Updated April 21, 2020: Brazil President Bolsonaro said the government will issue another MP to replace the new Green and Yellow employment contracts with a COVID-19 version. MP # 905, however, did much more than create a new type of employment relationship. It is unclear whether those other important measures, such as the elimination of the FGTS severance pay to the government and allowing work on Sundays and holidays, to name a few, will be addressed in a newly announced MP.

As to the measures implemented during the tenure of MP # 905, they are considered valid for the duration of the MP, but employment measures that continue past this date may need to be adjusted to pre-MP # 905 rules and regulations. 

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Provisional Measure # 905 (“PM”), published on November 12, 2019, establishes a new type of labor relationship in Brazil. The PM aims to reduce the alarmingly high unemployment rate affecting younger workers in the country, and—in keeping with President Bolsonaro’s government plan—to promote hiring by giving employers an alternative means to do so at lower costs.

According to IBGE, the Brazilian statistics agency, over 27% of people ages 18 to 24 are unemployed and another 14% are working less than they could be. This is caused, in large part, to the lower rate of job turnover; employees in Brazil are working longer over their lifetimes. The Brazilian president enacted the PM to mitigate the effects of lower job turnover, as well as to boost the economy, encourage employers to increase hiring, and promote economic investment. Specifically, the PM creates the Green and Yellow (“GY”) Employment Contract, a new employment contract model, which:

• Targets workers ages 18 to 29 who are seeking their first employment opportunity;
• Is limited to a two-year period;
• Has simpler and more flexible rules; and
• Provides for less-encumbering employment taxation.

In order to better understand this new model of employment contract, it is important to analyze some of the PM’s key aspects.

The PM aims to safeguard labor rights, while reducing the employer’s burden, by expressly stating that Green and Yellow workers (“GY employees”) are guaranteed all constitutional rights, as well as the ones established by the  Consolidation of Labor Laws (“CLT”) and negotiated in collective bargaining agreements, as long as these rights do not conflict with the PM’s rules.

This new form of employment contract is aimed at employing younger workers who have never had a formal job before and need initial assistance to start their career. Therefore, the job offer, with the advantageous conditions set forth by the new model, is restricted to workers ages 18-29 with no previous formal experience. Previous experience in temporary jobs, such as apprenticeships, intermittent or sporadic work, are not counted as previous experience.

The maximum salary to be paid to the GY employees is equivalent to one and a half times the Brazilian federal minimum wage which, in 2020, is BRL1,039.00 (approximately USD$255.00) per month; one and half times that amount equals BRL 1,558.50 (USD$383.00). Thus, the new employment contract model is directed at less-experienced workers, who are most intensely affected by the unemployment rates.

In addition, GY Employment Contracts do not apply to professions (such as engineers, lawyers, secretaries, sales representatives, teachers, journalists, airplane pilots, etc.) that are regulated by specific laws.

Another important aspect of the GY Employment Contract is that the contracts signed under this model cannot have a term greater than 24 months. Under the PM, any contract that exceeds this term will be automatically converted into a regular employment contract, with an unlimited term, subject to all rules of the Labor Code. This provision addresses the concern about such contracts being extended indefinitely and, consequently, potentially becoming exploitive.

To further prevent the exploitation of the new model of employment, the PM establishes a limit to the proportion of workers of the total workforce that can be contracted through a GY Employment Contract. For employers with more than 10 employees, the PM establishes a 20% limit in the number of GY employees in relation to the total number of the company’s employees; for employers with 10 or fewer employees, an employer may hire only two GY employees.  

Another measure adopted to avoid the exploitation of the new model is the rule that prohibits the re-hiring of workers who were laid off less than 180 days before by the same company, to ensure they will not terminate and rehire employees under the same conditions.

To increase the employment rates, the PM establishes that all positions filled by GY employees must be newly opened job positions. The company can only hire GY employees if the number of non-GY employees is at least equal to the number of employees the company had, on average, from January 1, 2019 to October 31, 2019, at the time of hiring. An exception is made for companies that lost 30% or more of their workforce from October 2018 to October 2019. Such companies may hire GY employees even if the job positions filled by such workers are not new, so that they have an opportunity to replenish their workforce.

The PM also aims to bring economic growth to companies. The GY Employment Contract is advantageous to both the employer and the employee because it is, noticeably, more flexible and negotiable than a regular employment contract. The parties, for example, can negotiate a payment period of less than a month, and payments can include the prorated amounts of vacation and 13^th month salary¹ that under other employment arrangements are paid only in lump sums at the required time. Another example is the possibility of negotiating up to two hours of overtime in the employment contract, compensated at a rate at least 50% higher than the employee’s salary.

Another significant benefit of the GY Employment Contract is the lower tax rates. Compared to a regular work agreement, the GY Employment Contract is subject to up to 30% less in social security costs, because it exempts the employer’s payment of certain taxes and lowers the rates for other mandatory contributions, such as the contribution to the Unemployment Compensation Fund (“FGTS”), which will be 2% of the GY employee’s salary, as opposed to 8%, for regular employees, and the severance pay will be only 20% of the FGTS account, half of the regular rate.

Employers will be able to hire workers under GY Employment Contracts from January 1, 2020 until December 31, 2022 (regardless of the contract’s end date). Any contracts signed outside of this timeframe will be converted automatically into regular employment contracts with an unlimited term.

Elimination of Social Security Contribution over the Value of the FGTS Account

In 2000, the Brazilian government created a new social security contribution to compensate for losses caused by the inflation rates in Brazil during the late 80s and early 90s. This contribution, created by the quasi-constitutional law #110, required employers to pay the government a fee equivalent to 10% of the value deposited in the worker’s FGTS account (in addition to the 40% fee already paid to the worker) in case of a dismissal without cause.

According to the Brazilian Federal Savings Bank (“Caixa”), by July 2012, the loss that was the impetus for the new social security contribution had been recouped. Therefore, from July 2012 on, the contribution ceased to have a purpose, but continued to be collected. In 2017 alone, the contribution amount reached BRL$ 5,2 billion (USD$1.3 billion). The PM, however, establishes that as of January 1, 2020, the contribution requirement will no longer be imposed.

Digital Storage of Labor-Related Documents

Law #13.874 (previously PM #881) allowed for the digitalization and storage through digital means of official and bureaucratic documents. The new PM now permits digital storage of any labor-related documents.

This shows the Brazilian government’s desire to reduce companies’ costs and to simplify not only the employer’s storage of documents, but also the labor fiscal auditors’ inspection of such documents.

Work on Sundays and Holidays

Another change the PM makes relates to work on Sundays and holidays generally, and to work on Saturdays for employees who work for banks in particular.

Before the PM, the CLT established that every worker was entitled to a weekly 24-hour rest period that had to coincide, at least in part, with a Sunday, and that work on Sundays was possible only if permitted by a competent authority (by the formal Ministry of Labor, current Ministry of Economy) and agreed upon by the unions. Jurisprudence used to allow work on a Sunday only once a month if for every seven days of work during a month, the employee had a day off.

The PM alters such legal provisions and expressly authorizes work on Sundays and holidays, establishing that the day off must be on a Sunday only once every four weeks for employees who work for services and commercial companies, and once every seven weeks for employees who work for manufacturing companies. Therefore, employers and employees will have more freedom to negotiate working days.

Additionally, the PM also eliminated the former express prohibition of work in banks during Saturdays. However, the work on Saturdays must be established through collective negotiation and, according to bank employees’ unions, the work on Saturdays will not be allowed.

Non-Salary Nature of Meals or Meal Vouchers

The PM has also clarified that meals and meal vouchers provided to the employees cannot be considered part of the employees’ salaries. This affects not only the social security costs and other salary-related taxes paid by the employer, but also the income tax calculation basis for employees. In essence, the employee’s income tax will be reduced because the value of meal vouchers, for example, will not be considered in the calculation. It bears noting, however, that other benefits regularly granted to the employees, such as housing or clothing, are still considered part of their salary.

Moderate Reform to the System of Labor Regulations Compliance Inspection

One of the other key changes brought by the PM is a minor change to the system of compliance inspections by labor regulations (“Labor Inspections”). The changes are related mainly to the legal certainty of the Labor Inspections and the decisions in the administrative proceedings resulting from such inspections.

The first noteworthy point is that the Labor Inspections are now conducted by labor inspectors exclusively. Previously, the CLT expressly permitted the delegation of the responsibility for Labor Inspections to people other than labor inspectors.

The PM also expands the number of situations in which warnings will be issued to the employer instead of fines.  For example, minor, non-repeat infractions will trigger employer warnings instead of monetary penalties.  Furthermore, if a labor inspector issues a notice of infraction in a case where a warning should have been issued, the notice of infraction will be considered invalid.

There have also been changes to the Terms of Adjustment of Conduct (“TAC”) and to the Term of Commitment (“TC”) imposed by the Labor Prosecutor’s Office and the Ministry of Economy. Both terms, which were open-ended, are now limited to a two-year term, extendable for two more years.

With respect to the TACs and TCs, an important change brought by the PM is that companies cannot be forced to sign both. This means that settling with either the Labor Prosecutor’s Office or with the Ministry of Economy will prevent the other entity from conducting investigations, imposing fines, or asking that companies enter any other agreements related to the same matter.

An important step towards the modernization of the Labor Inspections and of the administrative proceedings is the establishment of the Electronic Labor Domicile, a system designed to allow more efficient communication between the labor authorities and the employer in matters related to Labor Inspections and labor administrative proceedings. This “electronic domicile” will be mandatory and is intended to substitute for the publication of summons in the Official Gazette.

The PM amended the labor administrative proceedings as well. One of the most noteworthy changes was the extension of the term for the presentation of a defense and of an appeal in a labor administrative proceeding from 10 to 30 days. It is also important to note that the appeals process now has remanding and suspensive effects. In addition, employers will be able to present a broader range of evidence in administrative proceedings, which will guarantee a stronger means of defense.

Regarding appeals, the decision of the administrative court of appeals will be final and thus not subject to further appeal in most instances.  The PM does establish that it will be possible to request the reversal of such decisions if they are contrary to former labor administrative court decisions.

Moreover, it is now required that inspectors must visit the worksite twice in order to impose a fine for lack of employment records, late payment of salaries and FGTS contributions, child labor, slave-like working conditions, accidents involving death and resistance to the inspections.

The last point worth noting related to the Labor Inspections is the simplification and uniformity of the fines that can be imposed for labor-related infractions. The prior system involved various fines with greatly different rules, effectively creating a penalty maze. The new penalty system is concentrated into a few clear paragraphs laying out established fines for four degrees of infractions, and establishing a few aggravating and mitigating circumstances.

Change in Index Used to Update the Values of Judgment Awards from the TR to the IPCA-E

Another change brought by the PM is the alteration of the index used to update the value of the amounts owed by employers to employees for labor-related benefits awarded by the labor courts. Before the PM, the index used to adjust litigation’s judgment awards was the referential rate (“TR”). However, use of the TR has been largely criticized, mainly because it does not necessarily match inflation indexes and because it can be fully controlled by the government.

The TR has been stuck at a 0% rate for almost two years, and even the Brazilian Supreme Court has decided that the TR should no longer be used to update the value of governmental debts.

Because of the problems with the TR, the PM has established that it should no longer be used to update labor-related debts, and that the consumer inflation index (“IPCA-E”) should be used instead.

Changes to the Rules Regarding Payment of Profit Sharing and Premiums

The PM favors the negotiation of benefits between employees and employers absent the need to involve a union member when it comes to profit sharing. The PM authorizes, for example, the establishment of multiple profit-sharing programs by one employer and individual negotiation with employees who have a college degree and earn more than BRL$1,700.00 per month.

The payment of premiums, in turn, is permitted in any manner if such payment: (a) is made exclusively to employees; (b) is paid to employees whose performance was above-average (the plan has to indicate what an expected performance is); (c) is made no more frequently than quarterly; and (d) is based on previously established rules that must stay registered for six years after the payment.

Effect and Term of the PM

As mentioned above, the PM was published on November 12 and most of its rules, including the ones regarding the GY Employment Contract, have been in effect since the date of publication.

As its name suggests, the PM is only provisional and must be converted into law by the Brazilian Congress to have its effectiveness extended. As established by the Brazilian Constitution, the PM will only be in effect for 60 days, starting from the date of publication, which is also the term for the Brazilian Congress to either convert the PM into law or reject the PM and revoke it. Since the time period for voting on the PM is suspended by the recess of the Brazilian Congress, the deadline has been extended to February 20, 2020. If the PM’s conversion is not voted on by then, the PM’s effectiveness will automatically be extended for 60 more days, until April 20. If after April 20, 2020, however, the PM has not yet been converted into law, its terms will expire.

As of January 6, 2020, the PM has already received 1,930 proposed amendments from various Congress members, including amendments to expand it to other areas not originally mentioned in the PM, such as a new provision relating to arbitration (new paragraph in article 507-A of the CLT). Therefore, it is likely that the PM will become law, but there will be changes.

We will continue to monitor it and provide updates.

*Renata Neeser is a Shareholder in Littler’s New York Office; Marilia Minicucci is a Partner, and Victor Cavalieri Zampolo an Associate, with Chiode Minicucci Advogados in São Paulo, Brazil