Publications

Category: Infrastructure and energy

After a severe financial crisis, the shareholders of the concessionaire Aeroportos Brasil Viracopos S.A. (ABV) decided to request the rebidding of the concession contract for the Viracopos Airport based on Law No. 13,488/2017. This will be the first case of this type and opens up a pathway for others that may come to light because of Brazil’s difficult political and economic situation.

In addition to lower-than-expected passenger demand and reduced freight rates, Brazil’s political and economic situation is among the factors that most contributed to Viracopos's "friendly return" decision. The main shareholders of the concessionaire, UTC Engenharia and Triunfo Participações e Investimentos, have filed, respectively, requests for court and out-of-court reorganization, reported to the market by Material Facts published on July 17 (UTC) and July 22, 2017 (Triunfo).

ABV pointed to some data indicating the principal difficulties faced by the operator of Viracopos in a press release issued on July 28, 2017, the date of the extraordinary general meeting at which the decision was made to request the rebidding. The demand for 2016, with an initial forecast of approximately 18 million passengers, was much lower than expected, not reaching the 10 million mark. Freight movement was 40% lower than expected, according to a survey by ABV. The concessionaire also indicates a loss due to the decrease in freight transportation rates, which went from R$ 0.50 to R$ 0.08 per kilogram of merchandise. This cut had a strong negative impact on revenues, which, according to ABV, was composed mainly of these rates (about 60%).

It is in the troubled economic context described above that the provisions of the newly created Law No. 13,488/17, which establishes general guidelines for the extension and rebidding of partnership agreements for the road, railway, and airport sectors, will be applied. Pursuant to article 2 of the law, rebidding will depend on prior qualification of the venture in the Investment Partnership Program (PPI).

The concept of rebidding is linked to the return of the project and to the amicable termination of the contract, as well as the execution of a new agreement and new conditions that will be signed with new contractors through another bidding process.

What is the rebidding process like?

The first step in initiating the process of rebidding is to apply to the Council for the Investment Partnership Program (CPPI), which is responsible for qualifying the public venture, in accordance with article 2 of the law. The National Civil Aviation Agency (ANAC), as the granting authority, will be in charge of verifying the relevance, necessity, and reasonableness of the rebidding process, based on the justifications and technical elements that must be submitted by the concessionaire.

If Anac chooses to accept the request, the measures relating to the initiation or continuation of forfeiture proceedings will be suspended. Rebidding is also conditional on the execution of an addendum on the irrevocable and irreversible adhesion of the concessionaire to the rebidding and the subsequent amicable termination of the original agreement, pursuant to item I of article 15 of Law No. 13,488/17.

The same article also provides for the suspension of investment obligations, as of the date of execution of the addendum, and establishes that the current contractor and the granting authority will need to agree on the minimum conditions of the services that must be provided pending execution of a new concession agreement.

The law also provides that Anac will be responsible for preparing a new technical study to be used in the new bidding process, which prohibits the participation of the current contractor (in the case of Viracopos, ABV). If there are no interested parties or if the rebidding process is not completed within 24 months (counting from the date of qualification determined by article 2 of the law), Anac shall take the necessary measures to continue or establish a forfeiture process.

Category: Labor and employment

The entry into force of Law No. 13,467/2017 (Labor Reform) brings to light a debate already widespread in the US, but very little discussed here in Brazil: the application and enforceability of the clawback clause in employment contracts for executives at publicly traded corporations.

After the economic crises of the last two decades, especially after the collapse of the giant Enron in 2001, governments around the world have begun to devote more attention to the management practices of top executives with the power to impact on domestic and international markets. In response to this scenario, the US has issued a series of laws aimed at curbing deviations by these agents: in 2002, the Sarbanes-Oxley Act was passed; in 2008 and 2009, respectively, the Emergency Economic Stabilization Act (EESA) and the American Recovery and Reinvestment Act (ARRA); and finally, in 2010, after the 2008 crisis, the US government approved the Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank Act). Among other features, these laws regulate the so-called clawback clause. This provision requires restitution of bonuses and/or financial compensation received in advance by executives who make up the company's management in cases in which accounting restatements occur as a result of misunderstandings or fraud, even if misconduct/mismanagement is not demonstrated. In the US, clawback clause has become quite common in recent years, especially after the entry into force of the Dodd-Frank Act. According to author Sam Sharp, "A recent study by Equilar, a proxy research firm, found that approximately 73% of Fortune 100 companies had clawback policies as of 2009, compared to 18% of those companies in 2006." In Brazil, this trend was evident with the entry into force of the following regulatory acts: (i) Resolution No. 3,921/2010, issued by the Central Bank of Brazil (BACEN); and (ii) Normative Instruction No. 480/2009, issued by the Brazilian Exchange Commission (CVM) and subsequent amendments. The aforementioned standards clearly demonstrate a concern with the compensation of executives tied to risk taking. However, there is still no consistent debate on the implementation of the clawback provisions for listed companies. It seems to us, however, that BACEN Resolution No. 3,921 opened an important door for the introduction of the clawback clause in Brazil, although only for financial institutions. Now, the Labor Reform has further cemented the possibility of including this type of contractual provision in executive contracts in Brazil. This is because one could argue that, due to the fact that these high-level individuals are  regular employees of the company, they would automatically be considered in a weaker bargaining position and without negotiating power (autonomy of the will). Thus, clawback provisions in contracts with employees could be taken as abusive and therefore unenforceable. As a means of avoiding this understanding, the argument presented was more along the lines of principle by virtue of the applicability of the principle of pacta sunt servanda and the principle of autonomy of will. The argument in this case would be the impossibility of uncritically accepting that the rules adopted in 1943, when the Brazilian Labor Code (CLT) were enacted, may be be applied in the same way today, without a contextualized analysis. The reality of employment relationships has become more complex and the same has occurred with the standards and qualifications of the Brazilian workforce. Today senior executives have extensive CVs, national and international work history, vast professional experience, and a rich academic background. Obviously, they cannot be equated with truly weaker employees who often have not even completed basic education, precisely the category of employees for whom the CLT’s rules were designed, with a few exceptions. Following this line of reasoning, the Labor Reform changed the sole paragraph of article 444 of the CLT to include expressly that the negotiation of the terms of the employment agreement is free (insofar as one does not contravene labor protection laws, collective bargaining agreements, and decisions of competent authorities) for those employees holding a higher education degree and who receives a monthly salary equal to or greater than twice the maximum benefit limit of the General Social Security System, which today amounts to R$ 11,062.62. Therefore, the labor rule that will be in effect as of November 11, 2017, is that employees deemed to be in a “stronger" position will have unrestricted autonomy to negotiate and renegotiate all clauses of their contract. In this sense, there is no longer any impediment to inclusion of the clawback clause in executives' employment contracts in Brazil. As a practical effect of this change, companies may require the return of incentives (bonuses, PLR, stock options, etc.) advanced to executives to offset significant and measurable losses to the company due to misconduct in the management of the business. For proven willful misconduct, there is an express provision in the CLT regarding the possibility of reimbursement from the employee. This procedure is similar to the rules set forth in article 462, paragraph 1 of the CLT. More precisely, the difference between the discount set forth in that article and the effects provided in the clawback is merely practical, since both mechanisms have the same substantive nature. Instead of clawing back previous incentives advanced to executives, the article in the CLT provides for discounts from future compensation (including bonuses, if eligible) for losses caused. The essence, however, is the same: recovering pecuniary damages caused by employees by reason of misconduct, whether or not willful. Given the subtle difference between the two systems, with the inclusion of clawbacks in employment contracts, it will be possible to obtain reimbursement for losses even from those managers who have already been dismissed if it is proven that they did not fulfill their duty of care. In the case of the discounts set forth in article 462, paragraph 1, of the CLT, discounts could receive successive treatment and, in theory, could occur until the termination of the contract, under the terms of article 477, paragraph 5 of the CLT. With the Labor Reform, one finds that any limitation on amounts (currently it can be argued that discounts are limited to the value of an employee's compensation, per interpretation of article 477, paragraph 5 of the CLT) and as of the moment of the demand for reimbursement (up to contractual termination) it will undergo a major transformation, since “stronger" employees will be able to individually negotiate the terms and conditions of their employment contracts. Therefore, the discounts provided for in article 462, paragraph 1 of the CLT or the provisions of the clawback itself may be freely negotiated between the companies and their executives. Considering the substantial incentives granted to these employees, which are linked to the company's supposed financial success but only returned on the grounds of commission of error/fraud in the financial statements, there is no way of allowing any offsets/discounts to be restricted to the period of employment and subject to the limitations imposed by the CLT. Thus, the employer is granted the right to recover from executives who have acted to the detriment of the company, in an erroneous or intentional manner the exact amounts advanced by it and subsequently associated with errors or fraud committed by them. This applies both during employment and after termination, a more common situation since the conduct can lead to dismissal for cause immediately.

Category: Infrastructure and energy

The Brazilian Electric Energy Agency – ANEEL is holding a reserve energy contract cancellation auction, or reverse auction, on August 28, 2017, at 10:00 am, in accordance with the rules of the competitive mechanism announcement published at the end of July. Participation in the auction is a good alternative for eligible generation projects that fail to ensure their deployment viability.

The auction has been discussed for some months as an alternative to (i) excess contracting of distributors, in view of the forecast of an average structural surplus of 8.4 GW energy in 2018, and for (ii) the high number of projects with significant delay in deployment, which causes uncertainty as to their viability.

The eligible projects were disclosed by ANEEL through Order No. 2,254, dated July 26, 2017, totaling 4,518.5 MW of power and 1,600.60 average contracted MW. As set forth in Decree No. 9,019/2017, which created the competitive mechanism, these projects will allow for the contract cancellation of reserve energy from wind, hydro, and solar photovoltaic sources.

The criterion to define the winners of the auction will consider the price negotiated in the respective reserve auctions, which represents the advantage of the contract cancellation in relation to the performance of the respective contracts, and the payment of a premium offered by the bidders in the mechanism.

Participation in the auction is subject to acceptance of the conditions set out in the bid notice and its exhibits, including the impossibility for winners to participate in two reserve auctions subsequent to the mechanism (item 12.4 of the notice and exhibit III).

The bidding phase of the auction should take place in two steps: the initial step and the continuous step. For the first, bidders will be able to submit a single bid for each project, equal to or greater than the initial product premium (R $ 33.68/MWh for solar, wind, and hydro products). The ranking will be in descending order of the Premium Classification Index - ICP (corresponding to the bid prize offered plus the contracted sale price).

In the second step, those who offered a premium equal to or greater than the initial premium of the product will participate. In the continuous step, bidders may bid incrementally for a defined period in the system and will also be ranked in descending order of ICP. In the event of a tie in the final bids, a tie-break shall be conducted at the highest contractual price, followed by the criterion of greater contracted quantity.

The bid notice also defined the proposal guarantees to be provided by the bidders in the contract cancellation auction. Quite similar to the guarantee already provided for in the auctions to contract energy in the regulated market spearheaded by ANEEL, the proposal guarantee has as its main features:

• Types of collateral in money, performance bond, bank guarantee, or public debt securities;
• It should be provided via the Internet;
• It should have the Electric Energy Trading Chamber (Câmara de Comercialização de Energia Elétrica ) as beneficiary;
• It should be valid until December 20, 2017; and
• The amounts should correspond to R$ 2,000 for each lot of energy that can be contracted, with each lot of energy = 0.01 average MW.

   

In the event that the winning bidder desists from any of the obligations assumed in the contract cancellation auction, in addition to the execution of the proposal guarantee, a penalty of temporary suspension of the right to contract or participate in bids spearheaded by ANEEL for a period of two years shall be applied, and this penalty will also extend to direct and indirect controlling shareholders, subsidiaries, and controlled companies with a stake equal to or greater than 5%.

Agents that decommission energy in the auction will have their obligation to performance under their contracts released and will be spared the penalties provided in the reserve energy purchase and sale contract. In turn, they will be unable to participate in the next two auctions contracting for reserve energy.

Although the consequences of contract cancellation may sound discouraging to taking part in the auction, it is important to note that the maintenance of reserve power contracts that are behind schedule may result in the application of even heavier penalties, such as execution on the guarantee of due performance and suspension of the right to contract or participate in auctions held by ANEEL for two years by agents, controlling shareholders, and affiliates, among others.

Category: Restructuring and insolvency

From January to June of this year, 829 applications for bankruptcy and 685 applications for judicial reorganization were filed for Brazilian companies, according to Serasa Experian. The high numbers reflect Brazil’s unstable economic situation and overwhelm the Judiciary with complex bankruptcy proceedings due to the huge number of participants and the diversity of legal issues involved. To make the situation worse, there are few judicial districts where there are courts specialized in the subject matter, which further hinders the speed and effectiveness of procedures that, as a rule, are already time consuming.

To speed up the resolution of conflicts between creditors and debtors or other issues related to insolvency proceedings, the courts have authorized or ordered the use of alternative methods such as conciliation, mediation, and arbitration. This trend follows guidance No. 45 approved in the First Conference on the Prevention and Extrajudicial Settlement of Litigation in 2016 and authorizes the use of the aforementioned methods for resolving conflicts in bankruptcy and judicial reorganization proceedings.

Very recently, conciliation was authorized by the Judiciary of the State of São Paulo to resolve disputes over claims in judicial reorganization proceedings. Rather than opening an ancillary proceeding to litigate the amount of the debt, companies will be able to rely on conciliation sessions to try to reach an agreement directly with creditors. It is estimated that this represents a time savings of 6 months to 1 year.

Inepar, a company in the process of judicial reorganization since 2015, was a pioneer in adhering to this method in negotiating directly with the creditors that submitted a credit divergence. In total, 28 agreements were executed with unsecured creditors in the first joint effort organized by the company, according to the news piece published by the newspaper "Valor Econômico" on July 31 of this year.

In addition to contributing to speed up the process, the measure saves the company's financial resources, which may be better allocated to improving its financial health and paying creditors.

Governed by Law No. 13,404/15, mediation has also been explored in bankruptcy and judicial reorganization proceedings, as in the Oi case. Even if it is criticized for not abiding by the arbitration clause in the company's corporate documentation, the Superior Court of Justice – STJ has already recognized that this alternative means can be used to resolve conflicts between shareholders (Conflict of Jurisdiction No. 148,728/RJ). This procedure was also elected to litigate the divergence between the parties with respect to the competition of creditors for the debts of Anatel and the claims of smaller unsecured creditors (up to R$ 50,000), which is an extremely high number and may hamper, even in operational terms, the unfolding of a future general meeting of creditors that will deliberate on the reorganization plan. Mediation is still being used to resolve disputes involving essential services (undersea cables) provided by a significant supplier whose contract has a take or pay clause.

Regarding the issue of unsecured creditors with claims of up to R$ 50,000, mediation was suspended by a preliminary decision of the 8th Civil Chamber of the Court of Appeals of the State of Rio de Janeiro (TJ-RJ), issued with respect to interlocutory appeal No. 0033161-06.2017.8.19.0000, on the grounds that it could entail payment before the vote on the reorganization plan.

The mediation method consists of "technical activity performed by an impartial third party without decision-making power, who, chosen or accepted by the parties, helps them and encourages them to identify or develop consensual solutions to the controversy" (article 1, sole paragraph of Law No. 13,140/15). It is compatible with bankruptcy and judicial reorganization proceedings, since the subject-matter of mediation may be related to alienable rights or inalienable rights but which allow for settlements, under the terms of article 3 of Law No. 13,140/15.

In the same manner, arbitration is perfectly applicable to bankruptcy and judicial reorganization proceedings. Despite the collective interest in such procedures, the situations debated in these suits are contractual and deal with alienable rights that are amenable and subject to arbitration, by the free consent of the parties.

In this sense, there are those who argue, such as José Emílio Nunes Pinto,^[1] that arbitration agreements can be proposed even in judicial reorganization plans for the resolution of certain matters that relate to equity or are of an alienable nature. As is known, this practice has not yet been adopted, but the Judiciary has recognized the validity of arbitration agreements and has allowed companies in judicial reorganization or bankruptcy to use this extrajudicial method of dispute resolution.

This was the understanding of the STJ in precautionary measure No. 14,295/SP, as taken from the bankruptcy case of Interclínicas Planos de Saúde, and was also the position of the TJ-SP in the bankruptcy of the Diagrama Construtora, in interlocutory appeal No. 531.020.4/3-00. The situation is dealt with in guideline No. 6 of the First Conference on the Prevention and Extrajudicial Settlement of Litigation: "The granting of judicial reorganization or a decree of bankruptcy does not authorize the judicial trustee to refuse effect to arbitration agreements, does not preclude the initiation of an arbitral proceeding, nor does it suspend such a proceeding."

It is therefore hoped that the methods of conciliation, mediation, and arbitration for resolving disputes involving bankruptcy and judicial reorganization will increasingly be used to replace the numerous ancillary proceedings introduced in the course of suits of this nature and will help resolve gridlock related to alienable patrimonial claims.

Category: Real estate

In lawsuits relating to rural properties, the Public Registers Law (article 225, paragraph 3) determines that judges must require precise identification of the characteristics, boundaries, and location of the property by the parties, which is known as geo-referencing. This modern surveying technique considers the coordinates of the vertices, measured with the help of GPS and magnetic coordinates by satellite (UTM) in order to specify the area, shape, and location of a rural property.

From a legal point of view, in order for a rural property to be considered geo-referenced, it is not enough to merely comply with the technical requirements for surveying points and measurements, namely: (i) a technical survey in the field conducted by a professional qualified with the aid of GPS; (ii) preparation of a descriptive memorial; and (iii) payment of the respective Technical Responsibility Note (ART). Rural property will only be considered geo-referenced when its descriptive memorial is certified by INCRA (Brazilian Institute of Colonization and Agrarian Reform) and annotated in the title and enrolment certificate of the property with the Real Estate Registry Office. What guarantees security in the system is precisely the certification of INCRA, because it is the responsibility of the agency to verify whether there are overlapping areas between the property for which one seeks certification and other rural properties already certified or in the process of certification. The objective is to avoid the issuance of separate titles for the same territorial area (duplicate title and enrolment certificates). The requirement of geo-referencing was introduced into the Brazilian legal system by Federal Law No. 10,267/2001. The objective was to try to guarantee greater legal certainty to rural properties, thereby standardizing technical parameters and objectives in identifying, characterizing, and locating rural properties. These parameters are in accordance with the recording principle of the objective specialty. They avoid descriptions and precarious characterizations, which previously prevented correct verification of the location of the property, and this helps to reduce Brazilian land ownership problems. According to current legislation, all rural properties with an area of 100 ha or more must necessarily have geo-referencing. In order to enforce this obligation, the law provides for geo-referencing as an essential requirement in two moments: (i) with the Real Estate Registry Office in cases of division, parceling, gathering, or any situation involving voluntary transfer of rural properties, subject to legal deadlines of enforceability (grace periods); and (ii) with the Judiciary, in the event of lawsuits relating to rural properties. Compulsory observance of this legal provision by the Judiciary is essential in order to avoid judgments that, although final and unappealable, do not produce practical effects from the real estate recording point of view. This is because a geo-referenced description of the rural property is an objective requirement for a judicial decision. It can be said that judicial decisions that fail to observe the geo-referenced area do not necessarily refer to the same rural property and, therefore, must be reviewed. An example: if there is a court ruling favorable to adverse possession of a rural property, but the geo-referenced descriptive memorial and the INCRA certification were not requested and registered in the real property’s title, the judicial decision cannot be registered in the title and enrollment certificate pertaining to the real property. With legal support, it will be incumbent upon the Real Estate Registry Office to require geo-referencing of the rural property to be conducted prior to recording of the judgment or, even that a new decision be rendered and then be recorded. This, unfortunately, is not always so simple. In an attempt to certify the descriptive memorial of a rural property with INCRA, it is often discovered that part of that same territorial area is already subject to another certification in progress and that there are overlapping areas between the plat maps. When this situation occurs, it is essential to open an administrative proceeding with INCRA to ascertain the overlap. This may lead to the conclusion that the certification sought is not legitimate. If this had occurred in the example cited, the adverse possessor and plaintiff would not become the owner of the adversely possessed rural property, even if it is the beneficiary of a final court decision. For all the reasons above, it is advisable to conduct geo-referencing of rural properties, even if the legal term of their enforceability, according to the territorial area, has not expired, in order to avoid very common debates relating to overlapping areas during geo-referencing processes. It should be noted that grace periods for geo-referencing based on the area of the property do not apply to lawsuits brought after October 31, 2005. It is important to emphasize that not every lawsuit that deals with rural property has as a procedural requirement the submission of proof of geo-referencing of the property in order to validate the decision. This requirement shall apply only in lawsuits in which the rural property is the core of the suit and which result in the creation or modification of in rem rights relating to the property or in changes in its recording status. Lawsuits that deal, for example, with possession of rural properties (such as reintegration of tenure) are not included in this list. On the other hand, adverse possession lawsuits, judicial rectification of recordings, expropriation, establishment of administrative easements, division, and demarcation will necessarily need to observe this rule in order to guarantee legal certainty. The understanding that the geo-referencing of rural properties is essential to the resolution of most Brazilian land problems is a settled understanding. In order to achieve this much-desired goal, however, it is necessary that all parties involved, including the Judiciary, observe the applicable rule and avoid judicial decisions that violate recording rules. Failure to require proof of geo-referencing of rural properties opens up the legal possibility of land grabbing, with the issuance of judgments that order change of the land registry situation without being sure about which land surface is actually affected by the decision.

Category: Labor and employment

Much has been debated whether, with the Labor Reform, the annual bonuses paid by companies have ceased to be part of the remuneration of their employees for the purposes of calculating employment and social security charges. This is due to changes made to article 457 of the Brazilian Labor Laws (CLT) and article 28 of Law No. 8,212/1991, which governs remuneration.

Currently, it can be deduced from the current article 457 of the CLT that the remuneration of employees for employment purposes is composed not only of the fixed monthly salary but also of the adjusted bonuses paid in consideration for the services rendered. According to case-law, the concept of adjusted bonus comprises contractually agreed upon amounts and those paid on a regular basis, such as annual bonuses. At the same time, the current article 28 of Law No. 8,212/1991 establishes that the remuneration of employees for social security purposes is composed of all income paid, due, or credited in any way, to compensate the work, both for the services rendered, and for the time available for work.

Based on the systematic interpretation of these articles, both the Brazilian Labor Courts, in the employment sphere, and the Administrative Council of Tax Appeals (CARF) and Federal Courts, in the social security sphere, established the understanding that annual bonuses comprise the remuneration of employees and, therefore, should be a part of the calculation basis for employment and social security charges. According to the current understanding in case-law and legal scholarship, only bonuses paid in a lump sum, in a non-habitual manner and that were not contractually agreed upon would not be part of the remuneration, as they are not adjusted bonuses, but rather merely eventual income.

The Labor Reform, however, not only eliminated the term “adjusted bonus" from the text of the law, but also established that the remuneration for employment and social security purposes does not include amounts, even if they are customary, paid by way of rewards, that being understood as “liberalities granted by the employer in the form of goods, services, or cash amounts to the employee or group of employees due to performance above that ordinarily expected in the performance of their activities."

Due to this alteration brought by the Labor Reform, amounts paid by the employer, by way of mere liberality, spontaneously and unexpectedly, "due to performance above that ordinarily expected,” are not part of remuneration for employment and social security purposes.

In view of this, much has been debated regarding whether the scope of the new concept of “reward” implemented by the Labor Reform would also include annual bonuses paid by the companies and whether such payments have ceased to be part of the remuneration of the employees for the purposes of calculating employment and social security charges.

This debate stems from a lack of clarity in the definition of the term "liberality" and the expression “due to performance above that ordinarily expected." What would be liberality granted by an employer? What would be performance above that ordinarily expected that would authorize the payment of rewards?

With regard to the concept of liberality, there are two possible interpretations.

The first interpretation is that liberality would be all that is granted by the company, but not required by applicable law. In this case, it would be possible to argue that the new concept of a reward would cover any and all forms of variable remuneration, even if contractually agreed upon, since in most cases the company is not obliged to pay variable remuneration beyond the fixed salary of its employees.

A second interpretation is that liberality would be all that is granted by the company, but not required by applicable law, and that has also not been contractually agreed upon. In this case, the new concept of reward would be limited only to payments made to employees at the sole discretion of the company, spontaneously and unexpectedly. Thus, a reward paid by way of mere liberality could not be equated with a reward contractually agreed upon (in agreements, policies, job offers, etc.), since, once contractually agreed upon, its payment would cease to be mere liberality and would come to be a contractual obligation assumed by the company. That is, the unpredictability of the payment would be an element to be evaluated in classifying the payment within the concept of a reward provided for by the Labor Reform.

In this context, rewards paid by way of mere liberality would approximate the current concept of occasional and not contractually adjusted bonus, which, even before the Labor Reform, was not part of the remuneration for employment and social security purposes. In turn, contractually agreed upon rewards would approximate the current concept of adjusted bonuses, which, according to the established case-law of Brazilian Labor Courts, is part of the remuneration. That being the case, the Labor Reform brings in an innovation only in that it clarifies that rewards paid by way of mere liberality, even if on a regular basis, are not part of the remuneration, contrary to the current understanding in case-law according to which these payments made on a regular basis imply a tacit arrangement.

Likewise, there are two possible interpretations of the expression "performance above that ordinarily expected." The first is that the fixed salary would compensate normally expected performance, and variable remuneration would compensate performance above that ordinarily expected. The second is that only the part of the variable remuneration due to exceeding targets would compensate performance above the ordinary.

 
In view of this, considering the tendency of the Brazilian Labor Courts observed in recent years, it seems to us that the greater chances of prevailing in the administrative and judicial spheres lie with the understanding that only payments that have not been previously agreed upon will be considered as rewards, even if the payment compensates the employee for going beyond previously established targets.

 
In any case, it would be possible to argue that the qualification of a payment as a reward should be done taking into account the characteristics of each case in order to determine whether the payment would or would not compensate a performance above that ordinarily expected.

 
In view of this, at least at this early stage of the discussions on the impacts of the Labor Reform, it seems to us that contractually agreed upon annual bonuses tend to continue to be considered part of the employees' remuneration and, therefore, calculation basis for employment and social security charges.