Brazil: Government Takes First Step in Promised Labor Reform

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By Ed Taylor

Brazilian President Michel Temer has begun to make good on a promise of labor reform made last December.

On Dec. 22, Temer unveiled a reform package directed at easing some of the rigid labor laws that have plagued Brazilian companies for decades. One of the measures promised by Temer was the elimination of a 10 percent dismissal fine long opposed by employers.

Every month, Brazilian employers are required to contribute an amount equal to 8 percent of each employee's total salary to the employee's National Dismissal Fund (FGTS). This amounts to severance pay that is released when an employee is terminated without cause. In these cases, the employer also must pay a fine to the terminated employee equal to 40 percent of his dismissal fund and since 2001 an additional 10-percent fine to the government. This extra fine costs employers an estimated $1.3 billion a year.

On Feb. 17, Temer sent a bill to Brazil's congress that would eliminate the additional 10-percent fine gradually between 2018 and 2027.

Delayed Repeal

The extra fine was originally imposed to cover $20 billion in financial losses caused by court rulings that forced the government to increase the FGTS deposits and was to have been eliminated in 2012. In February of that year, the agency in charge of the dismissal fund confirmed that the debt had been paid and the extra fine could be eliminated.

In 2013, congress gave in to pressure from the National Confederation of Industry and other business associations and approved a bill eliminating the extra 10-percent fine. Two weeks later, however, then-president Dilma Rousseff vetoed the legislation, claiming that the fine was needed to pay for a low-income housing project.

Since 2013, employers have focused their resources on court challenges to the fine, seeking injunctive relief from paying it. Industrial, retail and banking associations have also filed constitutional challenges to the fine before Brazil's supreme court.

Because of the widespread opposition to the fine, the government bill eliminating it now before Brazil's congress is expected to be approved with little difficulty, particularly since the government has an ample majority in both houses of congress. Under the proposal, the 10-percent fine would be reduced by one percentage point a year through 2027.

In its message to congress, the presidential palace said that the extra fine “encumbers business activities in the country” and hinders economic growth.

To contact the reporter on this story: Ed Taylor in Rio de Janeiro at correspondents@bna.com

To contact the editor responsible for this story: Rick Vollmar at rvollmar@bna.com

For More Information

For more information on Brazilian HR law and regulation, see the Brazil primer.

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