On July 6, 2015, the Brazilian government issued an Executive Order (MP 680/15 and Decree 8.479/15) called Program to Protect the Employment (“PPE”) to slow down the rise of unemployment and the deepening of the recession.  PPE, among other things, is intended to allow companies in economic distress to negotiate a reduction in working hours and correspondent salary to reduce labor costs.

Currently, Brazil’s economy is experiencing a great recession and the forecast is dire.  With the exception of exports and farming, which have experienced some growth, “Brazil has reported a long list of negative macro-economic data.”¹ Inflation—which for the past 12 months has been at the all-time high rate of 8.17%—is expected to increase to 8.26% in 2015, although the official target is 4.5%.  Meanwhile, “investment has steadily shrunk over the past two years; production of motor vehicles has dropped by a stunning 20% since January. Although unemployment is still remarkably low, it is rising, with 100,000 jobs lost in April alone.”²

Multinational companies with operations in Brazil are struggling to survive this challenging period and the cost of labor is one of their biggest hurdles. The fact that the labor laws are so inflexible in Brazil accentuates the problems in times of crisis and companies are scrambling to find viable alternatives to deal with the crisis.

Companies have few options to manage slowdowns and most are hard to swallow. With the market retraction, companies are not selling and so production has been reduced to a crawl in certain sectors. However, even though production and sales have been reduced, salaries continue to rise, as negotiated by the unions (all employees in Brazil are represented by a union, regardless of affiliation).

The options to manage the workflow and the costs during a crisis include implementing one of the following options or a combination thereof:

i.“collective vacation,” where the company places all employees or employees of a specific department on paid leave which days off are offset from the employees’ individual annual leave rights (i.e., 30 calendar days per year);

ii.temporary layoffs that can last up to five months;

iii.voluntary dismissal programs, with enhanced severance pay;

iv.reduction of working hours and salary; or

v.termination of employment.

Implementation of most of these options would depend on successful negotiations with the applicable unions to enter into new collective agreements.

While the Executive Order allows companies to reduce working hours and salary for a maximum period of 12 months, it also expands employee rights and employer obligations in an apparent attempt to make it easier for unions to convince employees to vote in favor of these cuts.  Under the PPE, the working hours and respective salaries can be reduced by up to 30%, and the government will award employees with a subsidy equivalent to half of the salary reduction or R$900.84 (approx. $285), whichever is higher during the reduction period.  Therefore, an employee whose regular monthly salary is R$5,000 subject to a 30% reduction will earn R$3,500 from the employer and R$750 from the government, for a total of R$4,250.     

However, for employers the PPE’s benefits are debatable. Indeed, the PPE may help employers avoid the high costs of terminating many employees and later recruiting and training new ones, while maintaining talented employees active.  However, to participate in the program, companies must go through a difficult approval process, including, obtaining the approval of the employees’ assembly, union and governmental authorities by showing the company’s economic distress and tax and social charges good standing.  Even if the company can overcome the difficult hurdle of obtaining approval, the program may prove to be cost-prohibitive and burdensome for the employer in the long run. 

Assuming a company is approved for the program by overcoming this difficult hurdle, its employees will enjoy a temporary protection from termination, known as “job stability”, during the reduction period, plus an additional period equivalent to one third of the reduction period, so employees might enjoy up to 16 months of job stability. In addition, during this time, the company is not allowed to hire new employees, except to fill in for substitutions and former apprentices who completed their training. Moreover, the company will be required to pay its contributions to the social security and the FGTS savings fund, over the government subsidy paid to the employees.

Despite its best intentions, the government’s PPE program will not be helpful to all employers.  Whether being a small or large employer in Brazil, all companies should plan and prepare to deal with their excess workforce, union tactics, and the likely increase of employee lawsuits.

The government is expected to issue regulations in the upcoming days, to provide guidance on what sectors may implement a PPE program and the applicable procedures. Littler will keep our clients abreast of any important developments in this area.