Introduction

The labour reform recently approved by the House of Representatives allows arbitration in individual employment agreements (new Article 507-A of the Labour Code), provided that:

  • the employee's monthly salary is double the cap on social security pensions; and
  • the arbitration clause is proposed or expressly agreed by the employee, according to the Arbitration Law (9307/96).

This means that since November 11 2017 employees with a higher level of education and income have been able to sign employment contracts for the settlement of any disputes through arbitration.

Before the publication of the reform, there were obstacles to arbitration in labour disputes raised by labour courts.(1) The majority of case law against arbitration has taken place in the Superior Labour Court and relates to problems concerning:

  • the interpretation of the Constitution, which prohibits arbitration in individual disputes;
  • public policy labour rules;
  • the protective nature of Labour Justice, which presumes employees' lack of bargaining power; and
  • the cost of arbitration.

Federal Constitution

The Superior Labour Court's understanding of Article 114 of the Federal Constitution would admit arbitration in collective law suits only. However, this is open to interpretation, since the wording does not specifically prohibit arbitration in individual disputes. It merely states that individual disputes will be tried by labour courts and in collective disputes a party may elect arbitrators to solve its case.

The Constitution was passed before the Federal Arbitration Law (9307/96), and therefore it could not have accounted for the extent to which arbitration could be used after the enactment of the Federal Arbitration Law (which was established as a jurisdictional method of settling disputes). Thus, silence on arbitration as a method of settling disputes in the Constitution does not necessarily indicate its prohibition, since prohibitions must always be expressed in law. In other words, what is not expressly forbidden by the Constitution is indirectly admitted. Therefore, in accordance with Article 5 of the Constitution, individuals and companies are authorised, for example, to enter into employment contracts containing an arbitration clause.

However, the Supreme Court has been called on to interpret the constitutionality of Law 9307 (Securities and Exchange Commission 5206-2001) and concluded that it may be used as a judicial method of dispute settlement to replace the judiciary, rather than as a waiver to access to justice. Labour justice should be no different from any other justice; therefore, if it is possible to opt out of the regular judicial system in favour of arbitration, then this should apply to labour courts also.

Public policy

Material labour law can be interpreted to restrict workers' freedom of choice, such that the Labour Code contains several protective public policy rules that cannot be waived by an employee. The recently approved legal reform therefore intends to make labour legislation more flexible (without prejudice to constitutional rights) and enforce negotiation (whether private, to increase bargaining power, or collective).

Employees with a monthly salary over approximately $3,500 only can render disputes to arbitration. This corresponds to the richest 5% of Brazilians and to a small portion of those litigating in Labour Justice.

Further, labour rights are often erroneously defined as non-economic rights and thus not arbitrable. Labour rights are of an economic nature and are negotiable, which is how employees often make deals and negotiate clauses. Many labour rules have the nature of a 'public order' so as to limit the bargain between the parties. This should be observed and respected by arbitrators in arbitration proceedings between employers and employees.

Labour Justice

The protective character of Labour Justice presumes a lack of bargaining power on the part of the employee. However, labour law should no longer allow employees with a greater level of education and income to avoid state rule and choose their contractual clauses and method of dispute settlement. As economic Nobel Prize winner Ronald Coase said, by and large (which is true at least for the top 5% of Brazilian employees) individuals make better choices than generic state regulation. Further, Brazil has changed extensively since the publication of the Labour Code in 1943.

Despite the lack of data on education, urbanisation, life expectancy and income since 1943, when the Labour Code was passed, all social indexes in Brazil have substantially improved and some more than doubled. With greater life expectancy, access to information in large urban centres and the substantial improvement in schooling, the average income has increased significantly. Therefore, it is not possible to apply the Labour Code which is governed by such outdated social standards. The Brazilian Institute of Geography and Statistics' data, among other research, reveals that the general improvement in all social indicators makes more flexible legislation desirable. The Internet will also greatly help Brazilian employees regarding access to information.

Cost of arbitration

The last obstacle to labour arbitration is cost, which is perhaps its greatest challenge. However, as the reform deals with the richest 5%, this does not represent those who need free access to justice. This social group must even pay to use the public judicial system, or end up being subsidised via taxes. Labour Justice is subsidised by Brazilian tax payers and should bear the free access to courts statements for 'free' distribution.

The main arbitration centres could develop cheaper arbitration with simplified procedures to meet this new demand and arbitral procedures which are financed, at least in part, by employers may even eventually be considered.

This article was first published by the International Law Office, a premium online legal update service for major companies and law firms worldwide. Register for a free subscription.

For further information please contact Luciano Timm at Carvalho, Machado & Timm Advogados by telephone (+55 11 2872 4760) or email (ltimm@cmtlaw.com.br). The Carvalho, Machado & Timm Advogados website can be accessed at www.cmtlaw.com.br.

Endnotes

(1) In Brazil, there are specialised courts for labour cases and these courts tend to protect employees in disputes. Brazil also has a code to regulate employment contracts and procedural law. Access to labour courts is virtually free and courts deal with at least one million cases per year.