VZCZCXRO2394
RR RUEHRG
DE RUEHSO #0126/01 0651627
ZNR UUUUU ZZH
R 061627Z MAR 09
FM AMCONSUL SAO PAULO
TO RUEHC/SECSTATE WASHDC 8995
INFO RUEHBR/AMEMBASSY BRASILIA 0150
RUEHRG/AMCONSUL RECIFE 4317
RUEHRI/AMCONSUL RIO DE JANEIRO 9049
RUEHBU/AMEMBASSY BUENOS AIRES 3442
RUEHAC/AMEMBASSY ASUNCION 3689
RUEHMN/AMEMBASSY MONTEVIDEO 2869
RUEHSG/AMEMBASSY SANTIAGO 2689
RUEHLP/AMEMBASSY LA PAZ 4075
RUEHME/AMEMBASSY MEXICO 0873

UNCLAS SECTION 01 OF 03 SAO PAULO 000126 
 
SIPDIS 
SENSITIVE 
 
STATE FOR WHA/BSC 
 
E.O. 12958: N/A 
TAGS: ELAB EFIN ECON EIND PGOV PHUM SOCI BR
SUBJECT:  OUTDATED LABOR LAWS MAY ENCOURAGE LAYOFFS 
 
REF:  A. 06 Sao Paulo 280  B. 08 Sao Paulo 129 
¶C. Sao Paulo 70 
 
SENSITIVE BUT UNCLASIFIED--PROTECT ACCORDINGLY 
 
¶1.  (U) Summary:  According to Brazilian labor economists, Brazil's 
outdated labor laws are inflexible and may result in companies 
laying off workers rather than preserving employment through 
negotiation in times of crisis.  Therefore, some laws enacted to 
protect workers' rights paradoxically cause unemployment and push 
people into the informal sector.  In addition, labor court 
interventions in large-scale layoffs may hamper a company's ability 
to follow even the rigid Brazilian labor laws and react adequately 
to the global financial crisis.  Economists suggest a liberalization 
of the law to allow temporary contract renegotiations and a 
permanent modification of the law to help small enterprises reduce 
the costs of hiring formal sector employees.  End Summary. 
 
A GAME WHERE EVERYONE LOSES 
- - - - - - - - - - - - - - 
 
¶2.  (U) Brazil's labor laws were established in the 1940's by then 
President/dictator Getulio Vargas.  Vargas established a corporatist 
system whose aim was capitalism tempered by social justice.  The 
major sectors of the economy were organized into major interest 
groups (a.k.a. - corporations) and representatives of these interest 
groups settled differences through negotiation and joint agreement 
(collective bargaining).  He established the labor collectives 
(unions) to represent workers, the Confederation of Industry (CNI) 
to represent business owners, and incorporated strict protections 
for workers into the Brazilian Constitution.  Because workers' 
rights are embedded into the Constitution, any changes that could be 
interpreted as a reduction of workers' rights require constitutional 
amendment and are fraught with political delay and logrolling 
(Reftels A and B). 
 
¶3.  (U) The Brazilian Constitution defines a full time work week as 
an eight hour day with a maximum of 44 hours of work throughout the 
week (many laborers work half a day on Saturdays).  With the 
economic downturn, the Federation of Industry of Sao Paulo (FIESP) 
and many of the hardest hit sectors are calling for salary 
reductions and reduced work weeks to help preserve employment.  The 
major labor unions, the Central Worker's Union (CUT) and Union Force 
(Forca Sindical - FS) have had mixed reactions to these requests 
with CUT remaining steadfastly opposed to any measures that would 
touch workers' salaries or the work week and FS willing to negotiate 
(Reftel B).  In a January 22, meeting between Poloff and Quintana 
Severo, CUT's General Secretary, Severo stated that CUT opposed any 
measure that would "exploit the current financial problems to roll 
back the rights gained by workers over long years of struggle." 
 
¶4.  (U) In a February 12 meeting, prominent labor economist and 
University of Sao Paulo Professor, Jose Pastore, explained to 
Poloffs how the highly structured Brazilian labor laws can actually 
increase unemployment in times of financial crisis.  Pastore noted 
that because the constitution defines the work week, and salaries 
and benefits are so highly regulated, temporary reductions in hours 
or wages are dangerous for employers to negotiate.  While these wage 
and salary reductions are technically possible, employers must prove 
that they are in dire financial straits.  Usually, by the time they 
can prove that their financial situation is precarious enough to 
warrant an exemption from the law, it is too late to save the 
company, even with wage and hour reductions. 
 
¶5.  (U) Despite these legal obstacles, recent press reports 
sporadically note successful, finite contract renegotiations that 
include wage cuts and work week reductions.  Pastore revealed that 
these contracts can leave employers vulnerable to future lawsuits. 
Even if workers and unions agree to the reductions, they retain the 
right to sue their employer years later for back wages and benefits. 
 Furthermore, even if workers do not want to sue their employer, the 
unions and the Ministry of Labor can sue without the workers' 
consent.  Given this precarious legal position, Pastore maintains 
that many companies choose to fire workers rather than risk the 
uncertainty of future lawsuits and costly judgments.  Firing workers 
is also a very costly proposition in Brazil.  Companies must 
contribute eight percent of a worker's monthly salary into a 
Guarantee Fund for Time of Service (FGTS), which an employee 
receives if they are fired without just cause.  In addition, the 
company must pay an additional fine of fifty percent of all the 
accumulated funds in the worker's FGTS account upon dismissal. 
 
SAO PAULO 00000126  002 OF 003 
 
 
Despite the exorbitant cost of firing, many companies choose this as 
the safest route to quickly reduce labor costs in a crisis.  Pastore 
described the status quo as a "game where everyone loses." 
 
¶6.  (U) Recent economic reports seem to support Pastore's statement. 
 On February 20, FIESP announced that for the first time since 1994, 
industries in Sao Paulo State (which accounts for forty percent of 
Brazilian industrial production) shed more jobs in January than they 
created.  "Traditionally, January is a month where the number of 
industrial jobs grow, but this year, all the indicators show more 
layoffs," stated FIESP President Paulo Skaf.  In a separate meeting 
with Ambassador Sobel on February 19, Skaf stated that the current 
economic situation was "difficult, at best." 
 
¶7.  (U) Recent lay-offs at Embraer highlight the problem.  On 
February 19, Embraer announced that it would dismiss close to 4300 
workers (20 percent of its workforce) due to weakening demand for 
aircraft.  Union leaders claim that Embraer did not attempt 
negotiations with the unions prior to the announcement and Embraer 
continues to be publicly reluctant to negotiate.  President Lula 
expressed public indignation and met with Embraer's President to ask 
him to look for alternatives to the layoffs.  The President of the 
Bank of Economic and Social Development (BNDES), which owns 
non-voting shares of Embraer, reportedly also lobbied on behalf of 
the workers.  Meanwhile, the unions took their case to the courts 
and asked the Regional Tribunal of Workers for Campinas (TRT de 
Campinas which covers Sao Jose dos Campos, the location of Embraer) 
to stop the layoffs.  In a controversial move, the TRT decided to 
temporarily suspend the lay-offs pending negotiations between 
Embraer and its unions. (Note:  Originally, the suspension was 
issued pending negotiations on March 5th but, when Embraer refused 
to reinstate the workers at that meeting, the TRT extended the 
suspension until another round of negotiations scheduled for March 
¶13. End Note) Some union leaders have taken their demands a step 
further.  Jose Maria de Almeida, General Secretary for Conlutas, the 
labor syndicate that includes the metal-workers union, told 
reporters "the government has been supporting Embraer and now it 
should reassume full control (i.e. - nationalize the company)." 
Despite Conlutas strong stance, several other unions 
counter-proposed work week reductions, wage concessions and 
voluntary retirements in exchange for maintaining workers' jobs. 
 
¶8.  (SBU) Comment:  The situation with Embraer demonstrates the 
difficulty of navigating Brazilian labor laws.  Although Embraer 
appears to have followed the law, the labor courts still intervened 
suspending the layoffs.  The legal basis for the intervention is 
fuzzy at best.  Public discussion of the matter centers on standards 
set by the Organization for Economic Cooperation and Development 
(OECD) and the International Labor Organization (ILO) which 
encourage giving employees and unions notice and the opportunity to 
negotiate before a large scale layoff.  In January, a similar case 
was brought by the Public Ministry of Labor (MPT) for Volta Redonda 
against National Steel Company.  In that case, the MPT claimed that 
any "mass" layoff could only be enacted after negotiations between 
the company and unions failed.  None of the press reports or 
official commentary cite an actual statute in Brazilian law that 
requires these notifications or negotiations.  In fact, in a January 
meeting with Brian Finnegan, AFL-CIO Program Director for Brazil, 
Finnegan told Poloff that companies are specifically not required to 
give workers or labor unions notice prior to layoffs.  The confusion 
surrounding the matter highlights the complexity of Brazilian labor 
laws and the difficult legal position of companies doing business in 
Brazil. End Comment. 
 
TRUE IMPROVEMENT REQUIRES TRUE REFORM 
- - - - - - - - - - - - - - - - - - - - 
 
¶9.  (U) Pastore has repeatedly called for labor law reform and 
blames strong worker's protections and the high cost of firing for 
feeding the informal economy.  Estimates of the size of Brazil's 
informal economy range from as low as 40 to as high as 63 percent 
depending on how it is defined.  Pastore noted that most small and 
micro enterprises cannot afford to pay all the benefits and taxes 
associated with hiring a formal sector employee.  The eight percent 
monthly allocation into the FGTS plus the stiff fines associated 
with firing a formally hired worker discourage small enterprises 
from hiring formal workers in the first place.  Pastore reiterated 
that while large scale labor law reform is needed, much could be 
accomplished just by relaxing the FGTS requirements for small and 
micro enterprises. Pastore recommended that the government provide 
industry with some relief by using its right to enact provisional 
 
SAO PAULO 00000126  003 OF 003 
 
 
measures in times of crisis.  He noted that if the government used 
it powers to temporarily allow industry to negotiate salary and work 
week reductions, it could ultimately save jobs as industry could 
negotiate these reductions free from fear of future reprisal. 
 
¶10.  (SBU) Comment:  Uncertainty and costs in the labor market are a 
key variable in the "Custo Brazil", or cost of doing business in 
Brazil.  In order to avoid additional layoffs, FIESP has called for 
a reduction in wages and work hours; however, the GOB has not 
publicly announced any plans to relax (even temporarily) Brazilian 
labor laws to allow companies to safely negotiate with employees. 
For many businesses, the risk of future lawsuits is simply too great 
and they therefore are opting to fire workers even with the high 
costs involved in doing so.  While Brazil continues to weather the 
current economic crisis fairly well, outdated Brazilian labor laws 
create perverse incentives for employers that could drive higher 
unemployment and exacerbate the economic crisis.  Moreover, 
unpredictable Brazilian labor courts that show a clear bias toward 
protecting labor, even at the risk of seriously crippling industry, 
likely are a factor that discourages foreign direct investment and 
the new job creation that it would generate.  End Comment. 
 
¶11.  (U) This cable was cleared by Embassy Brasilia. 
WHITE