Labour challenges and opportunities in Brazil for M&A projects after the Covid-19 pandemic

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André Blotta Laza

Lobo de Rizzo, São Paulo

andre.laza@ldr.com.br

Fabio Batista de Medeiros

Lobo de Rizzo, São Paulo

fabio.medeiros@ldr.com.br

Daily reports released by the World Health Organization (WHO) from 1­-9 June highlight Latin America and the Caribbean as the current epicentre of the world’s coronavirus pandemic (Covid-19). The virus’s progression has led to around 1.4 million reported cases and 73,700 confirmed deaths in the region – roughly 20 per cent of the worldwide rates. Brazil is the most affected country, accounting for 50 per cent of confirmed cases and mortality in the region.^[1]

The extensive challenges in restraining infection rates have already affected the country's economic projections, disrupting the upward trend in the Brazilian GDP that we have seen since 2017, when it overcame the recession cycle started in 2015.^[2] The federal government's gross domestic product (GDP) growth forecast for 2021–2023 (3.3 per cent, 2.4 per cent and 2.5 per cent respectively), submitted for approval by the National Congress on 15 April 2020 and embedded in the country’s 2021 Budgetary Guidelines Law,^[3] should be significantly affected. The international market projections are currently negative: for example, the World Bank estimates a eight per cent fall in Brazil’s GDP in 2020.^[4]

In addition to the health and economic impacts of the crisis, the country’s underlying issues tend to unleash significant challenges to M&A transactions. Although it is among the world’s ten largest economies, Brazil was only placed 71st out of 141 jurisdictions in the World Economic Forum’s 2019 Global Competitiveness Report. ^[5] According to the report, the key elements of poor competitiveness from a labour standpoint were related to the bureaucracy involved in hiring and terminating the workforce, high costs and inflexibility of labour rights, and difficulties in attracting and retaining skilled professionals.

Moreover, companies doing business in Brazil have to deal with complex judicial and social issues, such as the entrenched activism of labour judges, labour auditors and prosecutors of the Labour Prosecution Office. By enlarging the labour law interpretation and application, which is often grounded on abstract constitutional principles rather than positive legislation, employees tend to be favoured in judicial and administrative disputes under the concept of their employers’ social and financial dependency, which triggers a contractual imbalance between the parties.

The labour authorities’ protective nature, coupled with a huge judicial and administrative structure^[6] and the ease of filing lawsuits – which, until the end of 2017, neither required the payment of court fees nor entailed the plaintiff’s punishment for costs and attorney’s success fees – led Brazil to become one of the world’s leaders in labour litigation, with 10.3 million new lawsuits filed from 2016 to 2018.^[7]

From a social standpoint, another major challenge for companies is the archaic Brazilian union structure, which is based on the Italian model from the 1930s. It prevents more than one union per industry and municipality, and ensured mandatory union financing by all members of the trade and labour categories from 1931 to 2017, even if they were not affiliated to the respective entities. However, this financing scheme weakened the unions’ representation activities: because no competitors existed within each territorial jurisdiction, there was a boom of registration requests before the former Ministry of Labour to enable directors to collect the statutory amounts paid by employees and employers. This led the country to register more than 17,000 unions in 2018. Legal claims brought by unions, federations, confederations and union centres against companies and employees aiming at collecting union dues were quite common.

Even so, the economic crisis triggered by the Covid-19 pandemic can bring countless business and investment opportunities in Brazil.

First, the reduction in value of national assets arising from foreign currency appreciation (such as the US dollar and the Euro), which is unlikely to reverse in the long term according to economic forecasts, may provide parties with greater negotiating powers. Industries such as education, insurance, healthcare, life sciences, technology and fintech – already M&A transaction leaders in Brazil – tend to become even more attractive in this context. The economic crisis does not affect the country’s consumer market size: the tenth largest in the world, according to the World Economic Forum. Finally, real currency devaluation usually improves the competitiveness of the nation’s key sectors – agribusiness, steel, metalwork and mining – which increases their export capability, enhances the goods and services production chain, attracts investments and creates more jobs.

Second, a more favourable legal scenario is in force since the end of 2017, when labour, social security and civil legislation reforms were introduced to simplify companies’ opening and closing regulations. It also cut labour relations bureaucracy by reducing state control over labour relations and reduced hiring costs. Such attempts aim to provide greater legal certainty for investors. The measures include the following.

Voluntary union dues

Union dues owed to labour and trade unions are no longer mandatory and can only be deducted from the employees’ compensation, or paid by employers, with their previous and express approval. This measure significantly affected union revenues, imposing a natural and accretive merger process which may eliminate redundant or inoperative unions.

Unrestrained outsourcing processes

According to Precedent 331 of the Superior Labor Court, outsourcing was only allowed for:

• activities unrelated to the company’s core business;

• surveillance;

• cleaning; and

• maintenance services.

The new legislation now allows it for all kinds of business.^[8] There is no direct employment bond between a contracting company and an employee of the outsourcing services provider. The former, on the other hand, is secondarily liable for the labour rights and the social security charges in case the latter fails to comply with such obligations.

Negotiation prevailing over the law

Multiple subjects can now be collectively negotiated among employers and unions, overriding legal provisions. Amongst them, the most relevant are:

• working hours control, provided that the constitutional limits are complied with;

• annual career planning charts;

• meal and rest breaks;

• company internal policies;

• employees’ representation at the workplace;

• telework;

• zero hour contracts;

• compensation related to work efficiency;

• working hours registration scheme;

• replacement of rest breaks due to holidays;

• profit sharing programmes; and

• fringe benefits related to goods or services.

Extended negotiation alternatives with ‘self-sufficient’ employees

Individual negotiations about the subjects referred to in the previous item, involving employees with a university degree and who receive a monthly compensation of at least R$12,202.12, prevails over both the law and the collective agreements entered into with unions.

Limitation of labour courts case law influence

Precedents and any other case law statements rendered by labour courts can neither restrict or limit rights legally ensured, nor create employers’ liabilities not provided for by the law or by collective agreements.

Liability of former shareholders

Former shareholders can now only be deemed secondarily liable for the company’s labour obligations considering the period in which they effectively held a shareholder position. This is limited to lawsuits filed up to two years from the respective withdrawal from the company, except in the event of fraud, in which case they are deemed jointly liable for all labour and social security obligations.

Appraisal of collective negotiations by the courts

There is an express prohibition on judges appraising the substantive content of collective agreements executed by unions and companies. Courts are now only entitled to check whether legal requirements are complied with within the negotiation process, such as the parties' ability to negotiate, the execution of deadlines, proceedings, and matters provided by law.

Telecommuting

Parties can now negotiate the rendering of services outside the company’s premises supported by communication equipment by means of written individual/collective agreements, which must state each party’s liability for the acquisition, maintenance, supply and reimbursement of costs related to the remote work. Employees under such scheme are exempt from working hours control and are not entitled to overtime payments.

Working time control

Employers are exempt from tracking daily working hours if they engage less than 20 employees. Employers with more than 20 employees are entitled to just track overtime periods, provided that an individual or collective agreement is entered into to set this condition. 

Working time offset system

This may now be negotiated by written individual agreements assuming that the offset is held within six months. If an employee is dismissed, the overtime balance shall be paid within the termination payment deadline.

Zero hour agreements

Employers are allowed to hire employees for services on an hourly, daily or monthly basis to perform intermittent or seasonal activities. In this regard, intermittent employees must be contacted up three days in advance of starting work; however, they are not legally bound to accept it. Payments must be made on an hourly basis and cannot be lower than the minimum wage’s hourly amount or the minimum professional wage stated by collective agreements. The pro rata salary impacts on mandatory rights are also enforceable for those employees.

Salary impacts

The following sums are no longer included in the employees’ compensation basis:

• travelling expenses;

• fringe benefits (any additional pay, bonus, benefit or extra payment granted, such as goods, services or cash related to an unexpected and higher performance accomplished by an employee);

• allowances; and

• food aid provided in kind or by means of meal vouchers.

These are no longer a basis for labour rights nor subject to social security dues.

Termination of agreements

Generally, employers are free to terminate any employment agreement upon the payment of statutory severance rights. Since the 2017 labour reform parties can agree upon the termination of the employment agreement with special conditions. For this purpose, employers must comply with:

• fifty per cent of the payment in lieu of notice;

• the unemployment severance fund deposits (FGTS) plus 50 per cent of the corresponding termination fine; and

• one hundred per cent of the mandatory severance sum.

Employees, in turn, can only withdraw 80 per cent of the FGTS deposits made available in their bank accounts and are no longer entitled to receive the government’s unemployment insurance. Ratification of the termination process by labour unions is no longer mandatory, provided that collective agreements do not state otherwise.

Mass layoffs

Employers are no longer required to negotiate mass layoffs with labour unions and are free to shut down without prior consent.

Alternative dispute resolution

Employees earning at least R$12,202.12 monthly compensation are entitled to enter into a contractual covenant or expressly agree on an arbitration clause to solve any disputes arising from the employment agreement, which prevents labour courts jurisdiction. No university degree is required for this intent.

Depending on the promises made by the current government, new measures are expected to be approved soon. These mainly relate to labour and social security charges exemption for many industries, as well as flexibility in inspections and assessments conducted by labour auditors.

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