An Easing of Brazil’s Restrictive Labor Laws? Only Time Will Tell

Brazil’s troubled economy has been making global headlines for the past few months. After five years of growth, understood now to have largely been fueled by China’s seemingly insatiable hunger for commodities, the economy has ground to a halt and is declining to negative growth for 2015 and likely 2016. For the first time in 13 years, the currency exchange rate hovers at around four Brazilian reais to one U.S. dollar, and the Brazilian stock market is at its lowest level in more than six years. And, with Standard & Poor’s recent downgrade of Brazil’s credit rating, Brazil has lost its investment-grade status.

The faltering Brazilian economy, along with rising unemployment and a loss of consumer confidence, means that many companies operating in Brazil will face challenges in the short and medium term. Since mid-2014, for example, the Brazilian automobile industry and oil and gas industries have been particularly impacted by sharply declining automotive demand and falling world crude prices, respectively. Declining demand may mean that companies need to downsize to remain in business. However, Brazilian labor law makes it very expensive to discharge employees; there is no exception for reductions in force for economic reasons (unlike under U.S. law), and instituting temporary layoffs has been difficult. The result for some companies may be shutting down operations, selling their companies, or exiting Brazil.

Brazil’s President Responds to the Current Economic Reality

In early July of 2015, in the face of economic slowdown, President Dilma Rousseff signed Provisional Measure 680/15 permitting companies to reduce employee working hours and salaries for up to 12 months in order to avoid layoffs and additional economic harm. Approved by the House of Representatives on October 14, 2015 with some modification and now before the Senate for approval,, the measure should remain in effect until December 31, 2017 The initiative created by this temporary measure is called the Program to Protect Employment (Programa de Proteção ao Emprego (PPE)). The PPE is designed to assist companies in certain industry sectors that find themselves in a serious financial situation by allowing them to reduce their costs of operation but maintain their employee base. The government has publicly stated its belief that it is more important to use public resources to maintain employment than to fund unemployment. In an unusual unity of interest, both employers and unions view the measure favorably.

What is the Program to Protect Employment?

According to the Brazilian government, the objectives of the PPE are to

1. protect employers in moments of temporary reductions in their economic activity;
2. maintain long-term employment relationships, guarantee workers’ rights, and preserve productivity;
3. preserve the economic and financial health of companies;
4. maintain contributions to the Government Severance Indemnity Fund (Fundo de Garantia do Tempo de Serviço (FGTS)) and social security (INSS); and
5. promote collective bargaining and improve labor relations.

 

The PPE enables employers to reduce employee work hours by up to 30 percent, with a commensurate reduction in salaries, until the employer’s financial situation improves or the maximum 12-month program period ends. Reducing work hours has the additional benefit of allowing companies to reduce production and operating costs overall.

For a qualifying company, the government—through its unemployment benefits fund, known as the Workers Protection Fund (Fundo de Amparo ao Trabalhador or FAT)—will supplement the reduced wages by up to 50 percent. In return, the qualifying company may not discharge any employees without just cause, until 2 months after the end of a 6-month program period or 4 months after the end of a 12-month program period. By reducing the impact of salary reductions, contributions to the FGTS and social security INSS are preserved at 85 percent of the normal rate.

Who Can Participate?

Eligible companies and industry sectors are determined by the PPE Committee (Comité do Programa de Proteção ao Emprego). Participating companies are required to maintain their current workforces and utilize the PPE to avoid discharging employees.

In order to participate in the program, companies must execute a special collective bargaining agreement with the representative union. Among other conditions, the agreement must pertain to all company employees or those of an entire division; the salaries of all affected employees must be above the legal minimum wage; and the company must comply with all applicable tax and social contribution requirements. The collective agreement must also state the intended reduction in working hours and the duration of the reduction.  The agreement must then be approved by the employees affected by the reduction.

To qualify for participation, a company must submit a request with a copy of the collective agreement and proof of the company’s serious financial situation. In addition to its poor financial health, a company will be considered “in crisis” if it has dismissed more employees than it has hired in the past year. The company must also demonstrate that it has exhausted other avenues to reduce salary expenses, such as granting holiday entitlements and using up employee banks of hours (i.e., paid time off in lieu of overtime pay).

Program Participation in First Three Months

The industry sector that has most actively sought participation in the PPE has been the automobile industry. The industry has experienced a 30 percent reduction in demand, resulting in almost 40,000layoffs by the summer of 2015, which represents more than 11 percent of all layoffs in Brazil. The Program was used by a leading European automobile manufacturer in August, for example, to return 1,500 laid-off workers to their jobs at a 20 percent reduction in pay overall. Another manufacturer entered the PPE in mid-September, after workers approved the collective agreement in August. Part of the agreement stipulates that work hours will be reduced by 20 percent, but salaries by 10 percent, and the workweek will run from Monday through Thursday. The heavy-equipment manufacturing industry has also been impacted by the economic downturn, and one of its biggest players—a U.S.-based company—is also participating in the PPE.

Is There an Alternative?

While the PPE might be a good program for employers that believe their economic challenges will be of a limited duration, this may not be a solution for companies and industry sectors facing longer-term challenges. The layoff system, which allows temporary suspension of labor agreements, may still be worth exploring due to hard cost savings.

Signs of Flexibility for Employers?

As the United States experienced during the 2008 global economic crisis, a company’s ability to quickly react to market downturns—and, if necessary, conduct layoffs, reduce hours and pay, or otherwise reorganize—is critical to a country’s ability to recover and return to economic growth. If the PPE continues after a vote by the Brazilian Senate , this program may be a step toward more flexibility for companies operating in Brazil. Although onerous, the PPE may be an option that could give companies some breathing room during a difficult economic time. Both Brazilian employers and U.S. companies with operations in Brazil may be able to adjust their workforces to fit the current economic reality and retain their positions in this important market.