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Financial provision set by companies for labor lawsuits modified by Brazilian Supreme Court decision

The Brazilian Federal Supreme Court (STF) recently decided to change the way labor lawsuit credits are updated, putting an end to a debate that has been fought in all the Regional Labor Courts of the country and also in the Superior Labor Court, and certainly impacting the - often significant – financial provisions established by companies for these kinds of lawsuits.

The STF has unanimously decided that the Referential Rate (TR), which has historically been used for the monetary restatement of labor credits, must no longer be observed since the Court’s understanding is that such index does not adequately replace the loss of “purchasing power” caused by the effects of inflation during the course of the lawsuits.

The new rule defined by the Brazilian Federal Supreme Court states that two indexes must be applied using a standard that has long been known to the Civil Courts – that is, the application of the Special Extended Consumer Price Index (IPCA-E) in the pre-judicial stages and, after the subpoena of the defendant, the SELIC rate, which is the Brazilian Basic Interest Rate.

The decision changes, in fact, more than just the index used for monetary restatement. Until the Supreme Court’s decision, all Brazilian employment lawsuits had the amounts involved adjusted according to the TR rate and by the application of interest of 1% per month, effective as of the moment the lawsuit was filed. In this regard, the decision also excluded the 1% interest rate per month that was applied before.

Practical example

Translating the Supreme Court’s decision into numbers, according to the “old” rule, for the year 2020, the amount involved in a labor lawsuit would be adjusted based on a 12% interest rate (1% each month), considering that TR was equivalent to zero for the whole year.

According to the “new rule”, considering a hypothetical situation in which an employee who has a credit that begins in January 2020 and filed a lawsuit in which the defendant was subpoenaed in February 2020, by the end of 2020 the lawsuit would be adjusted at 2,53% (0,46% of the IPCA index from January and February and 2,07% of the SELIC index from March to December.[1]

See below a comparison of both indexes for the entire calendar year (January to December):

It is important to highlight that the decision does not necessarily represent a reduction in the amount provisioned by the company since this depends on the applicable rates for each period. The modulating effect and the applicability for each case must also be observed on a case-by-case basis.

Demarest’s Labor and Employment Law team is available to provide additional clarifications on this matter.