Since the recently approved Labor Reform1 in Brazil took effect, companies and employees have a new way to solve their conflicts amicably. Employers and employees can now enter into private settlement agreements involving all employment-related claims that provide a full release of claims and set restrictive covenants, such as non-compete and non-solicitation, among others.

The idea behind this new provision and the Labor Reform is to reduce the number of judicial disputes, as Brazilian Labor Courts currently must rule on over 3 million new lawsuits per year. The Labor Reform has already shown a positive impact in the number of cases filed, with a 50% drop since the Labor Reform became effective in November 2017.

The Agreement

A Brazilian settlement agreement can be (and should be) a lot simpler than the release agreements we frequently use in the United States. All labor and employment laws are federal in Brazil and there is no need to list each law, or specific provisions of the law, to which the employee is waiving his/her rights.

There is still not a specific format or recommended practice for these agreements, but based on the recent rulings, we recommend listing the most common rights and benefits usually sought in the specific industry. For example, for individuals employed by the pharmaceutical industry, the waiver list should include items such as claims for misclassification, salary nature of work, equipment (car and other items), indemnity for keeping/stocking materials at their residence, and the other general common rights such as job tenures, differences in compensation and salary (e.g., equal pay, accumulation of duties, etc.), hazard pay, performance premiums/commissions, overtime, severance payments, and moral damages for harassment, discrimination or retaliation.

Also, there are no restrictions on seeking confidentiality, the return of company property, and non-disparagement clauses. Companies can also impose a post-termination non-compete restriction, provided that they pay the employee for the non-compete, usually the equivalent of a month of salary per month of non-compete, and that the duration and geographic area are reasonable. However, adding restrictive covenants to the separation agreements should be limited to executives and some high-level managers of the company, to minimize the risk of the settlement being rejected by the courts.

The agreement should be brought up when the employee receives the notice of termination. As in the United States, the termination payments (i.e., accrued wages, vacation, and other benefits) must still be paid, regardless of whether the employee accepts the settlement. Such payments cannot be delayed or the employer will be required to pay a fine.

The employer must offer consideration for the settlement agreement. The employer should discuss with counsel and their tax advisors the nature of the payments (i.e., indemnification or salary), which must be specified, as tax and social security impacts vary accordingly.

The Procedure

The new rules on private settlements require the approval of the labor courts. The process is fairly simple and much faster than a settlement under a lawsuit. Basically, each party must be represented by counsel, they must move to settle, and the court has 15 days to approve it, reject it or call a hearing.

The Regional Labor Tribunal of Sao Paulo issued a court procedure rule in January requiring each party to be represented by a licensed attorney registered with the Tribunal. The parties must be represented by different attorneys to avoid the presumption that the employee was coerced to sign the agreement and to ensure his or her best interests are considered. The labor judicial system in Brazil sees employees as incapable parties who need to be assisted in all negotiations.

The parties must file a joint petition seeking the ratification of the settlement agreement. The labor judge chosen to hear the case can call a hearing to make sure the employee fully knows of the rights he or she is waiving and agrees with the indemnification or severance pay proposed.

Some trial court labor judges, however, are against the Labor Reform and have denied ratifying the agreements, or are limiting the release to the amounts paid. Their rationale is that the new law provides that the statute of limitation of the rights listed in the agreement is suspended upon filing the petition, and, therefore, every right waived will be specified. In these cases, companies are filing appeals challenging such interpretation and defending the freewill of the parties. Appeals have not yet been decided.

To give companies a snapshot, in our experience, so far this year, 164 petitions for ratification were filed in various states, of which 68 are still awaiting a decision (i.e., meaning the courts are taking a lot longer than the 15 days provided by law), 24 were ratified but limited the release to the rights listed as paid, which are now under appeal, 58 were fully ratified and 14 were dismissed. Among the reasons for the dismissal, we have seen technical issues, such as the employee’s attorney not having a digital certificate, and judges not yet fully familiar (or comfortable) with the procedure leaving for the appellate courts to set forth first specific guidelines.

We have also noticed a pattern, although it is likely to change in the next few months. Courts that have either rejected the ratification or limited the applicability of the release of claims have requested a hearing at the court, while the courts that have granted the ratification had the hearings scheduled to be conducted by the Judiciary Centers for Solutions of Conflicts and Citizenship, where hearings are conducted by court’s assistants.

Neither the National Counsel of the Labor Justice, nor the Superior Labor Court, has yet published the number of agreements submitted to the labor courts for ratification. Courts are also awaiting specific guidelines to be issued by the Superior Labor Court after the Labor Reform Committee analyzes the changes and reconciles their past understandings with the new rules.

Although there are mixed results for the settlements, this new procedure is worth exploring, as it will likely reduce the number of lawsuits filed against companies every year and the costs of litigating. Employers should work closely with their counsel on drafting the settlement agreements and have them periodically revised based on developing court ruling trends.

This article was co-authored by Marilia Minicucci at Mattos Engelberg Advogados