In order to minimize the risk of future unexpected costs with its task force, any legal entity doing business in Brazil should become familiar with the provisions of the Brazilian Labor Law related to employee rights, execution and termination of employment agreements and some aspects of executive compensation.

The employee and employer rights and obligations are set forth in the Brazilian Federal Constitution, the Brazilian Labor Law, in specific legislation (especially that related to employee health), and in the union or collective agreements.

Article 5 of the Brazilian Federal Constitution ensures that foreigners and Brazilian citizens shall be treated equally and, therefore, foreigners are granted the rights to life, liberty, equal treatment, security and property. Furthermore, the Brazilian Labor Law provides that a foreign employee shall have the same rights granted to the Brazilian employees by our Constitution and also by the Brazilian Labor Law.

In this sense, article 7, item XXXII, of the Brazilian Federal Constitution forbids the distinction between manual, technical and intellectual work among employees. This rule, however, must be interpreted in connection with other laws, especially the ones that legislate on the regulatory professions including, among others, engineers, lawyers and physicians. Article 354 of the Brazilian Labor Law establishes that an employer shall maintain the ratio of 2/3 Brazilian employees to 1/3 of foreigners employed in its business.

It is also important to note that Brazilian Labor Law is mostly interpreted according to some principles applicable to labor rights, including, without limitation, the principle of employee protection, the application to the employee of the most favorable rule, no waiver of labor rights and prohibition of modifications in the employment agreement that may adversely affect the employee.

This article will focus on some general aspects of the employment agreement related to employee rights, its execution and termination, and some aspects of executive compensation. To avoid future unexpected liabilities, it is strongly recommended that a lawyer specializing in Labor Law be consulted before hiring any employees in Brazil.

The Employment Agreement

The Brazilian Labor Law sets forth in its Article 3 the legal concept of employee. Labor Courts consider as employee any individual who, expressly or tacitly, renders services to someone, personally, continuously, receiving any kind of compensation and reporting to this person.

An employer can be any individual or a legal entity that hires an employee, bearing the risks of the economic activity.

Under Brazilian Labor Law, employment agreements can be executed expressly or tacitly. Accordingly, the Labor Courts consider that a labor relationship can be characterized even without any express agreement between the parties, provided that the requirements referred to above are fulfilled (personal nature, continuous relationship, subordination and compensation).

For employees who receive lower compensations, most of small-size Brazilian companies do not execute a formal agreement. Usually, the company sign the Employee Identity Card (known as "CTPS") to formalize the labor relationship. The CTPS contains the information regarding the identification of employee and employer, the employee's admission date, the termination date, the employee's position, compensation and criterion of adjustment against inflation, vacation period and special remarks.

For medium- and high-level employees it is advisable that the contracting parties enter into a formal employment agreement, which shall cover, in addition to the above information, other aspects of the labor relationship such as working hours, fringe benefits and confidentiality obligation.

The employment agreement is usually a simple document which will set forth the essential obligations of the parties, compensation amount, benefits, etc. It is usually executed for an indefinite term, but can also be entered into for a limited term, when the nature of the work justifies a pre-determined period, or for 90 days, in case of a probation contract.

According to the Brazilian Labor Law, a regular employee must work for a maximum of 8 hours a day and 44 hours per week. The employee is allowed to work a maximum of 2 extra hours per day.

Such hours must be paid at a minimum overtime rate of 50%¹. The Labor Law also stipulates that there must be a minimum interval of 11 hours between the employee's working shifts for rest. The daily working hours must be recorded by the employee and the related records kept by the employer legal entity may be used as evidence in the event of a labor dispute.

Such rule however does not apply to: (i) employees who work externally in activities considered incompatible with a routine schedule (which condition must be registered in his or her CTPS); and (ii) employees who have management positions, such as the officers of a legal entity, provided that they receive an additional compensation equivalent to, at least, 40% of their regular salary.

There are other exceptions, usually providing for reduced work shifts for employees who work in dangerous conditions or who work in some specific activities. The union agreements may also establish different working hours for employees, including, among others, a different working shift for employees who work in continuous rotation.

The agreement must contemplate other basic rights of the employee, such as compensation not inferior to the minimum salary established by the Brazilian Government; one day off during the week, preferable on Sundays; 30-day vacation period², 13th salary per year (an yearly bonus equivalent to one salary), premium for dangerous work, premium for unhealthy work, payment of monthly social security contribution³, payment to the Guarantee Fund for Term of Service - FGTS⁴, and payment of a 20% premium on the normal working hour for the work performed between 22:00 pm and 5:00 am.

The employment agreement can also set forth other rules applicable to the labor relationship, such as confidentiality obligations, payment of bonuses, payment of profit sharing, payment of fringe benefits such as health plan, automobile, etc., among others.

The payment of fringe benefits will be usually considered as part of the compensation of the employee, as per articles 457 and 458⁵ of the Brazilian Labor Law. Thus, the employer will be required to pay the social security contribution and the contribution on the Guarantee Fund for Length of Service – FGTS on the amount paid as a fringe benefit as well. In this sense, it is advisable for the employer to make an accurate assessment of the total cost of the employee for the company before hiring him or her. Such cost, which is commonly underestimated, is quite relevant and can represent approximately 75% of the monthly compensation paid.

Brazilian Labor Law also provides that, in the event that a Brazilian employee executes the same work as the foreign employee, he or she will be entitled to receive the same compensation paid to the foreign employee.

On the other hand, pursuant to Brazilian Law, the salary must be established and paid in national currency. The stipulation of a salary in American Dollars or other currency, as well as its payment abroad, will be considered null and void.

Termination of the Employment Agreement

In the event of termination of the employment agreement executed for a limited term, the employee will not be entitled to the payment of any indemnification upon the lapse of the established term.

The employer must pay only the employee's salary, the 13th salary (which can be calculated proportionally), and the vacation time indemnification (which can be calculated proportionally), plus 1/3. The employer must also release the employee's Guarantee Fund for Length of Service – FGTS.

The termination of the employment agreement for a limited term before or after the agreed-upon date must fulfill the conditions for termination of the employment agreements for an unlimited term.

In case of termination of an agreement executed for unlimited term, without cause, in addition to the above-mentioned benefits, the employer will have to pay the to the employee: (i) a penalty of 40% of the total amount deposited with the Guarantee Fund for Length of Service – FGTS; (ii) a paid termination notice, which can vary, depending on the duration of the employment agreement, from 30 to 90 days; and (iii) release of the unemployment insurance.

In case of the termination of an employment agreement for unlimited term, for cause, the employer must pay to the employee only the salary and pending vacations, plus 1/3. The termination for cause in Brazil is unusual and is often disputed before the Labor Courts. Under the Brazilian Labor Law, the employer can terminate the labor relationship for cause if the employee is dishonest; in case of bad behavior; unfair competition with employer; criminal conviction and customary drunkenness, among others.

Independently of the manner the labor relationship is terminated and the term of the employment labor agreement, if the labor relationship has lasted more than one year, termination must take place before the representative of the employee's union. This, however, will not prevent the employee from filing a lawsuit with a Labor Court to enforce any potential claims he might have.

Conclusion

In conclusion, the full comprehension of the rules applicable to labor relations, as well as the correct assessment of the costs involved, will be necessary to avoid the risk of future liabilities for the foreign investors who intend to start a business in Brazil.

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1 Usually union agreements set forth a higher percentage such as 75% or 100%. The extra working hours during the day off or during holidays will be paid at a 100% overtime rate.

2 To the amount paid during the vacation time the employee must add an additional 1/3.

3 Usually 20% of the total compensation paid to the employee.

4 8% of the total compensation paid to the employee, including benefits.

5 "Article 457. There are included in the compensation paid to the employee, along with the salary, any tips paid to the employee.
(…) Article 458. Besides the payment in cash of the salary, the fringe benefits such as food, automobile, gasoline, health insurance, among others, are included in the compensation paid to the employee. (…)"

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*Patrícia Vilhena is a partner at Pinheiro, Mourão, Raso e Araújo Filho Advogados.