How much do your employees in Brazil really cost? (for Canadian and other foreign companies)

By Pablo Mourente, Lawyer and Head of International Business at David & Athayde Advogados.

It is quite a common-sense opinion, at least for Brazilians or people who already know the Brazilian market, that the employment costs in Brazil are very high. And the reason is not only related to the employment taxes, but also explained by the various workers’ rights granted by the Brazilian legislation, such as 30 calendar days of paid vacation leave per every year of contract and the extra month salary per year that all employees are entitled to (the so-called 13th salary).

This way, it is important to explain to the multinational companies that have employees in Brazil what is a myth and what is true about this, and to what extent.

First of all, we need to explain that by “employment costs” we mean every penny the employers pay on top of the payroll that is neither salary nor compensation, that is to say, we are talking about “hidden costs” that can increase (by much, in the Brazilian case) the personnel costs.

So what are exactly these costs in the Brazilian case?

As we already mentioned, such costs are represented by both payroll taxes and workers’ rights.

Payroll taxes in Brazil comprise: a) Social Security Taxes (which finances the pensions plans and other social security benefits); b) Other social contributions (which fund several social entities that mainly offer professional education at subsidized rates); and c) Additional Termination Tax (FGTS’ additional fine).

When it comes to workers’ rights, Brazil has a very extensive labour legislation, which was designed to grant a high level of protection for the employees, but at the same time increases the employment costs a lot. It undoubtedly produces an impact on the jobs creation, although it may not be the main reason of the current high unemployment rate.

There are also extra rights that some categories of employees can have, granted by collective agreements or at some enterprises’ own policies, but at this time we will only refer to the general rights that are granted by the legislation to any sort of employee. So here they are: a) Paid Vacation Leave of 30 days per year (which payment is added by an extra bonus of 1/3 of salary, so the employee gets 4/3 of a month salary for his annual leave); b) An extra month salary per year (the “13th salary”); c) FGTS (A compulsory severance pay fund financed by the employer amounting to 8% of the monthly employee compensation); d) Notice of termination (minimum of 30 days); e) Termination FGTS compensation fine.

In addition to that, there is also the ripple effect caused by the taxation of some of the mentioned workers’ rights (like the social security taxes, which are also levied on the vacation leave payment and on the 13th salary, for example).

Therefore, we could summarize the employment costs in Brazil as follows:

We must say that many items of the chart above do not represent a monthly disbursement, as we are talking about costs in an economic sense. For example, the cost of the annual paid vacation leave and the respective bonus are 1.33 times the employee wage, per year, divided by 12 (to find its monthly equivalent). Since in the leave month the employee does not receive salary, but only his leave payment, the extra disbursement actually only amounts to the additional bonus of 1/3 of the month salary. On the other hand, since the employee does not work during the leave, the cost informed on the chart includes the expense the employer could have to replace the employee that is on his leave. In addition, the “13th salary” does not increase the monthly disbursement, since it is paid only once a year (actually split into two payments, one that is due up to November 30th and the other up to December 20th).

As we mentioned in the beginning of this text, the employment costs in Brazil are on average the described above. However, depending on the workers field the showed numbers can go up, as well as they can go down when it comes to SME’s of some industries, which have the social security taxes levied in a different way.

Anyhow, the total of employment costs showed on the last line of the chart is significant:  on average, an employee in Brazil costs an extra 73.33% on top of his compensation. That’s why many people say in Brazil an employee costs twice of his salary (in fact, in some particular fields the employment costs may exceed 100% of the compensation).

It is true that the most part of the costs described above are workers’ pecuniary rights that the employees will receive at some point, like once a year or at the contract termination, which means it might be not considered as an additional cost by some people, but instead considered as part of the compensation itself.  But even if we consider only the payroll taxes (and their ripple effect), we are talking about an extra cost of 32.08% on top of the compensation, which is probably higher than in any other country.

Nevertheless, the Brazilian workforce is far from being among the most expensive in the world, because in fact, in terms of comparing its cost with the rest of the world’s, we must look at the combination “compensation + employment costs”. Since the salaries in Brazil are generally low, by comparing the combined cost we can see that a “Mobile Developer” in the province of Quebec, Canada, for example, cost to his employer 56% more than in Brazil, on average. For a “Marketing Analyst” position, this difference is as high as 87%1. It is not different if we look at the minimum wage in Quebec and in Brazil: the total cost of the minimum wage in Quebec for an employer is 404% higher than in Brazil!