Terminations in Brazil are tricky enough. If “just cause”—which is statutorily established and defined—does not exist, an employer can be on the hook for quite a bit, including indemnities and taxes tied to the balance in the employee’s severance fund account (referred to as the FGTS). In addition, employers are required to give notice, or pay in lieu thereof. But how much notice is required?
An October 2011 law (the Notice Law) increased the required termination notice period from 30 days to up to 90 days. Under the Notice Law, the minimum notice period is 30 days, to which three additional days are added for each year of employment, capping out at 20 years. This raises the question of how this law will be applied—does it have a retroactive effect?
According to a recent Brazil Supreme Court case, the answer is yes. The law itself did not explicitly state that the new notice requirements apply retroactively. However, there is a provision of Brazil’s labor code that provides employees a two-year statute of limitations period, running from the termination date, in which to sue their employers under the labor code. Labor unions in Brazil argued that this statute of limitations provision must also apply to the new Notice Law, making its application retroactive for two years. Unions in Brazil filed thousands of lawsuits with Brazil’s labor courts on behalf of former employees terminated with only 30 days’ notice within the two years prior to the law’s effective date.
Given the controversy, in May 2012, the labor ministry attempted to resolve the matter by issuing a statement indicating that the new notice policy applies only to terminations arising after the Notice Law’s effective date, October 13, 2011, “without any possibility of its application for terminations initiated before.” The labor ministry’s statement further affirmed that employees terminated prior to October 13, 2011, had a right to only 30 days’ notice.
The Brazil Supreme Court took the opposite position when it ruled that the new notice requirements apply to employees terminated up to two years before the law came into effect, much to the chagrin of employers in Brazil already struggling with high labor costs. Given the potential economic impact, employers are well-advised to add this enhanced notice requirement to their list of considerations for doing business in Brazil.