Labour Contracts in Brazil

In part three of our Brazil series, we cover practical information that companies need to know when hiring staff in Brazil. While many of the labor laws are similar to other parts of the world, there is some key details that will help companies understand how things work in Brazil. 

In our previous posts, we covered the process to incorporate a company in Brazil and the requirements for importing equipment or goods into the country using the new entity.  

HIRING YOUR FIRST EMPLOYEES

Brazilian employment relations are governed by the Federal Constitution and specific Labor Laws, such as the Consolidation of Labor Laws – CLT. The Brazilian labor legislation also allows agreements between employers and classes of workers and unions.

• Employee – For legal purposes, a person can only be considered an employee if rendering services to a company, under the orientation and demand of the employer, in exchange for compensation. Since labor courts tend to be protective towards workers, the employment relationship is recognized whenever those elements are proven with or without a written agreement.
• Employment agreements – Most labor rights do not need to be described in a written agreement, which is why the legislation does not oblige the parties to sign written contracts. However, more often than not, employers and employees sign written agreements, which cannot be modified without the written consent of the worker, and any modifications that compromise labor rights are considered null and void for legal purposes.
• Terms – Generally, labor agreements are open ended. The legislation only allows employment for a pre-determined period if under a probationary agreement (90 days) or if the nature of the services to be provided or the business activities justifies a fixed-term contract that is under 2 years.
• Termination – Employment agreements can be terminated by any of the parties, for any reason, and at any time. If the termination was prejudice-driven, there can be legal consequences to the employers, such as, monetary penalties and the obligation to rehire the worker. Also, depending on the justification for the termination, the employer will be required to indemnify the employee, as will be described below.

Practical Advice –

• The Brazilian labor courts are very protective of workers’ rights and controversial clauses will be interpreted to favor the employees, which can be very damaging to the company’s business. In short, the labor courts are very pro-worker which means that most cases are ruled against the employer.
• It is important to have good accounting expertise so they can help companies understand the taxation and social security obligations. This is particularly important when first hiring someone since you will need to understand the gross cost to the company which can be substantially more once you include mandated bonuses, social security, and taxation.

BRAZILIAN LABOR RIGHTS

• Minimum wage: the Federal Constitution requires employers to meet a minimum wage, annually adjusted, and allows working classes, unions, and employers to determine a higher wage. As of 2023, the minimum monthly wage is of BRL 1,320.00 (approximately USD 267.00).
• Working period: employers cannot require employes to work over 8 hour per day or 44 hours per week, without compensating the worked overtime, limited to 2 extra hours per day.
• Vacation period: to be entitled to take a 30-day paid resting period, employees must work for the same employer for at least 12 months. In the 12 months following the “earning period”, the employers must allow the vacation, otherwise, they will have to compensate the worker with twice the vacation pay. Also, it is due an additional vacation bonus of 1/3 of the employee’s monthly salary.
• Christmas bonus or 13^th salary: every December, it is due, proportionally, one month salary to the worker, for the months worked in the year.
• Overtime: whenever an employee is required to work more than 8 hours per day, or 44 hours per week, the employer must pay an additional rate of 50% on their regular hourly pay. This rate can be increased by an agreement between the employer and the employee or by determination of the employee’s labor union.
• Sick leave: the first 15 days of absence due to sickness is to be paid by the employer, and the remaining sick leave is paid by the government, upon approval by the Social Security Auditor (INSS).
• Maternity leave and employment assurance: after giving birth, mothers have the right to stay at home in a 6-month paid leave and cannot have their employment agreement terminated during the period of absence.
• Notice: prior to the employment’s agreement termination, the terminator party should communicate the other at least 30 days before. If the employee is not required to work the notice period, the employers should pay one monthly salary in indemnification.
• Contribution to the National Institute for Social Security (“INSS”): the employer is required to pay to the public institution a contribution equal to a portion of the employee’s monthly compensation, as well as withhold a contribution in the name of the worker. These contributions allow the INSS to assist workers during sick leave, for example.
• Deposit to the Guaranteed Fund for the Time of Service (“FGTS”): the employer is required to make monthly deposits of 8% of the employee’ salary to a blocked account. The employee will only be able to withdraw the account’s balance under specific circumstances.

Practical Advice –

• We strongly recommend the employer to keep every employment agreement and timecards, as well as record any amendments and verbal agreements. Besides from complying with the labor laws, these documents can help avoid unfair and impartial judicial rulings.

EMPLOYMENT AGREEMENTS TERMINATION

As mentioned before, employment agreements can be terminated at any time by either the employer or the employee. However, the labor legislation predicts consequences for determined motives to the termination.

Termination without cause

If the employer terminates the employment agreement, without fair reasoning or taking previous measures, the employee has the right to be indemnified with:

• Proportional compensation for the days worked in the month of the termination and the owed overtime;
• One monthly salary for the waived leave notice;
• Earned vacation period and 1/3 bonus;
• Proportional 13^th salary for the months worked in the year of the termination; and
• Penalty of 40% of the balance of the FGTS account.

Termination with fair cause

If the employee is dismissed for fair motive, that is failure to comply with contractual and behavioral duties, after the employer has taken the appropriate measure to communicate the worker of their inappropriate actions, the employee will have a limitation to their legal indemnifications:

• Proportional compensation for the days worked in the month of the termination and the owed overtime;
• One month salary for the waived leave notice;
• Earned vacation period and 1/3 bonus; and
• Proportional 13^th salary for the months worked in the year of the termination.

Resignation

If the employee chooses to resign, due to personal motive, they will also have a limitation to their legal indemnifications:

• Proportional compensation for the days worked in the month of the termination and the owed overtime;
• One monthly salary for the leave notice, only if required by the employer;
• Earned vacation period and 1/3 bonus; and
• Proportional 13^th salary for the months worked in the year of the termination.

If the employee resigns due to employer’s default, they will have the right to be fully indemnified:

• Proportional compensation for the days worked in the month of the termination and the owed overtime;
• One monthly salary for the waived leave notice;
• Earned vacation period and 1/3 bonus;
• Proportional 13^th salary for the months worked in the year of the termination;
• Unemployment insurance; and
• Penalty of 40% of the balance of the FGTS account;

Discriminatory dismissal

If the employer terminates the employment agreement due to prejudice, such as, racism, sexism, religion and xenophobia, the employee will have the right to choose between being rehired and compensated in the salaries for the period of unemployment and receiving twice the legal indemnifications. Also, it can plead the payment of moral damages, due to the prejudice and unfair dismissal.

Practical Advice –

• Besides from keeping the employment documentation and complying with the labor law, we also recommend that the employer should keep the payment receipts for the legal indemnifications and proof of the motive for the termination for at least 2 years after the event. The Federal Constitutional limits the employee’s right to litigate, so after 2 years of the termination, they are not allowed to levy the due indemnifications.

Conclusion – How can we assist?

Brazil is a great market with many interesting opportunities for foreign companies. It is relatively easy to incorporate a company, but local knowledge and know-how is required for foreign companies to navigate the business and labor aspects properly. Brazilian labor courts favor employees so it is important that companies understand their rights and responsibilities. 

For many years, Ax Legal has a partnership with Freitas Ferraz, a Brazilian law firm, located in Belo Horizonte and São Paulo. Ax Legal and Freitas Ferra work together to ensure that foreign companies entering Brazil have commercial and legal experts that can provide practical guidance at each stage of their growth. 

To help companies operate in the most efficient way possible, we work closely with clients on everything legal, tax, and accounting related.  This includes providing guidance on structuring the new entity, incorporating the company, acting as the local legal representative, using our address as the legal and commercial address, setting up the accounting and payroll, on-going legal advice, and assistance with taxation.

Ax Legal is an advisory firm that works with foreign companies in Latin America. Our team of legal and commercial advisors have a distinguished track record of helping foreign technology and services companies to grow and operate in Latin America. Over the years, we have worked with starts up, mid-size businesses, and publicly listed companies. The one common factor that connects our clients is that they are leaders in their field, providing innovative technologies and services to the industrial sectors.

To better understand how we can support you in the Region, please contact Cody Mcfarlane at cmm@ax.legal