Brazil Profit Sharing Plans Can Mean Big Savings: Part 1 of 2

5 August 2015

The following is part one of a two-part series on the subject of Brazil profit sharing plans. Read part two.

There’s no doubt about it: If you’re operating in Brazil, you need to understand how its labor union environment will impact your business. This will help minimize risks and (just as important) help you to seize on any available advantages.

One such advantage open to employers operating in Brazil is a profit sharing plan, or “PLR” (for Programa de Participacao nos Lucros e Resultados). Unlike many employer obligations, this one can benefit both employers and employees alike if it is structured properly from the start.

Let’s take a look at the basics of PLRs and why you should consider them if you’re an employer in Brazil — even if your union is not yet requiring one.

The basics of Brazil’s profit sharing plans

Profit sharing plans in Brazil involve a payment to employees, normally based on company profits. The PLR plan can also be designed based on employee performance targets or other relevant local company metrics to determine the PLR payment. If targets are not met, no PLR payment is due.

Because payments under a PLR plan are not considered salary-related, they are not subject to social contributions, relieving both employers and employees of this burden. PLR payments also attract a lower income tax rate than salary-related payments, another advantage for employees. And employers enjoy an additional benefit of their own: PLR payments are deductible for local income tax purposes (variable pay, on the other hand, is not deductible for this purpose).

So, PLR plans offer benefits that both employers and employees in Brazil can appreciate. And employers should seriously consider a PLR when designing their compensation plans, since a PLR is a more affordable compensation tool compared to regular variable pay or bonus schemes.

How to set up a profit sharing plan In Brazil

Brazilian employment law generally has strong worker protections, and this extends to profit sharing plans. PLR plans must be written, implemented and then approved annually by the union. The process will involve participation from both the employer and the employees. Employers and employees must negotiate the terms of PLR plans not just initially, but on an annual basis.

Below is a high-level list of steps that must be completed when developing a PLR plan.

  • The employer must form a PLR committee to agree on the criteria for the PLR plan. The committee must have at least three employees elected by employees. (If the company has fewer than three employees, then the total number of employees will form this group). It must also have the same number of company representatives, who can be employees or not and may be of any citizenship.
  • The employer must draft a PLR plan in Portuguese and present it to the Employee Committee for review. The plan must comply with Brazilian labor and union requirements. (Each union has different requirements.)
  • Once the employer and employee committees decide on the PLR terms, they must submit the plan to the union for approval. The union will usually have questions and may wish to further negotiate plan terms. These negotiations typically must be conducted in person and can take months to complete.

In part two of this two-part series, we address some other important aspects of PLRs that employers should keep in mind when operating in Brazil.