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Profit sharing plan for managers and staff of Nordic companies in Brazil

(VOLTAR)Cristiane Delfini Cera* and Renato Pacheco Neto**

Following Nordic tradition, Sweden has always kept an eye open to render a fair distribution of income within its society. That goes also along with Swedish policy to assure a good level of remuneration for its people, regardless of their social level, thus assuring a better socio-economic model. It is known worldwide that social differences in Sweden are much smaller than in other cap¬italist nations. Swedish companies have thus also the chance to assign part of their sub¬sidiary profits to their employees in Brazil.

With a view to converging the interests of both the companies and the workers, a new means of remuneration has been creat¬ed so as to "reward" the worker based on the success of his work, be it the profit earned by the company or the goals achieved. This ben¬efit is referred to as Income and/or Profit Sharing Plan [Participação nos Lucros e/ou Resultados - PLR}.

The PLR is provided in article 7, item XI, of the 1988 Constitution. Such mechanism which generates an increase in the final pro¬duction of the employee had been provided in the former Constitution of 1946, but it was not applied. With the advent of the 1988 Constitution, the use of such mecha¬nism began, although a specific regulation thereon was enacted in 2000 only (Law No. 10,101). Such law was introduced in the Brazilian legal system as the result of vari¬ous provisional acts [medidas provisórias] which had practically the same content sub-sequently given to Law No. 10,101. The first was Provisional Act (MP) No. 194 of 1994, followed by 13 re-submissions.

Income and/or Profit Sharing Plans afford companies a means to adapt them¬selves to the fluctuations of the economy: if the economic times are good, the compa¬nies' income (or profit) is better and enables the payment of the PLR. By applying this model, Swedish companies established in Brazil will therefore be able to grant better working conditions for their employees.

Pursuant to law, the PLR may represent a tax reduction, mainly as regards the Social Contribution on Net Profits (CSLL) and the Income Tax (IR) when the companies have registered with a tax calculation method based on actual profit (art.3, paragraph 2, of Law No. 10,101/2000).

The main innovation of the law which created income and/or profit sharing plans, undoubtedly, is the dissociation of the income or profit sharing from the worker's regular remuneration. Accordingly, all which is paid to the worker by way of income or profit sharing does not qualify as salary or Is included therein, so it is not subject to other charges such as social security contribu¬tions, severance pay fund deposits (FGTS), or the proportional payments such as vacation pay and Christmas bonus.

The main advantages for Nordic groups in adopting the Income and/or Profit Sharing Plan for their business in Brazil include:

Exemption from social security charges,
such as the exemption from any labor charges on the PRL amount (an interpreta¬tion upheld by the Federal Court for the 1st Circuit - Interlocutory appeal No. 2009.01.00.003064-4/MG);
The payment is due only to employees who have reached Individual and team tar¬gets;
Reduction of costs and expenses in the implementation of the PLR, as the employees participate In the production increase, reaching targets and earning profits;
Greater commitment on the part of the employees towards the company;
Possibility of having variable expendi¬tures with the payroll, so in times of smaller profit or production, the costs would be reduced as well;
Companies having high-level positions occupied by executives usually offer benefits, premiums or bonuses, but they do not pay due regard to the salary character of such payments and their respective labor, tax and social security charges, which may imply administrative and legal liabilities in the future;
The formulas and indexes to calculate the targets reached under the PRL Agreement may or may not be stipulated based on the fixed salary for such position, instead of the' executive, so that solely the latter, or the human resources department, will have access to the information concern¬ing the amount paid under the PRL program.

Nordic companies should, however, also be aware of the disadvantages in adopting the Income and/or Profit Sharing Plan, which include:

If the Law is not strictly observed upon implementation of the PLR, the benefit may be considered, in court, as having a salary character and, as such, all labor and tax charges thereon would be due;
If the plan does not establish clear tar¬gets and variable payments according to the fulfillment of objectives and the employee's position, the Social Security authorities may consider such benefits as extra salary pay-ments, which may give rise to the imposi¬tion of penalties;
The working hours may be increased, and this may cause additional stress on the employees.

The incentive to be set up by Nordic groups to productivity is one of the most highlighted objectives in PRL implementa¬tion. In addition to productivity, the increase in competitiveness and profitability is also pointed out. As the employee will partici¬pate in the sharing of the final earnings, he will endeavor to contribute so that the com¬pany may also increase such earnings. The employee thus motivated will be more ded¬icated, productive and proactive. This will occur because there will be formed a link between the company's good performance and the employee's good performance. They will envisage one and the same purpose which will benefit both. This follows the Swedish mentality and vision, as to allow fair compensation to all people involved in the economic production process.

The procedure to be adopted for the implementation of the Income and/or Profit Sharing is provided in article 2 of Law No. 10,101, to wit: "it will be subject to negoti¬ation through a commission, collective agreements between trade and labor unions and between employers and unions". Such instrument must be chosen by the parties of common accord. In all of them, the par¬ticipation of the labor union is mandatory. The PLR is considered valid only if the instrument executed is filed with the perti-nent labor union office.

Nowadays, companies may choose between three types of negotiation, namely:

a) Direct negotiation between the com¬pany and its employees: similar to the pre¬vious one, but including a union representative who is also an employee of the company and who works at the head¬quarters thereof. This negotiation results in a collective agreement [acordo coletivo].

b) Direct negotiation between the com¬pany and the labor union: the employees are represented by the union, instead of the commission of representatives. This negoti¬ation results in a collective agreement [acordo coletivo].

c) Indirect negotiation between the trade union and the labor union: the PRL is negotiated for the entire industry, instead of for only one company. The result of such negotiation is a collective convention [convenção coletiva].

In order to evaluate the strategic advantages of the PLR for the employer, Nordic companies should establish a relationship between the strategies of remuneration according to productivity and its effects on the organization of their Brazilian business.
Thus, it is important to find in the productivity itself the more commonly used assessment indicators such as profitability, sales volume, level of fulfillment of orders, productivity and cost reduction.

* Cristiane Delfini Cera graduated both from the Law School ofUNIP and from the Business School of FMU. She is the Manager of the Labor and Social practice team at the São Paulo Offices of the independent law firm of Fraga, Bekierman e Pacheco Neto -Advogados, with international alliances.

** Renato Pacheco Neto, LLM., is an alumnus of Harvard Law School's Leadership Program in Cambridge, MA. He holds Post-Graduate Management Diplomas from Handelshógskolan (Stockholm School of Economics) and Kauppakorkeakoulu (Helsinki School of Economics). He is Board Member of Swedcham, its Legal Director as well as Ethics Board Member of EuroCamaras. He is Managing Partner of Fraga, Bekierman e Pacheco Neto - Advogados.
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