As an example of the cultural as well as legislative pitfalls that can face businesses investing in Latin America, the case of Foxconn, the world’s largest contract manufacturer, is instructive. In October 2012, Brazilian workers protested outside the company’s factory in Jundiai, São Paulo. Unlike their Chinese counterparts, who had protested against highly regulated and stressful working conditions and long hours – there had been a high level of suicides among workers – Brazilian workers protested because they did not like the food in the canteen.

Foxconn is growing rapidly in Brazil. Many of its plants in the country make Apple products, which helps Apple to reduce its imports from China and consequently reduces import taxes on electronic goods sent to the US from China. Foxconn’s total investment in Brazil is estimated to exceed $12bn and the company has created thousands of jobs as a result. But the new factories in Brazil, where unions are historically strong, have faced considerable challenges.

In addition to the protests in Jundiai, Brazilian workers have staged protests over everything from overcrowded transport to working hours and the lack of career planning offered to employees.

The purpose of this article is to explore, based on experience gained over the past 25 years, the most common challenges foreign investors face with regards to labour and employment relations when entering Brazil, either through a newly incorporated wholly owned subsidiary or through the acquisition of an existing business.

Strict guidelines

Brazilian labour relations are governed by the Brazilian Labour Code (Consolidação das Leis do Trabalho, or CLT), a statute enacted in the early 1940s which, although amended repeatedly over the past 60 years, is still designed to protect employees and not to foster business development. 

The principles governing the CLT give a good flavour of the challenges employers in Brazil face on a routine basis. These principles are:

• Employees cannot waive rights and compensation cannot be reduced.
• The most beneficial rule to the employee prevails regardless of the hierarchy of the source.
• Facts prevail over form.
• Employment agreements are meant to be in effect for indefinite periods of time.

Because employees cannot waive rights, the ability of an investor to freely negotiate employment conditions is very limited. Therefore, before putting together a job offer for an employee working in Brazil, investors must be aware of the basic employment rights the employee will be entitled to, regardless of and in addition to what the job offer says. Otherwise, additional benefits provided for by the company will be added to the mandatory benefits and the investor may end up having to provide much more than it initially intended.

Note that any employee working in Brazil, regardless of their nationality or the place they were hired, is subject to the application of the Brazilian labour laws to their employment agreement. The most basic rights a Brazilian employee has are:

• A Christmas bonus or thirteenth salary equal to one additional month of salary per year.
• Thirty calendar days of paid vacation per year.
• A vacation bonus equal to one-third of a month's salary when vacation is either taken or paid.
• The right to a fund called Fundo de Garantia por Tempo de Serviço, or FGTS. The employer must deposit 8% of the employee’s monthly salary into this fund on a monthly basis. The fund bears interest and is adjusted for inflation. The employee has access to the fund if their employment is terminated without cause or in specific circumstances provided for by the law, such as when they want to buy a house or need to pay for medical treatment.

The Brazilian system accepts termination at will and upon being terminated the employer is required to pay a fine equal to 50% of the balance existing in the employee’s FGTS account. Of this fine, 40% goes to the employee and 10% to the government.

Therefore, upon putting together the job offer, foreign investors must make sure that the conditions offered, once added to these mandatory rights, will not make the employment agreement excessively expensive. Also, the offer must consider local requirements such as monthly salaries (as opposed to an annual salary) and payments in local currency only.

Catch 22

The inability to waive rights and the application of the most beneficial rule to the employee have created great challenges for newcomers in the Brazilian market. A good example of this is the case of a foreign investor that offered a local Brazilian a job and stated his monthly salary in US dollars, clarifying that he would receive, on a monthly basis, an amount in Brazilian reais equivalent to the stated amount of US dollars.

As at that time (early 2000) exchange rate fluctuation was quite constant, the employee’s salary was supposed to vary up or down on a monthly basis. However, the investor was told by its human resources department that Brazilian law would not allow a reduction in the employee’s salary in reais from one month to the next. Therefore, the investor decided to increase the employee’s salary when the exchange rate went up but not to decrease it when it went down.

This was a manageable arrangement for the company up until the time when, as a result of the uncertainties involving the election of president Luiz Inácio da Silva in 2003, the exchange rate variation upwards exceeded 200% and, suddenly, the employee was making more money than the CEO of the company. 

The company was then advised by its lawyers and human resources department that it could not change the conditions of the employment agreement that were beneficial to the employee, even though the company had the employee’s consent (the employee was willing to adjust his salary in order to keep his job). The company was therefore forced to terminate the employee's contract, even though both parties were willing to accommodate a more agreeable solution.

Tripping points

The principle that facts prevail over form has also caused a great deal of trouble for foreign investors. This is because it allows judges to disregard, for example, consulting agreements entered into between an employee and a foreign entity belonging to the economic group of the employer. Simultaneously judges can also disregard the employment agreement entered into between the employee and the local Brazilian subsidiary of the same economic group to allow the employee to receive part of their compensation outside Brazil. 

Based on this principle, a judge can determine that such a consulting agreement must be disregarded and that the payments made abroad must be treated as compensation under Brazilian law since the employee renders service in Brazil only. The court can rule that the consulting agreement has no substance and simply declare it null and void.

This same principle allows judges to declare that individuals hired as independent consultants or even statutory officers are, in fact, employees and therefore entitled to the benefits inherent to the employment agreements mentioned above. Judges are required to consider whether the elements of an employment agreement are present in each given case regardless of the type of agreement in place. Article three of the CLT states that an employment relationship exists when the work is performed, on a personal basis, on a frequent basis, in exchange for compensation and with typical employee subordination.

Finally, the principle under which employment agreements are meant to be in effect for an indefinite term resulted in provisions of the CLT limiting to very specific circumstances the parties’ ability to enter into a fixed-term employment agreement. In general, fixed-term employment agreements are allowed only for trial periods of up to 90 days and for agreements that have a defined fixed-term scope, such as when an engineer is hired to build a plant.

This means that foreign investors in Brazil should not use an automatically renewed agreement for fixed terms, even though they may be common in their own jurisdictions. An employment agreement entered into for two years is considered, under the Brazilian labour laws, as an agreement that provides the employee with the right to their employment for the term fixed therein. This means that if an employer decides to terminate an employee's two-year contract after the first year, the employee can validly argue that they are entitled to receive a salary for the remaining 12 months of employment.

This is another challenge new investors have faced when they have tried to apply foreign templates of employment agreements to Brazilian employees without a complete understanding of the governing principles and rules.

Protecting the workforce

Foreign minimum wage laws and the higher cost of living in Brazil mean that Foxconn must pay its Brazilian workers more than their counterparts in China, with wages in Brazil starting at $550 a month, compared to about $300 in Zhengzhou, China. Only a small percentage of the company's 1.2 million workers are based outside of mainland China and its headquarters in Taiwan, according to interviews with employees and company statements.

Despite occasional strikes in places such as Brazil, Foxconn's overseas operations have generally managed to avoid the sort of violent conflicts experienced in China. Cultural differences are muted slightly as the majority of overseas managers are locals, according to people familiar with its operations.

Employment relationships are highly regulated in Brazil and the regulations, as can be seen from the examples above, tend to benefit employees. There are a variety of additional payments provided for in the CLT a foreign investor should be aware of in order to be able to have a well-developed and successful business plan. These include additional pay for overtime, for night work, for dangerous work, for unhealthy work, for on-call work, and so on. These additional payments are the subject of specific rules that need to be well understood to avoid unknown liabilities that can go for as long as five years (the statute of limitations applicable to employment right in general).

Bending the rules

The most common source of litigation in Brazil is the control of work hours (or lack of control) and the payment of overtime. The general rule is that employees in Brazil cannot work more than eight hours per day and 44 hours per week. Also, all employees are subject to control over their working hours except for employees occupying high management positions and employees who work outside the premises of the employer and, therefore, cannot have their work hours controlled. 

Since the definition of 'high-level' is not clear, companies tend to exploit it by categorising a large number of employees as high-level management, thus making them exempt from the control of work hours. Companies give a certain level of flexibility to these employees thus avoid having to pay them overtime, which is required to be 50% or more of the employee's normal rate.

This is not a problem for companies, until the time the employees or the public prosecutors decide to challenge their classification of a large number of employees as high management. When this happens, companies face significant liabilities in individual lawsuits filed by former employees or in class actions filed by the labour prosecutors’ office.

As a final point, it should be noted that labour litigation in Brazil is very common and relatively inexpensive for the plaintiffs, as most of the lawyers work on a contingent fee basis and there are no court costs to initiate and process a labour claim. Therefore, one should not count on costs of litigation preventing lawsuits from being filed.

In brief, the Brazilian employment environment is highly regulated and very litigious. Foreign investors should therefore devote some time to understanding the challenges and avoiding the traps before entering the country.

Luiz Guilherme Migliora is a partner at Brazilian law firm Veirano Advogados, a member of the Ius Laboris alliance of human resources law firms. He is also professor of labour and employment law at the law school of the Getulio Vargas Foundation.