The Brazilian Labor Reform: Labor Lawsuits Plummet

Despite its modest impact on formal job creation, Brazil’s Labor Reform sent shockwaves throughout one of the country’s largest practice areas as well as leading domestic law firms. Analyzing these effects is deeply important for the Brazilian legal market, as is assessing the strategies being used to navigate this new legal landscape.

During 2018, the first full year following the enactment of the labor reform, Brazil’s labor courts registered a decrease of 34% in labor claims, with the 2.6 million cases filed in 2017 dropping to 1.9 million cases filed in 2018, representing a fall of approximately 700,000 new cases.

In June 2019, labor lawsuits pending trial reached their lowest volume since 2007, standing at ‘a mere’ 959 thousand cases – a significant reduction and an important achievement, if we consider that annual figures have stood at over one million pending cases for the last 12 years.

Although some critics associate this decrease in labor claims to the curbing of labor rights, other reasons for such a significant fall in employment lawsuits have been identified. One key reason, for example, has been the change in complainants’ desire to file labor lawsuits. Indeed, this has a decisive factor in the dwindling number of labor claims, as a new article of the Brazilian Consolidation of Labor Laws (CLT), 791-A, states that the defeated party in a lawsuit must now pay the prevailing party’s legal fees. In other words, should an employee be defeated in court, they must now bear the costs of the employer’s legal defense and vice-versa.

This new feature of the CLT ensures complainants are less impulsive in the filing of labor claims due to the reality of greater financial risk, which has proven to be an effective mechanism against bad faith labor litigation.

Another key factor in the decrease of labor suits has been a growing trend by Brazil’s specialized labor courts of applying the concept of general repercussion to repetitive labor claims, thus resolving bundles of similar disputes in a swifter and more efficient manner. 

As for the legal market, labor litigators and dispute-oriented labor firms have been severely impacted by the reform which has led to a significant drop in cases and a subsequent fall in revenue. Numerous firms have decided to switch their focus to more active practice areas by opening new departments, whilst others have taken another approach and are focusing on the consultancy side of the labor market.

Brazilian tribunals have identified two prevalent strategies being used by legal professionals seeking to mitigate the risks brought about by the labor reform and to remain active in the field: filing anticipated production of evidence actions (preventively evaluating the quality of evidence to assess whether or not to file a lawsuit); and filing public and collective civil actions in which the onus of bearing the opposing party’s fees could only occur if it is proven the complainant has acted in bad faith.

Whilst the labor reform has significantly reduced the litigation caseload of most Brazilian law firms, on the other hand, it has dramatically increased the demand for labor counsel. With the reform only being a few years old, companies of all sizes must frequently seek out legal opinions and expert consultancy to better understand the legal novelties they must now navigate on a daily basis.

Market demand for labor consultancy services should increase in 2020, in light of the recently approved Economic Freedom Bill (Law no. 13,874) which is set to bring a fresh wave of changes to the CLT and, consequently, trigger a new cycle of consultancy related to Brazil’s evolving labor legislation.