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Mass lay-offs at companies under judicial reorganization

Category: Labor and employment

Various businesses in Brazil have recently been suffering the consequences of the aridity of the current economic scenario. Often the organizations affected invite their creditors to discuss possible adjustments in their debt payments and at the same time reorganize their internal structure and staff.

To circumvent the point of no return from ungovernable debts with their creditors, renowned companies in crisis resort to an in-court or out-of-court reorganization plan to avoid bankruptcy - and, consequently, the domino effect on customers, suppliers, and workers.

In-court reorganization, in short, is the procedure initiated by a company with financial difficulties to make it possible to maintain its business. It is based on creating a plan approved with the creditors so that the debts are reorganized in order of preference and the business remains healthy while going through the turmoil.

As has been reported in the media, reduction and/or reorganization of the workforce has gained prominence in the judicial reorganization plan as a necessary instrument to ensure the company's health and may generate the forced measure of mass lay-offs.

The case of Lojas Americanas, especially after its filing for judicial reorganization on January 17 of this year, brought more relevance to the subject and raised questions: if the collective lay-off of workers is inevitable, is collective bargaining with unions necessary, even if the company is under judicial reorganization or in the process of reorganization? And, if negotiation is necessary, what should be negotiated with the unions?

On the subject of collective lay-offs, the Federal Supreme Court (STF) has decided Extraordinary Appeal 999435, with general repercussion (Topic 638), and decided by majority vote for the necessary prior intervention of unions in mass lay-off procedures, which we commented on in a recent article.

Looking at the current picture, it is known that if there is a need to collectively lay off workers, whether before or during the judicial reorganization phases, the prior intervention of the professional union is an indispensable step, and an agreement may be reached or not.

Although union negotiation in cases of collective lay-offs has been clarified to some extent by the STF, heated new debates have arisen over what "effective" negotiation would be when imposed on companies in crisis. In other words, what should "saving" businesses with compromised cash flow offer when negotiating with their unions?

We recall the emblematic case of Editora Abril which, at the time under judicial reorganization, proposed to its employees' unions a collective bargaining agreement with the purpose of paying in installments the severance pay and the fine provided for in article 477 of the Consolidated Labor Laws (CLT), due to workers that would be collectively laid off due to the organizational restructuring.

Despite Abril's financial challenges at the time, the 6th Panel of the Regional Court of Labor Appeals for the Second Region decided for the illegality of the collective lay-off and for reinstatement of the workers, under the argument that the proposal presented by the company to the unions "in no way represented an effective willingness to negotiate to minimize the impact of the collective lay-off of its employees.”[1]

In our opinion, the court's understanding in this case deserves to be changed, especially because it seems unreasonable to us that companies, in this delicate moment of scarcity of economic and financial resources, should have to make additional payments or commitments of an economic nature that may expose to risk the entire business activity and the chain of individuals and companies that depend on it.

Decisions such as the one in the Editora Abril case may form a line of case law contrary to efforts to overcome crises at companies that are already undergoing or may undergo judicial reorganization. More than this: they can consolidate dangerous concepts that, in practice, would affect jobs, future hiring, and the willingness of companies to file for judicial reorganization.

 


[1] Case 1000446-88.2018.5.02.0061.

Changes in the regulation of foreign capital in Brazil

Category: Banking, insurance and finance

Central Bank of Brazil (BCB) Resolution 278/22, published on December 31st of last year, regulates Law 14,286/21 regarding foreign capital in the country in foreign credit operations and foreign direct investment.

The aim of the new rules is to modernize, simplify, and strengthen the legal security for foreign capital operations in order to ensure that they are more transparent, less bureaucratic, and comply with the best international standards.

We summarize below the main changes brought about by Resolution BCB 278 in relation to this subject.

  • Expansion of the list of direct investment recipients: the definition of a direct investment recipient was extended to any entity incorporated or organized in the country in accordance with the applicable Brazilian legislation, whether for-profit or not, with or without legal personality, including any company, partnership, sole proprietorship, consortium, and partnership.
  • Change in the name of the information reporting system: The system used to report information to the Central Bank was changed and is now called:
  • System for Provision of Information on Foreign Direct Investment | SCE-IED, in substitution for the Declaratory Registration of Foreign Direct Investment | RDE-IED; and
  • System for the Provision of Information on Foreign Capital - Foreign Credit (SCE-Credit), in substitution for the Declaratory Registration of Financial Operations (RDE-ROF).
  • Minimum amount for reporting foreign direct investment and foreign credit: as of December 31, 2022, reporting of foreign direct investment and foreign credit became mandatory only when the reporting thresholds stipulated in BCB Resolution 278 were reached, as indicated below.

    For reference, the calculation of the equivalence in other currencies of the values set out below must consider the contract execution date, or the issue date of the securities abroad, taking into account the exchange rate of the prior business day published by the Central Bank.
  1. In cases of foreign direct investment, when:
  • there is a financial transfer related to a non-resident investor (i.e. foreign exchange) of an amount equal to or exceeding USD 100,000 or its equivalent in other currencies;
  • there is any transaction (such as corporate reorganizations, assignment, exchange, and contribution of quotas or shares, international contribution of quotas or shares, reinvestments, distribution of profits and dividends, payment of interest on equity, divestiture of holding, etc.) involving an amount equal to or exceeding USD 100 thousand or its equivalent in other currencies; or
  • the base date of periodic declarations for recipients subject to such declarations (such as quarterly, annual, and five-year declarations) occurs; and
  1. In the event of foreign credit, both in those cases of inflow of funds into Brazil and in the cases in which they are kept abroad, in the case of:
  • direct loan, issuance of securities in the international market, issuance of privately placed securities in the domestic market, and financing, including from international organizations, whenever the value of the transaction is equal to or greater than USD 1 million or its equivalent in other currencies;
  • financed imports of goods or services with payment terms longer than 180 days, whenever the value of the transaction is equal to or greater than USD 500,000 or its equivalent in other currencies;
  • advance receipt of exports and external financial leasing, with payment terms longer than 360 days, whenever the transaction value is equal to or greater than USD 1 million or its equivalent in other currencies; or
  • external credit operations contracted by entities of the Direct and Indirect Federal, State, Municipal, and Federal District Public Administration, regardless of the value of the transaction.

Furthermore, registration of foreign credit operations carried out before the effectiveness of BCB Resolution 278 must be kept updated until the end of the transaction. Transactions that do not fit into the reporting floors mentioned above are exempt from updating, so that the respective record will remain available only for consultation purposes until December 31, 2023.

  • New values and criteria for mandatory quarterly, annual, and five-year periodic declarations in foreign direct investment: the receiver of foreign direct investment must provide:
  • quarterly statement: on the base dates of March 31, June 30, and September 30 of each year, when it has total assets worth R$ 300 million or more;
  • annual statement: on the base date of December 31 of the prior year, when it has total assets worth R$ 100 million or more; and
  • five-year statement: on the base date of December 31 of the calendar year ending in 0 or 5, when it has, on the base date of December 31 of the prior year, total assets worth R$ 100 thousand or more. There will be no annual statement in years where there is a five-year statement.

Also released was BCB Resolution 281, of December 31, 2022, which regulates the transition period of BCB Resolution 278 and maintains the procedure for filling out the Economic and Financial Statement, as a form of delivery of the periodic quarterly statement mentioned above. In this sense, on the base date of December 31, 2022, the recipient of foreign direct investment that has total assets worth R$300 million or more must submit a quarterly statement by March 31, 2023.

In addition, the annual periodic statement of foreign direct investment for the base date of December 31, 2022, must be provided through the Foreign Capital Census system, exclusively by:

  • legal entities headquartered in Brazil, with direct participation of non-residents in their capital stock, in any amount, and with equity equal to or higher than the equivalent to USD 100 million, on the respective base date; and
  • investment funds with non-resident shareholders and net equity equal to or greater than the equivalent of USD 100 million, on the respective base date, through their officers. The deadline for filing the annual statement begins on July 1 and ends at 6 pm on August 15, 2023.
  • Exemption from the need to provide information on foreign credit transactions related to operational leasing, renting, chartering, and technology services: foreign credit transactions related to technology supply agreements, renting, operational leasing, chartering, trademark and patent use and assignment licenses, franchising, and technical and similar services are exempt from providing information and updating, regardless of the amounts involved.

    The registry of transactions of the modalities provided for above prepared before the effectiveness of BCB Resolution 278 will remain available only for consultation purposes until December 31, 2023.

BCB Resolution 278 also provides that the supporting documentation of foreign direct investment and/or foreign credit operations must be kept at the disposal of the Central Bank for a period of ten years, as follows:

  • in the case of foreign credit, from the date of termination of the transaction obligations; and
  • in the case of foreign direct investment, from the date of liquidation of each investor's foreign direct investment in the recipient

Collective applications for mandamus brought by associations

Category: Tax

The filing of an application for mandamus by associations has become increasingly common in the area of tax law. The existence of a favorable final and unappealable decision, capable of benefiting all members regardless of their date of membership, has attracted the interest of companies from the most diverse sectors, which, in many situations, have stopped filing individual lawsuits and have taken advantage of class actions filed by associations.

It is important, however, to evaluate the risks involved in this practice, especially considering the recent decision of the Second Panel of the Federal Supreme Court (STF), which found lack of standing of an association considered generic for the purpose of filing a collective application for mandamus.

Before we discuss this precedent, it is important to restate some premises and jurisprudential understandings related to the topic.

As we know, a collective application for mandamus is a type of class action, provided for in article 5, subsection LXX, of the Federal Constitution, which aims to ensure the right of members of a political party with representation in the National Congress, a trade union organization, class entity, or association legally organized and in operation for at least one year.

In relation to associations, defined by the Civil Code as a "union of people who organize themselves for non-economic purposes" (article 53), the Federal Supreme Court (STF) promulgated in 2003 Precedent 629, by means of which it defined "the filing of a collective application for mandamus by a class entity in favor of its members regardless of their authorization."

In 2009, with the creation of the Application for Mandamus Law (Law 12,016/09), it was established that associations duly formed and in operation for at least one year could file a collective application for mandamus as long as it is pertinent to their purposes in these cases, without the need to present authorization from the members.

Nevertheless, the debate involving the lack of standing of associations in collective applications for mandamus is not over. It then questioned the need for the association to submit the list of its members at the time the application for mandamus is filed and, furthermore, whether those who joined after the application was filed could benefit from any favorable judicial decision.

This issue was submitted to the STF's review in the record of Extraordinary Appeal 1.293.130 (STF Topic 1119), the framework for resolving cases with general repercussion. It was defined that "the express authorization of the members, their list of names, as well as proof of prior membership, is not necessary for the collection of past funds from a judicial instrument resulting from a collective application for mandamus filed by a civil association entity."

 

This understanding was supported by the interpretation given to article 5, subsections XXI and LXX, line "b", of the Federal Constitution, to the effect that, in a collective application for mandamus, contrary to what occurs in other class actions,[1] the petitioning association acts as a procedural substitute (and not as a mere procedural representative).

In fact, when it comes to procedural substitution, there is an express legal provision allowing the substitute to act in his own name to defend the rights of others, an exception to the rule provided for in article 18 of the Code of Civil Procedure. Thus, since this is an authorization under the law, it is unnecessary for the substitute to submit authorization.

The appellate decision in question was subject to a motion for clarification by the Federal Government, which sought, among other points, to rule out the application of the theory established for so-called generic associations. Although the motion was unanimously rejected, Justice Luís Roberto Barroso registered in his opinion that a situation involving the filing of a collective application for mandamus by "generic associations, which do not represent any specific economic and professional categories" had not been the subject matter in that issue, but could be reviewed in the future by the Supreme Court.

In this case law context, the Second Panel of the Federal Supreme Court, when considering ARE 1.339.496, decided by majority vote, on February 7th, on the lack of standing of an association considered generic for the purpose of filing a collective application for mandamus, ruling out the theory set forth in STF Topic 1119.

According to Justice André Mendonça, who cast the winning vote in the aforementioned ARE, the setting aside of the theory in question is due to the exception made by Justice Luís Roberto Barroso in the record of STF Topic 1119.

In his view, generic associations would not be subject to the theory established in the paradigm in question since, "without a reasonable determination of its social purposes, the association fails to inform the State as judge and the opposing party whom it in fact is substituting or representing. In the absence of this essential information regarding the association, the other subjects of the case have their corresponding adjudicatory tasks terminated, inasmuch as it is not known in advance to what end the association is oriented and therefore which members it, in fact, replaces. Hence, it is certain that the creation of an association without a minimally delineated determination of its objective will result in an offense to the basic principles of the process, of constitutional scope, such as access to justice, due process of law, an adversarial process, and a full defense.

Based on these premises, when analyzing the concrete case, the Justice pointed out that the association that filed the collective application for mandamus "does not categorize any individual or group of individuals, since it has been created by a congregation of individuals and legal entities that pay federal, municipal, and state taxes, legal entities or individuals, among others, that is, it can be an association of all Brazilians who pay taxes in essence.”

For this reason, the Justice concluded that "in view of the notorious lack of definition of its purpose, the aforementioned association could work on behalf of any and all taxpayers without the slightest identification of circumstance, class, or common origin (...) [which is why] the procedural substitution advocated in the collective application for mandamus, as set forth in article 5, LXX, "b" of the Constitution, does not apply in this case.”

Justices Nunes Marques, Ricardo Lewandowski, and Gilmar Mendes cast their votes in agreement with Justice André Mendonça's opinion. The dissenting opinion of Reporting Justice Edson Fachin was that the theory set forth in STF Topic 1119 should apply, recognizing the lack of standing of the applicant association. Publication of the appellate decision is awaited.

Although the decision did not assertively define what a generic association would be, which may give rise to much discussion, the fact is that some issues were mentioned as indications to classify the association as such. These are: few or no members, especially in the district in which the application for mandamus was filed, the existence of broad subject matter that does not allow delimitation of a certain and specific group, and the marketing of favorable court rulings.

Another issue that arises is whether associations that are considered generic will not be able to file a collective application for mandamus under any circumstances. Or whether, if the authorization and the list of members are presented, the possible defect will be considered cured, allowing the filing of the lawsuit.

Although the issue has not been decided in an exhaustive and definitive manner, it is undeniable that the judgment represents an additional point of attention for those who intend to rely on a final and unappealable decision in the scope of a collective application for mandamus filed by an association. This is because there is a risk that the use of the res judicata formed in the writ may be impeded due to the lack of standing of the association that filed the writ.

This situation reinforces the importance of previously evaluating the risks involved in the use of res judicata resulting from a collective application for mandamus, especially with regard to the characteristics of the association that filed the lawsuit.

We are available to assist you with this question.

 


[1] RE No. 573.232 and RE 612.043.

The return, not celebrated, of bad smoking habits

Category: Labor and employment

Redesigned, but no less dangerous, it has made its presence felt in conversation circles in front of the large commercial buildings in Brazil's urban centers.

After 17 years of prohibition and a strong campaign to raise awareness about the health problems it causes, cigarettes, now in electronic versions, are once again being smuggled into bars, parties, restaurants, and even workplaces.

Known as electronic smoking devices (ESD), this new type of cigarette has reignited the alert of health authorities and brought focus on an issue considered settled by companies: the ban on smoking in the workplace.

In 1996 Law 9,294/96 was enacted, which prohibited, in its article 2, the use of cigarettes, cigarillos, cigars, pipes, or any other smoking product, whether or not derived from tobacco, in enclosed public or private places.

States and municipalities also have laws that restrict use and bring severe punishments for establishments that allow their patrons to smoke cigarettes (and all variations thereof) on their premises. In São Paulo, Law 13,541/09 provides for possible shutdown of establishments that allow users (or employees) to smoke inside.

It is important, therefore, that companies bring the issue back up for discussion with their employees.

In 1988, the Ministry of Labor and Social Security issued Interministerial Ordinance 3,257/88, which recommended that smoking be dealt with by the Internal Committees for the Prevention of Accidents (Cipas). The reason is the harmful effects on the worker, including on his senses, which can result in an increase in the number of work-related accidents.

With the repeal of the ordinance in 2021 by the Infralegal Labor Regulatory Framework, some companies have stopped addressing the issue in their Cipas. But the increasing number of e-cigarette users in Brazil, including in the workplace, shows the importance of resuming the campaigns.

As there is no scientific data proving the safety or reduction of harm attributed to this type of device in humans, Anvisa has prohibited the marketing, importation, and advertising of electronic cigarettes in Brazil since 2009.

The companies must be alert to the return of smoking habits in their establishments, both out of respect for the law and because it represents damage to the worker's health, which can lead to an increase in absences from work, health insurance claims, and social security leave.

An employee caught smoking an electronic cigarette in the workplace can be warned, suspended, or even dismissed for cause, depending on the company's policies on the subject.

As always, it is best to invest in awareness and prevention, not allowing this outdated - and illegal - practice to return to the corporate environment as something cool.

For labor law, per diems and reimbursement of expenses are different budget items

Category: Labor and employment

Published by the Federal Revenue Service of Brazil (RFB) at the end of last year, Cosit Opinion Letter 63/22 answers a question about the legal nature, for tax purposes, of the sums paid to employees to cover expenses with internet and electricity during working hours, in a telecommuting regime.

The requesting taxpayer informed the RFB that the amounts paid were intended to reimburse expenses incurred by employees due to the adoption of a differentiated work regime (telecommuting). It argued that the payment was not intended to reward work, but to compensate the employee for the expenses incurred by him due to a change in place of work.

In response to the inquiry, the RFB concluded that the amounts paid to reimburse expenses incurred by employees for internet and electricity consumption resulting from the provision of services under the telecommuting regime should not be included in the calculation basis of social security contributions and withholding income tax (IRRF).

The RFB, however, added that, in order to establish the compensatory nature of the amounts received, the employee must prove, through proper and suitable documentation, the amounts spent by him.

Regardless of the RFB's understanding, it must be remembered that paragraph 2 of article 457 of the CLT provides for a per diem, which consists of an amount paid by the employer exclusively to cover the cost of the expenses incurred by the employee in the performance of his work activities.

In other words, it is not actual reimbursement of expenses, but rather advance payment for the expenses that the employee will have to bear for his activities. For this reason, it is not necessary to submit receipts or proof of expenses incurred by the employee.

This condition would apply only to the reimbursement of expenses, since the latter consists of reimbursing the employee for expenses generated by his work activity. In this case, proof is required, because it is a payment for an amount already spent by the employee, and not an allowance for the employee to cover expenses.

In our understanding, the RFB mixed up the concepts of a per diem and expense reimbursement when giving its answer.

The inquiry submitted to the RFB was, in fact, regarding payment of a per diem, which, according to the CLT, is compensatory in nature. In these cases, the employee cannot be required to prove the amount spent. This requirement is only applicable in the case of reimbursement of expenses, which was not the case.

State Court of Rio de Janeiro suspended issuance of new environmental licenses

Category: Environmental

In a judgment handed down under the popular action 0150428-88.2020.8.19.0001, on January 23, the 15th Court of Public Finance of the District of the Capital of the Court of Justice of Rio de Janeiro declared the nullity of the sessions and deliberations of the State Council of the Environment (Conema) held from September 14, 2019.

The court also ordered the state of Rio de Janeiro to refrain from granting new environmental licenses based on these deliberations, until the irregularities related to the designation of Conema members and parity in the composition of the council (recognized in the judgment) are duly corrected.

The popular action, initiated in July 2020 against the state of Rio de Janeiro, has as its object the environmental licensing of an international racetrack that was being planned in the capital of Rio de Janeiro.

The authors alleged that the institution of the State Council of the Environment (Cema) – made by State Decree 46.739/19 – would represent an offense to the principle of administrative legality since the state constitution of 1989 determines the mandatory edition of state law for the creation of the council.

They also argued that the formation of Cema does not meet the requirements of parity in the composition of its members (which aims to ensure the participation of the Executive and Legislative branches, scientific communities, and civil associations), provided for in article 261, paragraph 1, item XXII, of the state constitution. They also pointed out the absence of a normative act of the Executive Branch for the appointment of full and alternate members of the body.

Based on these allegations, the plaintiffs of the popular action requested the nullity of State Decree 46,739/19, Conema Resolution 88/20 and Conema Resolution 89/20 , as well as all Conema sessions and deliberations expressed in these two resolutions – which, respectively, approved the Conema Internal Regulations and authorized the holding of virtual public hearings in the context of environmental licensing during the pandemic.

Although the sentence pointed out that the main object of the process was lost, since the State Institute of the Environment (Inea) rejected the granting of an environmental license for the racetrack in Rio de Janeiro, the sessions and deliberations of Conema were declared null and void, "(...) including resolutions 88 and 89 of 2020, in view of the irregular appointment of representatives of the public power, as well as the lack of parity in the council, in violation of article 261, paragraph 1, XXII of the State Constitution of Rio de Janeiro".

The decision also determines the maintenance of the validity of the precautionary measure granted in the file, so that the state of Rio de Janeiro refrains from granting new environmental licenses "(...) until the irregularities now recognized are remedied."

If confirmed, the decision could affect the licensing competence delegated to the municipalities of Rio de Janeiro, although this effect was not explicitly mentioned in the judgment.

This is because, according to the provision contained in article 9, VIX, paragraph "b", of Complementary Law 140/11, it is up to the municipalities to promote the environmental licensing of activities or enterprises that cause or may cause environmental impact at the local level, "(...) according to the typology defined by the respective state councils of Environment", according to the criteria of size, polluting potential and nature of the activity.

The definition of activities and enterprises with local impact was recently established in  Conema Resolution 92/21 and Conema Resolution 95/22. These deliberations were also declared null and void by the judgment handed down in the popular action.

As determined by Article 19 of the Popular Action Law (Federal Law 4.717/65), the decision rendered by the Rio de Janeiro court takes effect immediately, until an appeal is filed, if applicable, with suspensive effect by virtue of the law (article 1.012, of the CPC).

The state of Rio de Janeiro filed a request for suspension of provisional compliance with the sentence, arguing that the measure makes "(...) the economic shutdown of the state" by impeding economic development, discontinuing the provision of public services and negatively impacting many strategic projects, especially in the energy, oil and gas and sanitation sectors.

In an injunction decision handed down on February 14, the presidency of the Court of Justice of Rio de Janeiro (TJRJ) ordered the suspension of compliance with the first-degree sentence, "(...) maintaining the hygiene of Conema's deliberations, including the environmental licenses already analyzed and resolutions 88 and 89 of the aforementioned body, as well as authorizing the commission to function normally until the final judgment of the process".

In response, the plaintiffs in the original case filed a declaration against the decision of the presidency of the TJRJ, which is still pending consideration.

It is worth following the discussions and eventual developments of the subject in the course of popular action  0150428-88.2020.8.19.0001, whose sentence, debated here, must still be the subject of appeals by the Attorney General's Office of the State of Rio de Janeiro and/or other interested parties.

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