While in the U.S. payroll costs to employers are 9% over the cost of
salaries, in Brazil theses expenses can represent as much as 102%. A new law approved by
the Brazilian Congress deals with temporary labor and the lower costs that come with it.
Employers are understandably happy, but employees are much less enthusiastic. There is a
new reality in the country and workers will need to learn the politics of direct
negotiation without the State’s paternalistic blessings.
By Marta Alvim
On January 13, the Brazilian Congress approved extensive legislation governing
temporary labor, which will allow the contracting of part-time staff for a period of up to
two years as opposed to the current three-month limit. In addition, the new law will
reduce companies’ payroll costs by nearly 40%, a move that is certain to please employers,
but not necessarily benefiting employees.
For years, Brazilian companies have complained about the overwhelming high costs of
payroll and benefits imposed by the current labor legislation, known as Consolidação
das Leis Trabalhistas (CLT). Enacted by President Getúlio Vargas in 1943, CLT
established a series of benefits for Brazil’s working class, including the minimum wage
and job stability. Under the CLT regime the length of a job contract, for instance, is
indefinite, and employers must pay a hefty fine if they terminate a worker without just
cause. Besides the finethe employee’s severance indemnity fund (FGTS)employers
must compensate the worker with a number of benefits, including a mandatory paid 30-day
According to the government, payroll contributions account for additional costs of 58%
over the wages, a number that will be reduced to 37% with the recently approved
legislation. However, those estimates are challenged by independent analysts, who contend
that payroll contributions represent as much as 102% over the cost of
salariesdropping to 82% with the new law. Either way, both figures are still very
high compared, for instance, to Japan and to the United States, where payroll costs are
11% and 9% respectively.
The new labor model comes in the wake of the Asian market crash, which sent shock waves
all over the world. In order to prevent a speculative attack against the Real, the
Brazilian government was forced to raise the annualized prime lending rates to
stratospheric levels. Although applauded by the international financial community, the
decision produced a ripple effect in the job market, as an economic slowdown and the
resulting upsurge in unemployment were inevitable. Consequently, the country’s major
companiesespecially in the automotive sectorfelt they had no alternative but
to temporarily reduce or stop production. Furthermore, companies announced they would
begin downsizing a large number of workers.
The Auto Parts Manufacturers Association (Sindipeças) alone planned to fire between 8
and 19 thousand people from its work force in the first semester of this year. Faced with
such a bleak scenario, labor union Força Sindical reached a collective agreement with
Sindipeças that is likely to change forever the way bargaining contracts are negotiated
between Brazilian employers and employees. According to the agreement, workers were
willing to have their salaries reduced by up to 10% in exchange for the auto parts makers’
guarantee that no lay-offs would take place until May 31st. What makes this situation
unlike any other seen in the history of Brazil’s labor movement is the acceptance of wage
reduction by such a large number of unionized workers.
Meanwhile, the ABC Metalworkers Labor Union, a chapter affiliated to the mighty Central
Única dos Trabalhadores (CUT) were also faced with the threat of massive lay-offs by
automaker Volkswagen. The company planned to dismiss close to 10 thousand workersa
third of its labor forcefollowing the remodeling and subsequent modernization of its
São Bernardo do Campo installations in the state of São Paulo. Eventually, the union
agreed to a 1.2% decrease in salaries and other benefit reductions in exchange for
Volkswagen’s assurance that it would not go through with the lay-offs. The car
manufacturer now plans to redirect the excess work force to its PQ 24 project, which will
replace the Gol, Parati and Saveiro models with a new line of cars in the year 2000.
Although a much better deal than the one negotiated by Força Sindical, the metalworkers’
decision to accept a wage reduction would have been unthinkable a few years ago,
especially considering CUT’s leaders notorious reputation as bullheaded negotiators.
In reality, structural changes in employment are inevitable in Brazil and all over the
world. The fierce competition of current markets provides new challenges for companies,
forcing them to find efficient models of management needed for survival in the
globalization era. Cost reduction and flexibility are two of the essential conditions to
achieve this purpose. However, even members of the Brazilian government are not quite sure
as to the degree to which temporary contracting will impact the nation’s job market.
Some caution that full-time employees could gradually be replaced by temporary workers,
and that the latter may become a regular fixture in many companies. Although there is a
provision limiting the hiring of part-timers proportionally to the company’s size, it is
unlikely that the Ministry of Labor will ever be able to enforce the law. Lack of
infrastructure and corruption are two of the major obstacles to the task of inspecting and
It is well known that, in order to avoid CLT’s excessive regulations and the costly
payroll contributions, numerous companies have resorted to irregular contracting
practices. The most common infraction is the lack of employees’ registration. By law,
employers must sign the Carteira de Trabalho, an official type of card that guarantees
social welfare and other benefits to Brazilian workers. However, enforcement of the law is
lax, bribery is rampant among inspection teams, and companies prefer to subject themselves
to fines or extortion rather than put up with the high payroll costs. It is estimated that
the mass of unregistered workers has increased by 17% over the past decade, and that
constitutes half of Brazil’s current labor force.
On the other hand, critics of the new legislation note that this is an oppressive
economic structure, where human beings are treated as disposable parts. In the United
States, where one in five American workers are employed part-time, job security and
lifelong employment are becoming a thing of the past. According to the U.S. Bureau of
Labor Statistics, the number of temporary workers grew from 500 thousand in 1987 to over 2
million in 1995. However, over a quarter of the temps were "involuntary"
part-timers who wanted full-time jobs.
To think that temporary hiring will have a significant impact on unemployment is
ludicrous. A healthy job market is a direct consequence of investments, production and
economic growth, not the other way around. Which raises another issue: how will the
decrease in payroll contributions affect the nation’s public funds?
Economists forecast that Brazil’s gross domestic product (GDP) will be a dismal 2% this
year, perhaps less. As is often the case, in times of an economic slowdown expenditures
for welfare benefits and unemployment insurance inevitably go up. Contributions to the
FGTS, INSS (National Institute of Social Service) and other funds are the means that
finance the government’s public policies. If those contributions are to be sharply
reduced, how will the government finance its social programs?
Overall, Brazilians have received the new legislation with reserve, especially the
workers currently employed under the CLT’s regime. For the legion of unregistered
employees, though, this may be their opportunity to come out of informality and achieve
some kind of legitimacy. What is certain is that a new employer/employee relationship is
taking shape in Brazil. Workers will need to become aware of the new reality, and learn
the politics of direct negotiation without the State’s paternalistic blessings.
Pay for Performance
On November 26, the Brazilian Lower House voted 322 to 157 to end the job stability
guaranteed to the nation’s civil servants. If the project, which was personally endorsed
by President Fernando Henrique Cardoso, is approved by the Upper House, Brazilian civil
servants will have to work much harder for fewer benefits.
The project establishes that civil servants can be dismissed for unsatisfactory
performance and low productivity, or whenever the federal and state governments, as well
as municipalities, spend over 60% of their net revenues in payroll. Considering the
current situation, where only seven out of the 27 Brazilian states conform to this
expenditure limit, one can speculate that a lot of people will be looking out for a new
job if the project is approved.
The states of Rio Grande do Sul and Minas Gerais spend over 80% of their budgets in
payroll, while the state of Espírito Santo spends 92% of its revenue in the payment to
its work force. Contrary to general belief, the Union has the smallest work force500
thousand civil servantsand its payroll expenses are around 50% of the budget.
If, in addition, the Social Security reform is also approved as expected, the civil
servants’ losses will be even more substantial. It is estimated that retirement salaries
will be 70% of the active duty wages instead of the current 100%.
In spite of unattractive salaries, generations of Brazilians have turned to the civil
service as a natural employment option due to its stability and generous benefits. With
such significant changes, things may never be the same.
Marta Alvim is a Brazilian journalist, freelance translator and interpreter.
You can reach her at email@example.com