Employee and Contractor Termination and Severance Pay in Brazil

Brazilian labor law stipulates that an employee contract can end in several ways. First, the contract may be terminated by the employer. This type of termination may be with or without cause. If an employee is terminated without cause, it means they may not have infringed on the employer’s regulations. Hence they are paid to compensate for the sudden change of their employment status. Those terminated with cause are dismissed for misconduct and are not compensated as much as those dismissed with cause. 

An employee may also resign from their role after which they’ll get their salary balance, 13th month salary, accrued vacation bonus and proportional vacation bonus. Furthermore, the contract may be terminated based on a mutual agreement between both parties (employee and employer). 

What are the Legal Grounds for Employee Termination in Brazil

In Brazil, employment can be terminated at any time as long as the notice period is respected and the employee is paid a severance fee. It’s also not mandatory that a reason is stated for the termination of the contract, except if it’s classified as a termination with cause. 

There are two major ways an employee can be dismissed in Brazil – with or without cause. Termination with cause occurs when the employee has infringed on any of the laws listed in the Brazil Labor Law. However, termination without cause is based on the employer’s discretion and may be based on redundancy or other reasons that may not be specified. The difference between Brazil termination of employment with or without cause lies in whether or not the employer pays the severance fee. 

Termination with cause is a severe sanction and usually results in the reduction of the employee’s severance fee. This type of termination is considered to be an exemplary action to other employees. However, employers should only terminate with cause when the misconduct is pre-stated by law and serious enough to warrant such action. 

Brazilian labor legislation stipulates that an employee can be dismissed with cause under the following conditions: 

• Sexual harassment or inappropriate behavior
• Dishonesty
• The employee operates a business that competes with the employer or engages in business activities that may harm the employer’s operations, on his/her own or through the aid of third parties and without the employer’s permission
• The employee faces criminal conviction resulting in an incarceration or inability of the employee to work
• Poor performance 
• Disclosure of company secrets 
• Drunkenness at work
• Insubordination or lack of discipline
• The employee abandons his work 
• Frequent gambling
• Losing a professional qualification necessary to work as an employee
• Insult, physical assault, or defamation carried out at work against any other person, except in cases of self-defence or protecting the interest of a third party
• Engaging in actions that endanger national security

It’s crucial to note that not all employees can be dismissed without cause. The following employees have the right to stable employment: 

• Pregnant employees cannot be dismissed without cause from the date the pregnancy is confirmed till five months after childbirth
• An employee who suffers an accident and has been let off work for at least 15 days cannot be dismissed without cause for the next one year starting from the date the employee resumes back to work
• An employee who contests for a position in the union or worker’s cooperative cannot be dismissed without cause from the date the candidacy is confirmed until one year after the term is completed
• An employee who has been elected as the president of the commission for accident prevention cannot be dismissed without cause from the date the position is confirmed till one year after his or her tenure is completed

Aside from dismissing employees with or without cause, it’s also possible for an employer to dismiss the employee based on a mutual agreement. This type of agreement would usually result in a lower severance pay. 

What is the Mandatory Termination Procedure in Brazil?

Before terminating an employee, it’s essential to determine whether or not the individual is entitled to job protection that may affect the dismissal process. This type of job protection may be specified by law or mentioned in the collective bargaining agreement between both parties. 

If an employee is not entitled to any job protection, the mandatory termination procedure includes the settlement of severance pay within 10 days of the contract expiry. The employee is also expected to submit a medical examination that attests to their health condition. However, there are some other administrative procedures that must be completed. They include: 

• A termination notice is to be signed by the employee
• A note containing the termination information in the employee’s electronic Human Resources file
• Delivery of the necessary documents that will allow employees access the FGTS and receive any unemployment insurance
• Submission (during the month following termination) of information detailing the termination to labour authorities through appropriate methods

When an employee is terminated with cause, it must occur as soon as possible after the employer gains knowledge of their misconduct. If not, the court will rule that the employer forgave the employee for their actions. Employers are to spend no longer than 30 days investigating the employee’s misconduct. However, employees can only be dismissed if their offense warrants such disciplinary action. All employees involved in the same misconduct must receive similar punishments. 

The employer is also expected to notify the employee about their dismissal in writing. The termination letter must contain the reason(s) for the termination and the termination date. For instance, it can contain a list of the employee’s infringements as well as the dates they occurred. 

How to Calculate and Manage Severance Pay

If an employee is dismissed with cause, the employee is not due for any severance pay. In this type of scenario, the employer is only expected to pay for any rights accrued during the employment period. These payments may include pro-rata payments for accrued holiday benefits. 

On the other hand, if the employee is dismissed without cause, the employer is liable to settle the severance pay. Employers must also settle any accrued rights and an amount equal to 40% of what was deposited into the employee severance compensation fund (FGTS) (as a penalty for unfair dismissal). 

Every month, employees are expected to put 8% of an employee’s monthly salary into his/her FGTS account. This account will be managed by the Federal Savings Bank on behalf of the employee. The unfair dismissal penalty fee paid by employers is dependent on the monthly salary of the employee and how long they’ve been employed. 

If both parties (employer and employee) agree to a mutual settlement, the employer will settle a severance pay equal to half the previous financial compensation for prior notice if both parties agree that the employee will be financially compensated instead of working during that period and an amount equal to 40% of what was deposited into the FGTS. 

All other termination payments indicated in the contractual agreement between both parties will also be paid, such as amount due as a result of accrued rights. 

If the employee has a fixed-term agreement where the employer is not allowed to terminate the contract before its expiry without due cause and the employer opts to end the contract early, the employer must pay an amount equal to half of what the employee earns for the remainder of the agreed duration.

What are the Challenges in Employee Termination?

Employee termination in Brazil may be somewhat challenging due to a few labor laws and complex protection put in place for workers. Some of these challenges include:

• Presence of Strict Laws: Employers must follow the regulations governing the termination process or else they risk legal sanctions and repercussions. 
• Calculating Severance Pay: Brazilian labor law stipulates that employers make a severance payment for terminated employees which may be relatively complex to calculate. 
• Strong Employee Protection: The employee protection laws in Brazil are strong. So, it’s common to find a few employees leveraging these protection laws unfairly against employers. 

Contractor Termination: A Different Landscape

While the relationship between employee and employee is controlled by the Brazilian Labor Code, independent contractor relationships are regulated by the Brazilian Civil Law. This law allows Brazilian companies to sign an agreement with people to render services as contractors. An independent contractor is not meant to work with the company on a permanent basis. 

Due to the nature of their employment, independent contractors may work either as individuals or legal entities. They are also to negotiate the terms and conditions of certain benefits. All agreements and benefits are to be paid in Brazilian currency. Furthermore, independent contractors do not have any minimum remuneration or work conditions that must be adhered to. 

How to Navigate Contractor Agreements

You’d do well to note that the law governing the termination of the agreement with individual contractors differs from labor law. Independent contractors are governed by the civil code. Therefore, the process for terminating the agreement with an independent contractor may vary depending on the terms of the agreement. 

In this type of scenario, both parties are free to terminate the contract according to the notice specified in the agreement. If a notice period isn’t specified in the contract, take note of the following standard notice period for independent contractors:

• 8 days for monthly remuneration contractors
• 4 days for weekly or biweekly remuneration contractors
• No notice for contracts valid for less than 7 days

If an independent contractor is misclassified in this type of scenario, the employer will owe him/her back severance payments, as well as other benefits. 

What are the Legal and Ethical Considerations in Contractor Termination?

As mentioned earlier, the relationship between independent contractors and employers is not the same as between employees and employers. Here are certain legal and ethical considerations to ensure compliance with local laws: 

• Both parties must adhere to all contractual terms and obligations to avoid legal disputes. So, ensure to review the details of the contract such as notice period, termination fees, etc. 
• Brazilian law stipulates that an employer must indicate just cause if they want to end the agreement with the independent contractor early. Employers will need to indicate a breach of contract, non-performance or misconduct. 
• Employers should handle contractor termination with fairness and openly communicate with the contractor about the termination. They must even be ready to provide support during the transition period. 
• Employers must ensure contractor terminations are not based on discrimination due to gender, age and race. 

Further reading: Employee Benefits in Brazil, Leave Policies in Brazil, and Work Hours in Brazil

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Article author

Vit Koval

Co-founder at Globy

A top Global Hiring voice on LinkedIn, co-founder of Globy, and host of Default Global. Using deep expertise in global hiring, remote work, and global business expansion to help companies excel worldwide with innovative strategies.