Sources of rules and practice
Provide an overview of the primary sources of law, regulation and practice that govern or affect executive compensation arrangements or employee benefits.
In Brazil, the primary sources of law applied to executive compensation and employee benefits matters are the Federal Constitution and the Labour Code. In addition, other federal laws, collective bargaining agreements, ordinances issued by the Ministry of Labour and Employment, employment agreements and companies´ policies or handbooks (if any) also govern executive compensation arrangements and employee benefits.
The primary sources of law applied to executives who are not engaged as employees are the Civil Code, federal laws, articles of association or by-laws and regulatory rules (i.e., particular rules applied to a business sector, if applicable), individual agreements and companies´ internal policies (if any).
In Brazil, courts can classify an individual as an employee irrespectively of his/her engagement status, if he/she renders services to another individual or to a company on a personal and habitual basis, under subordination (i.e., the individual has limited autonomy to execute his/her duties) and for compensation.
What are the primary government agencies or other entities responsible for enforcing these rules?
The Ministry of Labour and Employment and the Labour Prosecution Office are the main responsible for enforcing these rules. In addition, labour courts may also be responsible to enforce these rules in case of lawsuits.
Are any types of compensation or benefits generally subject to specific corporate governance requirements or approval by shareholders or government?
For executives hired as statutory officers, the annual compensation and other benefits (e.g., stock options, D&O insurances, bonuses, among others.) must be submitted to shareholders approval.
Benefits granted to employees are usually not subject to specific corporate governance requirements nor approval by shareholders or government.
Under what circumstances does the establishment or change of an executive compensation or benefit arrangement generally require consultation with a union, works council or similar body?
For employees, the establishment or change of certain benefits, particularly the ones provided under collective bargaining agreements, may require collective bargaining. This obligation is not applicable to executives engaged under a non-employment relationship.
For executives engaged under either an employment or non-employment relationship who work in financial institutions, the executives’ compensation must follow the restrictions of the Brazilian Central Bank Regulation No. 3921, which links 50 per cent of the variable compensation to the company’s shares and share-based structures, and defers the payment of 40 per cent of the variable compensation to three years after the issuing.
Are any types of compensation or benefit arrangements prohibited either generally or with senior management?
For employees, Section 468 of the Labour Code bars any type of agreement that is detrimental to employees (e.g., salary reduction, withdraw of benefits without any concession by employer, among others).
Except for the restrictions for financial institutions explained in question 4 and Section 468 of the Labor Code, as a general rule, companies and employees are free to negotiate any type of compensation or benefit arrangement, provided these are within the limits of the applicable laws (e.g., performance criteria in profit-sharing plans cannot be linked with health and safety standards).
What rules apply to compensation of non-executive directors?
The compensation paid to executives who are not engaged as employees may be subject to regulatory standards (e.g., banking and finance), individual agreements and companies´ policies. The compensation paid to executives engaged as employees may be subject to collective bargaining agreements, regulatory standards, employment agreements and companies´ policies.
Must any aspects of an executive’s compensation be publicly disclosed or disclosed to the government?
As a rule, companies are required to collect taxes and social security payments from the compensation paid to executives. Therefore, the companies must disclose payroll information to the relevant authorities. Listed corporations must also disclose its financial statements, which include the total amount of compensation paid to executives (officers and board members), but there is no obligation to disclose executives’ compensation individually.
Other disclosure provisions may apply depending on the business sector and applicable regulatory standards (e.g., securities).
Are employment agreements required or prevalent? If so, what provisions are common?
While written employment agreement is not required by Brazilian laws, it is a common practice. The employee is formally engaged when the employer fills in the employee’s employment booklet.
The terms may vary depending on the job title. Usually, employment agreements applicable to executives include, but are not limited, to the following:
• a description of the main duties and responsibilities;
• working hours schedule and offset agreements or the release from working hours control;
• rules and conditions regarding benefits and compensation schemes;
• confidentiality, intellectual property and other restrictive covenants (e.g., non-compete, non-solicitation and non-disparagement); and
• compliance and anti-corruption obligations.
Note that offer letters are binding in Brazil and thus employers must comply with its terms and conditions if accepted by employees.
What are the prevalent types and structures of incentive compensation? Do they vary by level or type of organisation?
The types and structures of incentive compensation vary depending on the level and type of organisation.
The prevalent types and structures of short-term incentives are commissions, bonuses, and profit-sharing payments; long-term incentives are usually structured thorough stock options, stock awards, restricted stocks and retention bonuses.
Are there limits generally on the amount or structure of incentive compensation? Are there limits that adversely affect the tax treatment of the employer or the executive?
Although there are no formal limits on the amount of incentive compensation, the Brazilian tax legislation may set out certain limits on the incentive structure that can restrict the incentive amount. Different incentive structures may result in discriminated tax treatments.
Is deferral and vesting of incentive awards permissible? Are there limits on the length or type of vesting and deferral provisions?
No, parties are free to decide on the deferral and vesting of incentive awards, to the extent that there is no detrimental change to employees in previous agreements
Can it be held that recurrent discretionary incentive compensation has become a mandatory contractual entitlement?
Yes. There are court precedents ruling that continuous payment of discretionary incentive compensation entails mandatory employment rights.
Does the type or amount of incentive compensation awarded to an executive potentially affect the compensation that must be awarded to other executives or employees?
Yes, if same-level employees are granted different incentive compensation or even if one of them received compensation and the other one did not, the employee may bring a lawsuit against the employer claiming compensation differences and/or a statutory discrimination fine (BRL2,765.66) on the grounds of discrimination or equal pay.
Section 461 of the Brazilian Labour Code sets forth the following equal pay requirements with regard to the employee and his/her comparators: (i) substantial equal work (job content, not job titles), meaning same production and technique level; (ii) length of service for the same employer must be less than four years; (iii) working in the same position must be less than 2 years; and (iv) employee and comparator must be working at the same time for the employer at the same workplace (same premise).
Is it permissible to require repayment of incentive compensation under certain circumstances? Are there circumstances under which such repayment is mandatory?
In Brazil, enforcement of clawback clauses depend on a case-by-case basis analysis by the courts (e.g., companies may require the repayment of a ‘signing bonus’ if an executive resigns before a certain date).
What are the prevalent forms of equity compensation awards in your jurisdiction? What is a typical vesting period?
In Brazil, the prevalent forms of equity compensation are stock options, restricted stocks and stock grants. The typical vesting period varies between three and five years.
Are there forms of equity compensation that are tax-advantageous or disadvantageous to employees or employers?
Yes, all equity compensation structured as share-based payment directed to the employer’s statutory directors will be tax-advantageous to the employer owing to the possibility of deducting the corresponding expenses for corporate income tax purposes, provided they are treated as compensation for tax purposes. As a rule, expenses related to variable compensations paid to statutory directors, such as bonuses, are non-deductible for corporate income tax calculation purposes. However, because of a specific rule, share-based payments paid to statutory directors and employees can be deducted.
Specifically with regard to stock options, it may be possible to sustain that certain structures should not be taxed as compensation, resulting solely in a capital gains taxation at the employee’s level upon sale of the corresponding stock/share. However, tax authorities tend to disagree with such position, arguing that all forms of equity compensation should be taxed as compensation. There is currently a relevant discussion in Brazil’s administrative and judiciary courts on the matter.
Does equity-based compensation require registration or notice? Are exemptions, or simplified or expedited procedures available?
Yes, stock options must be submitted to the shareholders for prior approval. Furthermore, corporations must comply with certain rules and procedures provided by the Brazilian Securities Commission.
Are there withholding tax requirements for equity-based awards?
Whenever an equity-based award is treated as compensation for tax purposes, withholding income tax will apply at progressive rates (maximum rate of 27.5%) upon the delivery of the equity instrument to the participant.
However, as previously explained (question 16) it may be possible to sustain that certain stock option structures should not be taxed as compensation, due to the absence of a specific legal provision regulating the taxation of stock option plans. In this case, withholding income tax would not apply. However, note that tax authorities tend to disagree with such position, resulting in a relevant discussion in Brazil’s administrative and judiciary courts on the matter.
To summarise, based on part of the administrative and judicial precedents on the matter, whether a stock option plan is subject to taxation requires a case-by-case analysis to verify if the plan is a commercial contract or (deemed to be) part of the participant’s compensation. A plan will be deemed to have a commercial nature if the following conditions are met:
• the participant accepts the grant as an investment opportunity, independently from the employment relationship (voluntariness);
• the exercise of share options must be performed through the payment of a certain price by the participant, and the price cannot be symbolic (burden); and
• the investment must be subject to common market fluctuations (risk).
However, if such conditions are not met, and the share-based plan has a compensation nature, withholding income tax will be levied on such payments.
Note that in 2014, the Brazilian government enacted a new law (Federal Law No. 12,973/14) that, among other provisions, specifies the general rules for a company to deduct expenses incurred from share-based payments from its corporate income tax. This law refers to such payments as ‘compensation in exchange of services rendered by employees or similar’. Although the law does not specifically state whether income taxes affect share-based plans or not, it is possible that tax courts may come to recognise such plans as compensation for tax purposes, regardless of their specific characteristics.
Are inter-company chargeback agreements between a non-local parent company and local affiliate common? What issues arise?
Yes, inter-company chargeback agreements between a non-local parent company and local affiliate for equity compensation purposes are common in Brazil. In such structures, Brazilian accounting rules (following International Financial Reporting Standards) will regulate the corresponding accounting adjustments to be carried out by the local affiliate in order to register the corresponding agreement.
Are employee stock purchase plans prevalent or available? If so, are there any frequently encountered issues with such arrangements?
In general, stock options are available, but not prevalent. They are more frequent when considering large, publicly listed corporations. The main issue with such structures is related to the taxation by withholding income tax and social security contributions, as described in question 18.
Are there any mandatory benefits? Are there limits on discontinuing voluntary benefits that have been provided?
Employees and executives engaged under an employment relationship are entitled to the following statutory benefits:
• vacation (30 calendar days after 12 months of work);
• vacation bonus (one-third of the monthly salary);
• Christmas bonus or 13th salary (one monthly salary per year);
• severance fund (FGTS) (8% of the monthly salary);
Employment agreements, policies, handbooks, and/or collective bargaining agreements may provide other benefits.
Section 468 of the Labour Code prevents companies from discontinuing or modifying voluntary benefits if the change are detrimental to employees.
Executives who are not engaged as employees are entitled to the benefits provided in the executive agreement and company policies.
What types of employee benefits are prevalent for executives? Are there tax or other financial incentives or disincentives for any employee benefit arrangements?
In addition to the statutory employment benefits, executives engaged under an employment relationship may be entitled to vehicles, medical and dental plan, and life insurance, among other things. These benefits could also be applied to executives engaged under a non-employment relationship. Tax and any other applicable financial incentive will depend on the nature and circumstances in which the benefit is granted to the executive.
Termination of employment
Are there prohibitions on terminating executives? Are there required notice periods? May executives be dismissed without cause?
In Brazil, for executives engaged under an employment relationship, termination of an employment agreement can be proceeded with or without cause, with distinct statutory severance payments applicable to each circumstance. The statutory notice period is set out at a minimum of 30 days, plus three days per anniversary of employment up to a total limit of 90 days. The minimum 30-day period may be either worked or paid in lieu.
Executives engaged under a non-employment relationship may be dismissed in accordance with the terms and conditions set forth in the executive agreement (if any).
Are there statutory or mandatory minimum severance requirements in your jurisdiction? Are there any other mandatory, post-employment benefits?
Employees might be entitled to the following statutory severance payment, depending on the type of termination:
• accrued salary;
• accrued and prorated vacation;
• vacation bonus of one-third of the monthly salary;
• accrued and prorated Christmas bonus (13th salary);
• notice period of at least 30 days plus three days per anniversary of employment up to a total limit of 90 days (for terminations without cause);
• FGTS (see question 21);
• FGTS fine (40% of the total FGTS deposited by the employer from the outset of employment) (for terminations without cause); and
• other payments that may be applicable depending on the collective bargaining agreement and companies´ policies or handbooks (e.g., a prorated portion of the profit-share agreement, continuance in the corporate health plan under certain circumstances, etc).
Executives who are not engaged as employees may be entitled to severance payments provided in the executive agreement (if any).
What executive severance payment level is typical?
In addition to statutory severance, provided that the executive is terminated without cause, companies usually extend the coverage of the health plan (if allowed by regulatory provisions) and pay incentives provided in the respective executive agreement.
Are there limits on dismissal for ‘cause’? Are there any statutory limits on ‘constructive dismissal’ or ‘good reason’? How are ‘cause’ or ‘constructive dismissal’ defined?
For executives engaged as employees, the dismissal for cause can only be triggered if at least one of the following circumstances is met:
• practice of any dishonest act;
• lack of self-restraint or improper conduct;
• helping competitors or business competing (without the employer’s consent);
• a final criminal ruling (without possibility to appeal) against the employee;
• constant laziness in the execution of employment duties;
• drunkenness during work time (if not related to alcoholism or any other illness);
• corruption or violation of company secrets;
• employment abandonment;
• practice of any injurious act against the company;
• practice of any injurious act against any person during working hours;
• continuous gambling;
• practice of any act that could undermine national security; and
• disqualification to legally perform his/her activities due to act of wilful misconduct.
As a general rule, performance issues are not grounds for a termination for cause.
Executives engaged as employees may claim constructive dismissal only if at least one of the following circumstances is met:
• the employee is required to perform services that are beyond his or her powers or capacity or that are prohibited by law, or considered contrary to morality, or not covered by the employment agreement;
• the employee is treated with excessive severity by the employer or his or her superiors;
• the employee has a clear risk of suffering a serious injury;
• the employer fails to fulfil the obligations set forth in the employment agreement;
• the employer practices any detrimental act against the honour or moral reputation of the employee, or against his or her family members;
• the employer practices any direct injury against the employee (except in cases of legitimate self-defence or in the defence of another person); and
• the employer reduces the work of an employee in such a manner as to materially affect the amount of the compensation earned.
Executives engaged under a non-employment relationship are subjected to the rules provided in the agreement (if any) and the articles of association or by-laws. Usually, companies tend to define the conditions for good and bad behaviour in the agreement.
Are ‘gardening leave’ provisions typically used in employment terminations?
Garden leave provisions are not enforceable in Brazil.
Is a general waiver or release of claims on termination of an executive’s employment normally permitted? Are there any restrictions or requirements for the waiver or release to be enforceable?
In Brazil, separation agreements, waivers and releases are usually not binding and do not prevent an executive from filing labour claims against the company. The recent Labour Reform (effective November, 2017) allowed parties to request out-of-court settlement validations with the court, which include separation agreements. Both parties must be represented by separate counsels in order to request the court validation.
Post-employment restrictive covenants
What post-employment restrictive covenants are prevalent? What are the typical restricted periods?
Although there are no specific provisions in the law, the main post-employment restrictive covenants are non-competition, non-solicitation, non-disparagement and confidentiality, regardless of whether the executive is engaged under an employment or non-employment relationship. The typical restricted periods vary from six to 18 months.
Are there limits on, or requirements for, post-employment restrictive covenants to be enforceable? Will a court typically modify a covenant to make it enforceable?
In general, there are no specific limits or requirements for the enforceability of post-employment non-solicitation, non-disparagement and confidentiality.
Regarding non-competition, however, case law suggests that it may be enforced if the contract provides that:
• a fair financial compensation is paid to the executive for the non-competition period;
• the non-competition period, the jurisdiction in which the executive cannot compete and the businesses or competitors the executive cannot be engaged with are limited; and
• the restriction is commercially significant for the company.
Given that there is no law governing restrictive covenants, companies must be wary of the non-enforcement risk when negotiating the scope of the clauses.
Courts rulings are usually limited to whether the restrictive covenants are enforceable or not. Decisions modifying the scope of restrictive covenants are not common.
What remedies can the employer seek for breach of post-employment restrictive covenants?
Companies may file injunction requests with labour courts in order enforce compliance with post-employment restrictive covenants.
Pension and other retirement benefits
Are there any required pension or other retirement benefits? Are there limits on discontinuing voluntary benefits that have been provided?
Executives contributing to Brazilian social security are entitled to a public pension. As a rule, companies are required to collect social security contributions from and on top of the compensation paid to executives. Private pension plans are not mandatory, but are commonly offered to executives.
With respect to executives engaged as employees, companies are not allowed to discontinue or modify any voluntary benefit if the change is considered detrimental to the employee.
What types of pension or other retirement benefits are prevalent for executives? Are there tax or other financial incentives or disincentives for any employee benefit arrangements?
Companies usually provide private pension plans to executives. Provided certain rules are observed, private pension plans are exempt from social security contributions and are also subject to a more favourable withholding income tax rate upon release of the corresponding amounts to the executives.
May executives receive supplemental retirement benefits?
For executives engaged under an employment relationship, the applicable collective bargaining agreement may provide additional retirement benefits to employees, which must be complied with by companies. Further, the company and the executive may agree other retirement benefits through agreements and internal policies.
For executives engaged under a non-employment relationship, the company may also provide additional retirement benefits through agreements and internal policies.
May an executive be indemnified or insured for claims related to actions taken as an executive, officer or director?
Yes, depending on the business sector (e.g., insurance, finance, banking, etc) and job position held by the executive in the company, companies usually negotiate a hold harmless agreement or directors and officers liability insurance in the event the executive is considered liable for any potential misconduct or loss, regardless of whether the executive is engaged under an employment or non-employment relationship.
Change in control
Under what circumstances will an asset sale in your jurisdiction result in an automatic transfer of benefit obligations to the acquirer?
For employees or executives engaged under an employment relationship, the transfer of control, substantial assets and business of a certain company will cause the buyer to be deemed liable for any existing and potential labour proceeding or debt or benefit obligations of the seller (labour succession). The corporate change cannot cause any loss to the employment rights of the executive.
This rule is not applicable for executives engaged under a non-employment relationship. Usually, the buyer and executive negotiate a new agreement during or after the corporate change is concluded.
Is it customary to provide for executive retention or related arrangements in connection with a change in control?
Yes, it is common and usually done through an incentive policy or clause (e.g., restricted stock units, retention bonus, etc).
Are there limits or prohibitions on the acceleration of vesting or exercisability of compensation in a change in control? Are there restrictions on ‘cashing-out’ equity awards?
No, there are no legal limits or restrictions on the acceleration of vesting or exercisability of compensation in a change in control, or on ‘cashing out’ equity awards.
Do foreign exchange controls rules apply to the remittance of funds, or the transfer of employer equity or equity-based awards to executives?
Foreign exchange controls apply on any transfer of funds in and out of Brazil. Usually, a foreign exchange transaction must be registered with the Brazilian Central Bank, resulting in the levy of tax on financial exchange transactions. However, similar rules do not apply on the transfer of employer equity or equity-based awards to executives.
Must employment agreements, employee compensation or benefit plans, or award agreements be translated into the local language?
Yes. The Civil Code provides that all documents written in a foreign language must be translated into Portuguese to be considered valid in Brazil.
Are there prohibitions on tax gross-up, tax indemnity or tax equalisation payments?
No, tax gross-up structures are available and rather common in Brazil.
Are choice-of-law provisions in executive employment contracts generally respected?
No, all contracts are subject to Brazilian laws. In addition, for executives engaged as employees, the Brazilian employment laws may apply even outside the country in the case the executive is hired in Brazil and begins providing services abroad or is transferred to a foreign subsidiary of a Brazilian company.