the major statute that regulates the labour and employment relations. In addition, specific regulations are set forth in federal laws for certain professionals (such as engineers, physicians, attorneys) and there are regulations relating to occupational health and safety issued by the labour agency (currently connected with the Ministry of Economy). The labour agency is responsible for controlling compliance with legislation and for regulating employment relations in Brazil on matters ascribed to it by federal law.

In addition to establishing material rights, the CLT also regulates the entire labour court procedural system. There is no discovery phase or trial by jury, as a labour claim must be filed with a labour court and evidence is produced in the proceeding and before the judge who will rule on the case.

Claims can be individual or class; the former is most common. Class actions may be brought against an employer by the union that represents the employees or by the Labour Prosecution Office.

There are three levels of employment courts. The first includes the lower labour courts in which a judge rules on cases at the local level. Next are the regional labour courts, which are generally located in the state capitals. The third level is the Superior Labour Court, which is in Brasilia, the federal capital. In addition to the labour courts, the Supreme Court, which is the highest adjudicative body of the Brazilian legal system, also hears labour cases when lower court decisions violate constitutional provisions.

From the administrative standpoint, in addition to audits conducted by the labour agency, the Labour Prosecution Office monitors compliance with legislation through investigative proceedings. The Labour Prosecution Office acts by means of an indictment, which may or may not be anonymous, and also when urged by the labour courts or by a professional union. If any irregularity is found, the Labour Prosecution Office can propose a settlement, granting the company a period in which to remedy the irregularity subject to the imposition of a fine, or file a public civil action against the company.

II YEAR IN REVIEW

On 11 November 2019, the government issued Executive Order 905, which amends the CLT and adds new employment provisions. In brief, the following are the principal changes that are proposed:

  1. employment contract to boost new job positions for young people (between 18 and 29 years old) (the green and yellow contract);
  2. implementation of a disability rehabilitation programme to assist in the rehabilitation of workers who suffer a work-related accident;
  3. creation of a loan programme to support small businesses;
  4. employers authorised to record labour and employment documents electronically;
  5. standardisation of administrative fines;
  6. employers do not need to request the authorisation from the labour authorities to work on Sundays and holidays;
  7. food benefits are not regarded as part of salary for labour and tax law purposes (no incorporations and no payment of social contributions);
  8. the payment of gratuities by third parties should follow several proceedings (e.g., the distribution criteria relating to tips and payments need to be provided under a collective bargaining agreement or a decision of the employees' general assembly);
  9. establishing a new term of 'adjustment of conduct', to be approved by the Ministry of Economy;
  10. removal of the 10 per cent tax on employee severance indemnity fund (FGTS) fines in terminations without cause (affirmed by Law 13,932 of 2019);
  11. implementation of several changes to the profit-sharing programme; and
  12. l establishing new criteria for premium payments.

The Executive Order will be in effect until 20 February 2020; this term may be extended for an additional 60 days until 20 April 2020. During this time, Congress will decide whether to convert the Executive Order into law. If it does not become a new law, then Congress must define its limits and effectiveness for the period it remained valid.

III BASICS OF ENTERING INTO AN EMPLOYMENT RELATIONSHIP

i Employment relationship

Brazilian law does not require the execution of a written employment contract but most companies and employees follow this practice.

In general, written employment contracts establish the duties to be performed, salary, working hours, corporate benefits, possibility of transfer, confidentiality and non-disclosure obligations, obligations to comply with internal policies, payment for damage caused by employees, payroll deductions in addition to the legal deductions.

Employment contracts in Brazil are usually executed for an indefinite term. Contracts executed for a fixed term are limited to two years. To be valid, contracts for a fixed term must be executed only for services whose nature or temporary measure justifies a definite term, or for temporary business activities.

The principal employment rights are the following:

  1. monthly salary;
  2. transport vouchers;
  3. five days' paid paternity leave;
  4. vacation pay, plus one-third vacation bonus;
  5. 13th-month salary, equivalent to one-twelfth of the monthly salary for each month worked. This is calculated based on the salary for December and paid in two instalments, the first between the months of February and November and the second on 20 December;
  6. monthly contribution to the FGTS, equivalent to 8 per cent of monthly remuneration, deposited monthly with a government bank;
  7. 120 days' maternity leave (this is actually a social security right, rather than an employment right, as the Social Security Agency pays the maternity benefit);

rights provided for in a collective bargaining agreement; andi severance pay.

The remuneration paid to employees generates social security contribution obligations, the percentages of which (as of March 2020) vary according to the amount of salary paid:

Salary (for the purpose of social security contributions) (reais) Index (%)
Up to 1,039.00 7.5
Between 1,039.01 and 2,089.60 9
Between 2,089.61 and 3,134.40 12
Between 3,134.41 and 6,101.06 14

Employees must pay income tax on the full amount of compensation, which must be deducted by the employer. Employers are required to withhold tax and pay the deductions directly to the Federal Revenue Office, providing the employee with annual information that is required for the preparation of an annual tax return. Withholding percentages vary according to the amount of salary paid:

Monthly tax base (reais) Rate (%) Amount of tax to be deducted (reais)
Up to 1,903.98
Between 1,903.99 and 2,826.65 7.5 142.80
Between 2,826.66 and 3,751.05 15.0 354.80
Between 3,751.06 and 4,664.68 22.5 636.13
More than 4,664.69 27.5 869.36

In addition to the payments based on employees' salaries, employers must pay social charges to social security services.

The basic social tax rate applicable to the company on the salary paid, payable or credited to an employee who provides services is 20 per cent. The calculation is based on the total compensation paid, payable or credited for work on any account during the month to socially insured employees providing services.

Sums are added to this 20 per cent contribution to cover the cost of occupational accident insurance, and for contributions intended for social security services that are specific to each activity carried out by the company. The average rate that results from this addition is 28.8 per cent but may vary depending on the economic activity of the company.

Regarding non-employees, the social security contribution rate payable by the company that contracts them is 20 per cent on total remuneration paid or credited to any account. Contributions are not levied to cover the cost of occupational accident insurance, or social security services that are specific to the economic activity of the company.

ii Probationary periods

Pursuant to Brazilian law, a Brazilian company can execute an employment contract containing a probationary period of a maximum of 90 days, and that may be extended once if it has been executed for a term that is less than the legal limit.

If the probationary period has expired and the employee continues working, the contract is automatically deemed to be for an indefinite term.

iii Temporary work

Federal Law No. 6,019 of 1974 on temporary employment authorises that in the legal event of the temporary substitution of regular and permanent staff arising from an increase in business demand, temporary workers may be hired for up to 180 days, which can be postponed by 90 days if the increase in business demand arises from unpredictable factors, or predictable factors relating to intermittent, periodic or seasonal features.

The contracting company is responsible for ensuring that health and safety conditions are met when temporary workers perform services on its premises. Medical facilities and meals that are granted to the contracting company's own employees must be provided also to the temporary workers.

iv Establishing a presence

If an employee is hired by a foreign company to work in Brazil, Brazilian law and jurisdiction will prevail regardless of any other provision established by the employment contract.

The employee, consultant or service provider of a foreign company providing services in Brazil may not perform any acts that could be construed as 'doing business in Brazil'. Regarding the concept of doing business in Brazil, Brazilian domestic legislation does not provide for the notion of 'permanent establishment' as that term has been construed by international tax doctrine, foreign laws and model conventions to avoid double taxation.

The most similar aspect to regulations on a permanent establishment is Article 147 of the Brazilian Income Tax Regulations, which sets forth very specific situations in which Brazilian tax legislation subjects non-residents to the same tax regime applicable to Brazilian tax residents. In this sense, Article 147 lists hypothetical circumstances in which non-residents would be deemed to be doing business in Brazil by means of an organisation of persons or assets. As a result of the application of Article 147, income derived by the non-resident through the organisation of persons or assets would no longer be subject to territorial taxation (which is the standard regime applicable to non-residents) and would be subject to the general tax regime applicable to Brazilian resident legal entities to the extent that the income can be attributed to activities carried out in Brazil.

In this context, while Brazilian law acknowledges the legal personality of foreign legal entities, it does not embrace the freedom of establishment of those entities, as is the case in several other countries. In other words, Brazilian law requires foreign legal entities to obtain authorisation to carry out their activities in Brazil.

If a foreign company establishes a subsidiary in Brazil, it will not be able to hire employees until it has filed its organisational documents (articles of association or by-laws) with the commercial registry of the state where the subsidiary is located.

There is no legally provided time frame for the incorporation of a company.

Hiring consultants or service providers through an intermediary company is possible.

IV RESTRICTIVE COVENANTS

During the term of the employment contract, the employee has a duty of loyalty to the employer and therefore cannot carry out competing activities unless the employer has given authorisation in this regard. Exclusivity does not apply to employees hired on demand (i.e., for work on occasional days, weeks or months).

On account of the constitutional principle of the freedom of every person to work, the employee may carry out competing activities after a contractual termination of employment, unless he or she has executed a non-compete agreement with the employer.

Based on court precedents, a non-compete agreement must be executed at the moment of hiring (either included in the employment contract or in a separate document) and must meet the following requirements: (1) it must be limited in geographical area; (2) the former employee is compensated during the non-compete period; (3) it must be for a limited period of time; and (4) it must be limited to the business area of the employer. Although there is no regulatory legislation, the labour courts have judged non-compete agreements to be valid only when these four requirements are present and provided that the compensation established for the period of non-competition is equal to the salary received by the employee during the term of the employment contract. Note that upon contractual termination, if the employer requires the employee to execute a non-compete agreement, the employee is not under an obligation to do so.

Regarding confidentiality and non-solicitation agreements after termination of the employment contract, these will be valid and payment of an indemnity will not be necessary. For these obligations to be valid after termination of the employment contract, an express agreement in this regard is required.

The employment contract must also contain provisions governing the protection of intellectual or industrial property to the extent applicable and particularly in accordance with the duties being performed by the employee. Regarding provisions concerning inventions created by employees (works made for hire) that are the property of the employer, the contract must provide that compensation paid already includes compensation for intellectual property comprising inventions and enhancements.

V WAGES

i Working hours

The Federal Constitution establishes that the maximum number of hours to be worked by an employee is eight hours per day, 44 hours per week and 220 hours per month.

Special working hours may include continuous rotating shifts, which may only last a maximum of six hours per day, and may be extended to up to eight hours per day subject to a collective bargaining agreement in this respect.

The company must grant a break for rest and a meal whenever the working period is more than four hours, which will be 15 minutes for a working period of up to six hours and of one to two hours for a working period of more than six hours. The break for rest and a meal is not included as part of the working hours.

Working hours do not apply to employees whose working day is proven to include 100 per cent external work with no control of time or hours worked (including employees under home office schemes), as well as to employees who are shown to hold positions of trust, in other words, employees who perform management (or administration) activities as legal representatives of the company and who are not subject to time or hours worked, or monitoring or control. These employees do not have the right to payment of overtime.

Companies with more than 20 employees are required to maintain control of working days for employees who are subject to compliance with working hours. Records of working hour may be manual, mechanical or electronic, so that employees may record the times of entry, exit and breaks.

ii Overtime

If an employee works beyond his or her contractual working day, the company must remunerate the excess hours as overtime, with a minimum rate of 50 per cent more than the ordinary wage for an hour, although there are collective bargaining agreements that establish higher percentages. The employee may work only two overtime hours per day, so that the working day is limited to a maximum of 10 hours.

Hours worked on Sundays or holidays, if not offset in the subsequent week, must be remunerated by 100 per cent of the ordinary wage, irrespective of whether they exceed the daily or weekly limit.

VI FOREIGN WORKERS

Foreign workers may work in Brazil if they hold a residency visa, which is temporary. Requirements for granting visas are set forth in the law and in the regulations of the Ministry of Justice.

For the granting of a temporary residency visa, among other requirements, the foreigner must receive a job offer from a Brazilian company (subsidiary or not) or show evidence that he or she has a graduate degree.

In relation to a temporary visa for an employee who has an employment contract with a Brazilian company, subject to fulfilling the qualification and experience requirements for the job, the maximum term is two years, which can be postponed subject to application and confirmation by the immigration authorities. The permitted number of foreigners holding this visa is limited to a proportion of one-third of the total number of Brazilians hired by the company, in addition to compliance with the rule of two-thirds of payroll salaries. Furthermore, if a foreigner is performing work that is also performed by a Brazilian employee, other requirements such as salary parity may apply, as provided for by the Ministry of Justice. The proportionality requirement is only applicable for the purposes of immigration. The employee must receive remuneration in Brazil and, if he or she continues to receive remuneration from the company abroad, he or she must submit his or her full monthly earnings (in Brazil and abroad) for the purposes of taxation in Brazil. Thus, the Brazilian company must consider for tax and FGTS purposes the amounts received by the foreigner abroad. It should be determined whether there is a tax treaty in place between Brazil and the country of origin for the purposes of offsetting taxes. Dependants of a holder of a temporary visa may also work in Brazil provided that they request authorisation from the immigration authority.

When working in Brazil, a foreign worker who has the status of an employee of a Brazilian company is protected by Brazilian labour legislation, irrespective of the provisions of a foreign employment contract. Thus, the company must afford the foreigner the same rights guaranteed by law to Brazilian workers and it is advisable that he or she be included in the local benefits policy.

The provision of services by a foreign worker who does not hold a work visa, or whose visa has expired or is irregular, may result in administrative sanctions for the company and deportation of the foreigner.

Foreigners holding visit visas (for tourism or business) are not authorised to perform work activities in return for payment. Exceptions apply for audits, consultancy, news coverage (journalism), and working on flights or vessels as a crew member.

VII GLOBAL POLICIES

Brazilian legislation does not prohibit the application of global policies to employees, provided that they do not violate Brazilian law and it is not necessary to obtain approval by the employees or by any government agency for the policies to be implemented. Policies on discrimination, sexual harassment and corruption must comply with applicable Brazilian law.

A global policy should be implemented with care, because concepts, expressions or even words may have a different legal effect if applied in Brazil, giving rise to consequences that would otherwise not occur in other countries. An example is anti-corruption legislation, such as the US Foreign Corrupt Practices Act – practices may be in accordance with the legislation of the country of origin, but as far as the policy in other countries is concerned, including with regard to the form of a potential investigation, certain practices may have legal implications. Thus, prior analysis of the possibility of application of the policy is recommended.

The policies become constituent parts of employment contracts, including disciplinary measures, and may not be altered to the detriment of employees. The policies should be implemented in Portuguese to avoid any allegation by the employee of lack of understanding thereof and so that they can be enforceable. As for the form, they may be written or distributed via the company's intranet.

It is important for a company to have written or documentary evidence that its employees are aware of the policies, particularly if, based upon the terms of those policies, an employee could fail to receive any payment due to him or her, or be subject to a disciplinary measure. In the event of subsequent implementation, depending upon the nature of the policy (e.g., a code of conduct or ethics), it is recommended that the company offer training for its employees and have evidence thereof, on account of the potential civil liability of the company in the event of damage caused by the employee to another employee or to third parties. If the company so wishes, it may also hold a copy to be available to employees.

VIII PARENTAL LEAVE

Maternity leave entitlement is 120 days. An employee may opt to commence paid leave up to 28 days before the expected birth date or just after the child is born.

An employee who has an abortion is still entitled to maternity leave but only for two weeks. The law permits abortion in limited situations; voluntary abortion is not one of them.

Adoption or child custody also entitles a parent to parental leave, the duration of which depends on the child's age:

  1. under one year: 120 days;
  2. between one and four years: 60 days; or
  3. between four and eight years: 30 days.

Maternity and paid leave may be extended to 180 and 20 days, respectively, if the employer joins a government programme called Company-Citizen. In recognition of participation in this programme, employers are entitled to specific tax benefits.

Paternity leave is five days only. During both maternity and paternity leave, an employee continues to receive his or her base salary plus related employment benefits.

IX TRANSLATION

Pursuant to the Civil Code of Brazil, documents must be translated into Portuguese by a certified translator.

It is recommended that all documents, including job offers, employment contracts, internal policies, confidentiality agreements and bonus policies, be executed in Portuguese (or Portuguese and another language).

X EMPLOYEE REPRESENTATION

The Federal Constitution provides that in companies with more than 200 employees, an employee must be elected with the exclusive purpose of representing fellow employees in discussions with the employers.

According to the CLT, which regulates this matter, the number of employees who may be elected depends on the size of the company:

  1. between 200 and 2,999 employees: three representatives;
  2. between 3,000 and 4,999 employees: five representatives; and
  3. more than 5,000 employees: seven representatives.

These representatives have provisional job tenure for one year after they have completed their term as a representative.

In addition, in respect of representation with unions, the law determined that employers and employees must be represented by unions regardless of their acceptance or membership.

Only unionised employers and employees have to pay union dues. In addition to monthly dues, unionised employers and employees are also required to pay other types of contributions to the union.

Employees are also represented by an internal committee for the prevention of occupational accidents, which must be set up by employers, according to the level of risk of the company's activity and the number of employees. Employees elected to this committee will have employee rights during their term of office and for up to one year thereafter.

XI DATA PROTECTION

i Requirements for registration

In addition to the Brazilian General Data Protection Law, which was enacted in 2018 and will come into force in August 2020, a principle in the Federal Constitution already protects employees' privacy and confidentiality.

Personal data that can be requested by an employer is that which is inherent to the hiring of an employee (to fulfil the employment agreement), or is required by labour legislation. These types of personal data do not include sensitive data.

Personal medical information about employees may not be disclosed to third parties; in fact, only the employee, his or her private physician, or the company's physician may have access to this information. If it should be necessary to use medical data, the employee must provide his or her express consent.

Employee data that may be required by the government includes that which relates to the federal government through the annual report on social information, the general report on employment and unemployment, and the severance fund payment receipt and social security information.

On account of the constitutional principle of the right to privacy, information on employees cannot be made available to third parties, unless the employee provides his or her express consent.

It is recommended that the use of data, and the transfer and maintenance of information in a database handled by third parties, be preceded by express authorisation of the employee. In addition, the company should include such terms in employment contracts or even maintain a policy relating to the protection of personal data, in the sense of stating what data will be used, transferred and maintained in databases used by third parties, together with the express agreement of the employee. Likewise, it is also recommended that the policy state that the company's systems are monitored and that any personal data entered by the employee on the company's system may be at risk of disclosure.

ii Background checks

The CLT has no specific provisions on the types of background checks an employer may conduct to investigate a job applicant or an employee during the employment relationship, nor any provisions setting limits on employers undertaking such investigations. Thus, background checks are reviewed according to the principles of the Federal Constitution relating to the protection of employees' privacy and confidentiality. Certain practices relating to background checks can be adopted by employers, provided that they are reasonable and proportional to the work to be performed by the employee. Certain regulations and court precedents permit background check for prospective employees who will assume specific job positions (e.g., finance managers of certain entities, domestic workers).

XII DISCONTINUING EMPLOYMENT

i Dismissal

There is no law forbidding termination of employment in Brazil, except in the cases of vested employee rights provided for by law, such as for a pregnant employee, a representative of the workplace's internal committee for the prevention of occupational accidents, an employee who has suffered an occupational accident, a union official or in a case of vested employee rights provided for in a collective bargaining agreement or internal policy.

ii Redundancies

If an employer needs to terminate employee contracts because of new technology rendering their services unnecessary, the need to cut costs or if the activities of the company are to be terminated or transferred, the employer may simply terminate employment contracts without cause, but with notice and the payment of severance to the affected employees, which is mandatory in such cases.

If redundancy terminations are necessary, a review should be undertaken to determine whether the company employs any workers possessing vested employment rights, as these employees may not be dismissed as a result of redundancy.

Certain collective bargaining agreements grant benefits or provide for indemnities upon terminations deriving from redundancy, and certain employers offer payments that are higher than those provided for by law when contractual termination occurs as a result of discontinuance of a job or function. In these circumstances, it is also sometimes the case that consultation with the union is required before the terminations.

XIII TRANSFER OF BUSINESS

Labour legislation provides that changes to corporate shareholdings do not affect employment contracts with employees. Thus, in the event of a change of control, a previously existing employment contract is maintained and employees may challenge any alteration made to the employment contract that is to their detriment.

Employment succession will be considered whenever there is continuity of the business. Thus, even if only the assets of the Brazilian company are being acquired (totally or partially), labour succession of employers will still be considered and existing contractual employment conditions must be maintained.

Likewise, if the successor company continues to employ its employees, but in the future ceases to pay employment rights or its partners cease to exist, nothing can hinder employees, including those that came with the business, from holding the company that acquired the assets, totally or partially, liable for the obligations. The predecessor company will only be held jointly and severally liable with the successor if there was fraud in the transfer of business.

The law provides that former shareholders are liable for labour-related debts relating to the period in which they were shareholders. This liability is limited to labour lawsuits filed up to two years after the company's by-laws were amended to allow for removal of the shareholders. Before proceeding with enforcement attempts against a former shareholder, the plaintiff must try to enforce the award first against the company and then against its current shareholders. In the event of fraud in the change of the corporate shareholders structure, the former shareholders will be jointly and severally liable for labour-related debts.

Legal compensation

The labour rights relating to mandatory severance pay vary according to the type of termination, as follows.

Termination without cause at the employer's initiative

  1. Prior notice of 30 days, increased by three days for each year of service for the same company;
  2. salary balance in the termination month;
  3. unused earned vacations and one-third additional payment;
  4. prorated vacation and one-third additional payment;
  5. 13th-month salary (or prorated 13th-month salary, depending on the date of the termination);
  6. FGTS: a deposit in the employee's dedicated FGTS account (equivalent to 8 per cent of severance pay as specified by law);
  7. a 40 per cent FGTS fine based on the amount deposited in the employee's dedicated FGTS account;
  8. any other labour right relating to the termination provided for in the current collective bargaining agreement; and
  9. any other compensation or benefit contractually agreed with the employee.

Termination with cause at the employer's initiative

  1. Salary balance in the month of termination;
  2. earned vacation and one-third additional payment; and
  3. FGTS: a deposit in the employee's dedicated account (equivalent to 8 per cent of severance pay as specified by law).

Termination as a result of resignation by the employee

  1. Salary balance in the termination month;
  2. 13th-month salary (or prorated 13th-month salary, depending on the date of the termination);
  3. earned vacations and one-third additional payment;
  4. prorated vacation and one-third additional payment; and
  5. FGTS: a deposit in the employee's dedicated account (equivalent to 8 per cent of severance pay as specified by law).

Termination by mutual agreement is also possible. In this situation, severance pay is the same as stipulated for a termination without cause at the employer's initiative, except for (1) the notice, which is reduced by half, and (2) the FGTS fine, which is also reduced by half (from 40 per cent to 20 per cent). Moreover, the employee may collect only 80 per cent of the FGTS deposited in his or her severance fund account.

In any termination, the law provides the employer with a limit of 10 days from the date of termination for paying severance.

XIV OUTLOOK

The new government under the administration of President Jair Bolsonaro has completed its first year in January 2020.

The composition of the Brazilian Congress is considered favourable for the new government's agenda of liberal reforms, considering that centre-left and leftist parties lost ground in the last election:

Leftist-Centre = 178 (from 209 in 2014);

Rightist-Centre = 335 (from 304 in 2014);

Constitution Amendment Threshold = needs 308;

The political spectrum is more fragmented (30 parties), however, making negotiations more difficult, and the President has not managed to improve the public's opinion of him. In a survey carried out in July 2019, 33 per cent rated him as excellent or very good and 33 per cent rated him as bad or very bad.2

However, the reality of Brazil's current financial status has generated debate about relevant reforms – such as Brazilian social security and tax reforms – which has led to an increase in popular support for the necessity of a substantial overhaul.

The social security reform was approved at the end of 2019, which will lead to a sizeable volume of savings during the coming decade. It should also bring some respite to market participants in the short to medium term, which should help to restore confidence and to allow for a stronger currency and lower base interest rate.

Having emerged from an economic crisis, Brazilian Central Bank's Focus Report (published in 2019) demonstrates that economic activity is expected to accelerate in the future, in terms of:

  1. a lower level of real interest rates, which is expected to boost credit and consumption;
  2. the new government's approach to controlling expenses, which will be a key factor in controlling inflation; and
  3. low exposure to foreign debt as compared with the country's peers and high reserve levels to protect the Brazilian currency.

Markets are expected to start growing at higher rates if critical reforms are approved and investors' confidence increases. The recent enactment of the social security reform confirms this tendency.

Since the election of President Bolsonaro, markets have improved significantly on the back of positive news reporting.


Footnotes

1 Dario Abrahão Rabay is a partner and José Daniel Gatti Vergna and Vinicius Sabatine are associates at Mattos Filho, Veiga Filho, Marrey Jr e Quiroga Advogados.

2 Source: Datafolha.