Member Article

The escalation of fierce competition among companies for more cost effective products and services has raised discussions about Social Dumping, a curious combination of a traditional pure economic concept with labour and employment regulation. The search for less expensive manpower is not new, but countries are self organized independent bodies, so the balance between job opportunities and international trade is a matter for the UN and the diplomats. But while social dumping has been usually associated with disputes between countries, the Brazilian Courts seem to indicate that it may apply as well to internal employment issues. 

What is Social Dumping? 

Dumping, as you all know, is the artificial and temporary reduction of prices, in an unfair or speculative manner, with the purpose of harming or eliminating competitors. The payroll is just as an important item for pricing industrialized products as taxes and materials. Actually, it is the most important cost for pricing services. According to the European Foundation for the Improvement of Living and Working Conditions, Social Dumping is a practice involving the export of a good where the exporter’s costs are artificially lower than its competitors in countries with higher standards, hence representing an unfair advantage in international trade.  

As compares to other countries, Brazil is in the high end of employment costs on top of payroll. Statutory Labour benefits and Social Security represent an added cost of at least 60% on top of total wages, which includes salaries, commissions, bonuses and fringe benefits. So, it comes out as a natural conclusion the understanding that the compliance with the Labour Laws represents an important portion of the production costs.   

Labour law practitioners (judges and public attorneys) are now using the notions of social dumping and such understanding (cost of compliance) to apply a new idea that is frequently called Labour Dumping. Therefore, Labour Dumping would be the deliberate and systematic failure to observe certain aspects of the law with regard to all or a significant number of employees, in which case, the production cost decrease would be a natural consequence and inferred driver. And here is what makes this Labour Dumping so interesting and peculiar. The Courts are not primarily protecting the competition, but the workers, collectively, while the competition is a derivative. Illegal conducts, such as cuts in wages, or the failure to provide a safe work environment, project serious consequences beyond the individual employment agreements. Ultimately, they could also harm the fair competition by producing economic gains at the cost of employment benefits. 

The rationale looks good on paper, but in practice there are a couple of inevitable controversial questions: Where to draw the line between the involuntary damages that result from bad decisions or financial constraint and a socially disapproved conduct? How should we assess the indemnification?  

Recent Court Decisions in Brazil 

There is no specific legislation governing Social Dumping in Brazil. Still, there are a few judgements passed by lower Labour Courts sanctioning penalties to companies for Social Dumping. The first decision that came to our attention was passed by the Courts in the State of Minas Gerais in April 2009. It was based on repeated individual labour claims against the same company for excessive number of work hours and irregular offsetting of such hours against time off. The grounds for such decision, which has recently been confirmed by the Labour Court of Appeal, also included:

· The employees were often required to work 10 hours a day or more;

· Non-compliance with overtime limitations allowed employer to reduce the prices, as an absolute statement (regardless of the position of such products in the market, that is of actual gains made by the company);

· The company’s conduct was beyond legal, economic and social boundaries and, thus, could harm the internal market;

· The illegal conduct was repeated (at least 20 identical cases) and could not be reasonably defended (since it was against a court precedent of the Superior Labour Court).

The penalty was arbitrated in R$500 for each employee (approximately US$260 at the current rate of exchange).  

But the most representative case was a class action filed by the Public Attorney’s Office that was adjudicated against a well known Brazilian multinational, which resulted in a penalty of R$200,000,000 (approximately US$110,000,000, at the current rate of exchange). The circumstances were not fundamentally different from the first case (excessive work hours), but here amount was arbitrated according to (a) the number of labour claims reporting the lack of overtime payment (6,761 in 2009), (b) the company’ market position and (c) on a rough calculation of the illegal reduction of costs with manpower (including outsourced manpower). 

Final Consideration 

The Social Dumping can indeed unbalance the internal market and put a country like Brazil on a vulnerable position to antidumping reactions from other countries. On the other hand the scope and the extension of the Social Dumping remain controversial and should first involve political actors. 

None of the decisions mentioned above are final.

 

Footnotes: