Labour and employment challenges faced by the Brazilian luxury industry

22 Mar 2017 , 10:00am

Brazil’s political and economic crisis is far from finished, but the forecast looks optimistic for companies and entrepreneurs.

In contrast to many businesses, the luxury industry in Brazil has not been severely hit by economic recession in the last years. Instead, market reports indicate that sales of luxury goods experienced a slow growth in 2015 and 2016. Economic consultants state that the trend should continue during 2017, which is an indication that the crisis has not shattered the mood of consumers with high purchasing power.

According to ABRAEL (Associação Brasileira das Empresas de Luxo) – the Brazilian Luxury Companies Association, the luxury market expects to have increased from 10% to up 13% in 2016[1]. Today, the sector’s revenue is approximately US$ 3.5 billion, from which more than 60% is concentrated in the city of São Paulo. The future seems even more promising: specialists believe that Brazil, Russia, China and India will hold 50% of the global luxury market within the next ten years[2].

Labour law reform

With the promise by the new government to shift Brazil into a more competitive player, companies from the fashion industry should take advantage of this opportunity to grow their business even further. One of the measures vowed by President Michel Temer is a reform in labour and employment laws, which are known to be tough and frequently inadequate to contemporary labour relationships.

Indeed, foreign investors and employers engaged in the fashion business are eager for a reform in the labour and employment law system. They have frequently struggled to comply with the many labour rules over the years, generating higher costs and losses to this sector. Even small workshops dedicated to the production of goods for luxury brands have been facing many labour and employment issues, such as lawsuits filed by independent contractors seeking employment recognition, or claims/assessments by labour authorities in the supply chain matters.

Outsourcing in Brazil 

To illustrate this point, we raise the outsourcing discussion. In Brazil, there is no specific law about outsourcing. All legal provisions concerning this matter are stipulated in Precedent 331 of the Superior Labour Court (Tribunal Superior do Trabalho), which does not resolve many disputes faced by companies and employees daily.

Precedent 331 forbids a company from outsourcing its core business to another company, which means that only non-core activities can be outsourced (e.g., cleaning, security and back office services). Nevertheless, the problem resides in the grey zone between core and non-core activities, which brings legal uncertainty to the parties involved. If a contracting company outsources its core business, it may be held liable for any labour and employment credit due to outsourced employees. The labour court may even grant employment recognition to the outsourced employee with the contracting company and as a result, the employee will be entitled to all labour and employment rights provided by the contracting company, including but not limited to any benefit provided by internal policies (e.g., profit or result sharing plans), collective rights, and health and safety rights.

In theory, under the current outsourcing regime, the contracting company is considered secondarily liable for all labour and employment credits due to outsourced employees. In practice, however, it is not clear to which extent a company may be considered liable for the labour and employment misconduct of other companies in the outsourcing chain. If there is a long chain of suppliers, which frequently is the case with companies in the fashion industry (particularly, in the fast fashion segment), it is difficult to determine whether a company at the beginning of the chain will be considered liable for any misconduct verified along the supplying process.

Liability and 'social responsibility' 

In these cases, labour authorities may support a claim and impose liability on a certain company based on social responsibility that each entity has with other companies and third parties in the chain. Indeed, every company is required to have social responsibility, but to which extent it must be addressed against a company?

The concept is not clear and consequently, companies may be subjected to several fines and penalties. Further, depending on the severity of the misconduct (e.g., working conditions akin to slavery), companies may be subjected to class actions (Ação Civil Pública), either filed by the relevant Union of Employees (Sindicato dos Trabalhadores) or the Labour Prosecution Office (Ministério Público do Trabalho).

Tailoring for luxury 

Besides the outsourcing matter, there are many other challenges waiting for a change in Brazil. The luxury industry, particularly, should be treated differently because of its uniqueness. In fact, this seems to be the major problem in the applicability of labour and employment law: companies from different industries are treated the same when their treatment should be tailored to their business reality. Even within the same line of business, the law should provide a different treatment (e.g., luxury industry v. fast fashion).

There is hope that the labour reform vowed by the new government will improve Brazilian businesses and employment situations. We expect that the upcoming scenario for development and consumption of luxury brands in the country becomes even brighter.

Note (27/03/2017): In a quick turn of events, on March 22, 2017 the Brazilian Congress approved the bill of law regarding outsourcing. If the new law is further sanctioned by President Michel Temer, it will allow companies to outsource its core business, which might trigger a sensitive change in the current model of business applied to companies in Brazil, possibly affecting the fashion market as well. Further commentaries on the matter may be addressed soon.

Sólon Cunha and José Daniel Gatti Vergna are partner and associate respectively at Brazilian law firm Mattos Filho. 

[1] FECOMERCIOSP, Mercado de luxo cresce mesmo com a crise (FECOMERCIOSP, 2016).

[2] G1, Cidade de São Paulo concentra mais de 60% do mercado de luxo no Brasil (G1, 2016).