Brazil: Injunction Suspends Increase in Corporate Labor Debt

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By Ed Taylor

Oct. 27— Brazilian companies facing a major increase in their labor debts received a reprieve when a supreme court justice suspended a labor court decision changing the index used to correct the debts.

It is common for companies in Brazil to appeal labor court rulings that go against them, and these appeals can take years. Over this period, the labor courts adjust the charges the companies are appealing for inflation.

Injunction Granted

In its August decision, the labor court declared unconstitutional the previous index used to correct the charges, which traditionally fell below inflation, and substituted Brazil's consumer price index, the official inflation rate. This change threatened to produce a massive increase in corporate debts, since last year the previous index applied to employer liability was 0.86 percent, while the consumer price index was 6.46 percent, and over the past five years the CPI was 30 percent higher than the index used to correct potential employer charges.

Compounding the problem, the new index factor was to be applied to all pending appeals filed after June 30, 2009. Employers rushed to challenge the court's decision, and on Oct. 19 supreme court justice Dias Toffoli issued an injunction not only suspending the labor court's ruling but allowing employers using the new index factor to be reimbursed for the extra expense. The previous index value will now be restored at least until the entire supreme court rules on the question.

‘A Giant Problem'

“The supreme labor court created a giant problem for companies with losses that would easily run into the billions at a time when the country is fighting to emerge from a recession,” said attorney Maurico Pessoa of the law firm Barbosa Mussnich Aragao, which represented the bank federation that brought the lawsuit in which Justice Toffoli's injunction was issued.

Toffoli accepted the federation's argument that the labor court lacks authority to declare laws unconstitutional and in addition held that the labor court's argument was based on a misinterpretation of the 2009 case used as precedent.

“With this decision, everything is back to normal,” said labor attorney Rafael Ferraresi Holanda Cavalcante of the firm Siqueira Castro Attorneys.

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.