Brazil: Supreme Labor Court Raises Cost of Employer Appeals

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Aug. 25—A decision by Brazil's supreme labor court to change the inflation-correction mechanism on company labor debts will have a major impact on the cost to employers of labor court appeals.

It is common for companies in Brazil to appeal labor court rulings that go against them, and these appeals can take years. While the appeal is pending, the labor courts adjust the charges the companies are appealing for inflation. Until now, this adjustment was based on an index favorable to employers, and corrections to possible penalties tracked behind annual inflation.

Under the supreme labor court's Aug. 4 decision, however, the consumer price index will now be used to calculate the inflation adjustment. This is a significant change, since last year the index applied to employer liability was 0.86 percent, while the consumer price index was 6.46 percent. Over the last five years, the CPI was 30 percent higher than the inflation adjustment index applied to employers.

'A Billion Dollar Increase'

The new indexing mechanism will be applied to all appeals filed after June 30, 2009, that have not yet been resolved. This will force employers to increase significantly the reserves they set aside for labor cases, accountant Lazinho Monteiro Junior of the firm A.S. Couto & Monteiro Associated Accountants and other labor analysts told Bloomberg BNA.

“This is a billion dollar increase in labor costs for companies, and it is coming in a crisis year” as Brazil's economy rapidly slips into recession, said attorney Adauto Duarte, a member of the labor relations council of Brazil's National Confederation of Industry.

The new calculation has made it potentially much more expensive for employers to appeal labor court rulings than to pay the penalties initially levied, according to attorney Juliana Bracks of Bracks Attorneys, which is likely to reduce the number of appeals going forward.

“I think this was the idea of the labor court,” Bracks said. “It has to be too expensive to not settle cases and choose to challenge labor charges in the court system.”

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