6. Cost-Reduction Strategies

To what extent can employers implement the following cost-reduction strategies as a result of COVID-19, and what are the primary limitations on each? 

• Furloughs and Salary reductions.

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NOTES

• Current maximum amount of the unemployment insurance: BRL 1,813.03.
• Companies must inform the Ministry of Economy and the employees’ union within 10 days, counted as of the execution of the agreements.
• The monthly allowance does not have salary nature (i.e., it is not subject to labour and social security charges). The monthly allowance may be granted by the employer in all alternatives above, but it is only mandatory in the situation detailed in the chart above.
• Employee’s job stability: during the period of the salary / working hours reduction or temporary suspension of employment agreement and an equal period thereafter.
• For pregnant employees: the stability period of Law No. 14,020/2020 will only start to count after the end of the job stability period already guaranteed to pregnant employees by Brazil’s Federal Constitution. Hence, after the end of the period of 5 months after the delivery of the baby, the employee will still be entitled to the job stability period of Law No. 14,020/2020.
• Termination without cause may be executed during the employee’s job stability period, however, it will result in the payment of the mandatory severance + an additional indemnification established in Law 14,020/2020, except for employees with disabilities who cannot be terminated without cause during the state of public calamity.
• It is possible to adopt both alternatives (reduction of salary + temporary suspension of employment agreement) for the same employee if the limit of 180 days is observed.
• Other situations in which the Law No. 14,020/2020 allows individual written agreements to perform reduction of salary and working hours or suspension of the employment agreement:
  • When the total amount received monthly by the employee is kept: in case of proportional reduction of working hours and salary or temporary suspension of the employment agreement when the individual agreement negotiated does not result in a reduction of the total amount received monthly by the employee, on a monthly basis, including in this amount (i) the Emergency Benefit paid by the Government, (ii) the monthly allowance offered/paid by the employer and (iii) in case of working hours reduction, the salary paid by the employer due to the remaining working hours.
  • Retired employees: employees who are already retired in accordance with the Brazilian rules and receive the retirement benefit from the Government, but continue to have an active employment agreement, are not entitled to receive the Emergency Benefit. However, the employer may still adopt the measures for proportional reduction of working hours and salary or temporary suspension of their employment agreement through an individual written agreement if, in addition to the requirements mentioned in the chart above for the execution of an individual written agreement, the employer pays a monthly allowance in accordance with the following conditions: (a) the amount of the monthly allowance must be at least equivalent to the amount of the Emergency Benefit that the employee would receive if he/she was not retired; (b) in the case of an employer with a gross revenue higher than BRL 4.8 million in the calendar year for 2019, the amount of the monthly allowance must be at least equal to the sum of the amount mentioned in the previous item (a) and the amount equivalent to 30% of the employee’s salary.

Besides the alternatives established by Law No. 14,020/2020, enacted in view of the COVID-19 pandemic, the Brazilian Labour Code previously  recognised the possibility to suspend employment agreements for a period of 2 (two) to 5 (five) months for professional qualification (e.g. the participation of the employee in a course or professional qualification program offered by the employer). Over the course of the COVID-19 crisis, most employers have decided against employing this option. To adopt this alternative, there are several aspects that the employer must be aware of, including the necessity to negotiate a collective bargaining agreement with the employees’ union. During the suspension of the contract, the employee may apply for a professional qualification scholarship granted by the Special Secretariat for Social Security and Labour, linked to the Ministry of Economy (for more information, please visit http://trabalho.gov.br/seguro-desemprego/modalidades/bolsa-qualificacao).

• Redundancy

Redundancy is considered a termination without cause in Brazil. There is no rule currently in place that forbids termination during the COVID-19 pandemic. Thus, companies may continue with to take such action during this period, upon the payment of the mandatory severance. Although negotiations with unions are not mandatory to perform large scale/mass terminations, depending on the size of the company, location and union representing the employees, we recommend negotiating with the union before carrying out such terminations.

An alternative that may be adopted in large scale/mass terminations, would be to negotiate with the union and implement an Incentivised Dismissal Program (“PDI”), where the company offers other benefits in addition to the mandatory severance, and employees who wish to receive these additional benefits, voluntary elect to be terminated, and also grant full release to the employment agreement.

• Facility closure.

The Brazilian Labour Code provides that in the event of partial or temporary interruption of the business activity, or the closure of a company due to a determination of a public authority, the employer may consider the employment contracts to be extinguished and claim “fact or order of the Government” (Government Act – “Fato do Príncipe”). As a consequence, the compensation due to employees, related to this period, shall be paid  by the respective public authority. We recommend that employers proceed with great caution when considering this option, because, in a court proceeding, it will be very difficult to obtain a favorable decision recognising this condition.

The most common procedure is to terminate the agreements without cause, upon the payment of the mandatory severance. Depending on the number of employees to be terminated, location of the company and the union that represents the employees, a negotiation of the terminations with the union is recommendable, as well as the alternative option to adopt the Incentivised Dismissal Program (“PDI”) mentioned above.