A few weeks ago, Brazil celebrated May Day by holding traditional meetings of its CUT, the central labor organization, and Fuerza Sindical (which literally means “labor strength”), another major union. Together, the two meetings had an audience estimated at two million people. The relative economic calm that characterizes the second term of Luiz Inácio da Silva made this year’s May 1 a festive occasion, a year of commemorations.


The number of workers employed in the private sector grew by 4.4% in March, compared with the same month a year earlier. It was an increase of about 363,000 people. This was the 30th consecutive month in which those numbers increased. Meanwhile, the number of unionized workers increased to 18.35% in 2005, from 16.73% in 2001. All of these facts reflect the strong health of the labor market and a higher number of workers who are formally employed.


Nevertheless, the positive figures cannot hide a reality that is widely discussed in Congress and among specialists in labor law: The need to redefine labor relations in Brazil in such a way that it does not penalize employees and companies but manages to reduce worrisome statistics about the underground, or “informal,” economy.


“It is important to be careful about the way this flexibility is being discussed nowadays, so as not to deprive workers of their rights,” says Fabiola Marques, professor of labor law at the Pontifical Catholic University in Sấo Paulo. “You have to think about providing them with a security safety net.”


Informality and Inflexibility


Specialists keep returning to the same topic. A study published at the end of last year by Ipea, the Institute for Applied Economic Research, and titled “Brazil: The State of a Nation,” calls for reducing bureaucracy in the labor market to combat unemployment and address the growing trend toward “informal” employment. The current labor law is inflexible, which explains the shortage of investment and new jobs, says the study. The Ipea report also shows that companies have a hard time adjusting to changes in the marketplace because labor law imposes a series of conditions on them. The study makes it clear that Brazil’s labor laws have to be changed.


The report stresses that “very broad laws and collective bargaining at the industry and sectoral level establish valid horizontal rules for every company in every sector. These rules reduce companies’ flexibility and sometimes impose costs some companies can bear but many other companies find severely restrictive.”


This lack of flexibility begins from the very moment when a labor contract is signed. Brazilian labor law is quite complicated. Established back in 1943 by the government of President Getulio Vargas, the CLT is a body of labor law that covers the rights and obligations of employers and their employees. Unlike the case in most countries, workers in Brazil have the right not only to a monthly salary for services they render, but also to a series of benefits such as overtime, paid vacations, free transportation, food, and a health plan. In addition, workers have the right to receive an additional sum of money from the government if they are fired without just cause.


What’s more, employers in Brazil are obligated to set aside a monthly payment known as the FGTS, “the guaranteed fund for service time.” This is the extra money that each employee has the right to receive when he or she leaves the company; the more time spent, the more money he or she receives. Some Brazilian economists argue that a typical worker costs his company three times more than the numbers registered on his official job documentation. Some people are calling for tax increases of more than 100%. And this piece of the pie does not even consider the basic contractual obligations each company needs to provide each worker (such as overtime pay, vacations, transportation and food).


“The problems still revolve around the fact that the taxes paid by employers — such as the INSS, the national social service tax — are very onerous,” argues Fabiola, who is also president of the Association of Labor Lawyers in Sấo Paulo. Although 10 out of every 10 labor specialists agree that Brazilian labor law is totally pro-labor, there is another side of the coin. For example, there is a 27% discount on income tax that is paid directly to the government [by the company], a sum that consumes a significant share of each worker’s salary.


Taxes and Labor Reforms


Where to begin labor reforms? According to Marques, the first step is not to reform the labor laws themselves but to enact tax reforms. Only later is it essential to reform labor unions. “Before you make labor laws more flexible, you have to change trade union law. It is absurd that employees are obligated to make payments to trade unions that do not fight on their behalf. The right thing would be for a worker to join on his own free will, and then contribute [to the union], and receive benefits. The current reality, however, is that labor unions are created for collecting money.” According to Fabiola, the current government has shown no interest in making deeper reforms of trade unions. “The latest proposals have not changed the situation. They have left labor unions with the right to run things in a way that suits only their own interests.”


The third step, Fabiola explains, would be to make structural readjustments in the relationship between employers and employees. “The CLT acts the same way for all workers in all companies, whether they are small companies or are multinationals, and this is a mistake. A good idea would be to match the rights of each worker to the kind of company where he works,” says Fabiola. Other suggestions involve lengthening the workday, and creating a mechanism that enables companies to pay bonuses to workers without having this money classified as “salary.” Those payments would be subject to lower taxes, both for employees and employers.


Márcio Túlio Viana, professor of labor law at UFMG, the federal university in Minas Gerais state, notes that efforts to make the system more flexible began many years ago. In the middle of the 1960s, the FGTS, (the “fund for guaranteeing time of service”) was created so that a company had the future of the worker in its hands. “In recent decades, with the impact of globalization — including corporate mergers and acquisitions — and the global nature of unemployment, the trend toward taking a more flexible approach has become more apparent, as has workers’ declining effectiveness in the marketplace.”


Viana says that it is essential to deal with the precarious quality of labor relations. Proposals for greater flexibility are related to this trend, he argues. “The talk about reforming current labor law is ambiguous. In reality, there is a hidden rigidity in the rules. It gives the impression of benefiting the worker but the power is actually passed to the stronger side, the employer.” He cites an example: “Years ago, people were talking about a rule that said that a worker’s contract could not be altered by either party after he [or she] signed it. Instead, people wanted to make things more flexible so that a boss could make some changes [when necessary]. The boss winds up dictating the rules, and in a situation with high unemployment, the worker is vulnerable to his capriciousness.”


Another negative example took place at the outset of the administration of President Fernando Henrique Cardoso (1995-2003). The idea was to approve a bill that would make it possible to reduce salaries through collective bargaining. However, “this is unconstitutional,” notes Viana.


Areas of Discussion


The topic of labor relations is being widely discussed in government and by society as a whole. Some proposals are currently being discussed in the Congress. One example comes from Nelson Marquezelli, a lawmaker from Sấo Paulo who belongs to the PTB party [the Brazilian labor party]. Marquezelli has proposed that workers should be able to receive their gross salaries, and then pay income taxes and social security contributions on their own. This proposal would provide an option for directly administering payments and contributions. This idea is still being discussed in the Congress.


One suggestion is to create a new sort of labor contract that provides employers with an incentive by removing their obligation to pay any taxes. Another controversial idea, the so-called “Third Amendment,” wound up being vetoed by president Luiz Inácio Lula da Silva last month. This would have prohibited tax auditors from penalizing people or annulling labor contracts made by legal entities that claim to provide [outsourced] services to a company when, in fact, the relationship can be shown to be a [normal] working relationship [of employer and employee]. According to the text approved by the National Congress, only labor courts would have had this power.


Another much discussed topic is the battle against the black, “informal,” economy. “This is a complicated topic,” notes Viana. “In some cases, a worker winds up making a lot more at the end of the month by providing services and claiming that he is a legal entity [rather than an employee]. In doing so, he does not have the usual rights of his colleagues who work within the framework of the CLT or under the code of labor law. There is also this paradox: This kind of worker can sue his employer and demand rights that he does not otherwise have, if his labor contract is cancelled. In most cases, this is unjust” to the company.


One idea for combating the “black” economy has already been officially approved. Known as Super-Simple, it is a mechanism that creates a tax framework that is differentiated by corporate size. It also helps smaller companies to export, and to bid for government contracts. And it ends bureaucratic barriers to creating companies, shutting them down, and complying with regulations. This law will go into effect on July 1, and it is expected that a million companies will become formal legal entities as a result. In the process, this initiative could generate from two to three million “formal” jobs. Nevertheless, Marques says, “It won’t mean big changes for workers, only for companies.”


For Viana, reducing the informal economy must also involve pursuing macroeconomic policies that make it possible to create new jobs. “The plan for this law includes creating instruments for the sustainability and reconstruction of the labor union movement. In addition, the public prosecutor’s office must also play a decisive role.”