Fernando Vaisman Carlos Crosara March 4 2014 Severance payment fund cases: flood of litigation on the horizon? Leite Tosto e Barros Advogados | Litigation - Brazil Fernando Vaisman, Carlos Crosara Litigation Monthly monetary restatementsFGTS casesCommentAlmost 40,000 Brazilian workers have filed judicial claims in an attempt to compel a recalculation of the balance of their severance payment fund (FGTS) accounts. This number is expected to rise, and concerns have been raised that such cases could ultimately flood the Supreme Federal Court.Monthly monetary restatementsUnder Brazilian law, each month companies are required to deposit an amount equal to 8% of a worker's pay into a FGTS account for that worker. Debate has arisen over the proper method to calculate monthly monetary restatements to FGTS balances. At present, Brazilian savings bank Caixa Economica Federal uses an adjustment rate equal to the sum of the reference interest rate, plus 3% annual interest.The reference interest rate is calculated by the Central Bank of Brazil. It is based on the average rate offered by the largest Brazilian banks on certificates of deposit with maturities of between 30 and 35 days. However, reductions in the basic interest rate since 1999 have eroded the value of the reference interest rate. As a result, FGTS balances have not kept up with inflation. Interest rates have fallen even more noticeably during President Dilma Rousseff's administration.This has had a significant effect on the value of FGTS accounts for Brazilian workers. According to the non-governmental FGTS-Facil Institute, a worker who had R10,000 in 1999 and had made no further deposits would now have slightly less than R20,000. However, if the FGTS balances had been adjusted by reference to the domestic consumer price index, the worker would now have more than R40,000.This difference has motivated tens of thousands of Brazilians to seek court-ordered adjustments that use the domestic consumer price index plus 3% formula, instead of the reference interest rate plus 3%. Unions have begun to file class action lawsuits, often at fees that are lower than those charged by lawyers to represent a single client.FGTS casesSeveral signs suggest that the courts might look favourably on these actions. Last year, the Supreme Federal Court ruled that the reference interest could not be used to index debt securities to pay citizens who win a lawsuit against the government.Although Caixa claims that it has already won 18,300 of these FGTS cases, judgments in favour of workers have begun to be awarded recently, although Caixa plans to appeal such decisions. In early February 2014 the public defender's office brought an action in the public interest in the Court of Rio Grande do Sul, seeking a change in the FGTS adjustments to reflect the loss of purchasing power that workers have suffered.In view of the rising tide of FTGS litigation, Judge Bruno Brum Ribas of the Fourth Federal Court of Porto Alegre has decided that the result in the public defender's case will settle the issue throughout Brazil. If the workers win, the restatement of FTGS balances will be retroactive to 1999.CommentAlthough the tide appears to be turning in favour of the workers, these issues are still some way from being resolved. The statute of limitations on such cases is 30 years (ie, 2029). It could therefore be advantageous for a worker to wait and see which way court decisions are trending before becoming involved in a lawsuit.It could take as long as five to 10 years before the Supreme Federal Court decides the issues, but the resulting political ramifications could be significant. The outcomes of these cases will ultimately be decided in Brasilia, although possibly not by the courts.For further information on this topic please contact Fernando Vaisman or Carlos Henrique Crossara Delgado at Leite Tosto e Barros Advogados Associados by telephone (+55 11 3847 3939), fax (+55 11 3847 3800) or email ([email protected] or [email protected]). The Leite Tosto e Barros Advogados Associados website can be accessed at www.tostoadv.com.