Employee award programs can be an important way for companies to recognize exceptional performance. However, when implementing these programs in Brazil, an important question arises: when can a payment actually qualify as an award rather than being treated as part of an employee’s remuneration?
The Brazilian Labor Reform introduced significant changes to the treatment of employee awards. When the applicable legal requirements are met, awards are not considered part of an employee’s remuneration and are therefore not subject to labor or social security charges.
However, whether a payment qualifies as an award depends on the applicable legal requirements and the specific circumstances of each program.
What qualifies as an award?
Under Brazilian legislation, an award is a discretionary benefit granted by the employer, in the form of cash, goods, or services, to an individual employee or a group of employees in recognition of performance exceeding what is ordinarily expected.
Two elements therefore deserve particular attention.
1. Genuine employer discretion
The payment should result from a voluntary decision by the employer.
When assessing the nature of a payment, it may be relevant to determine whether it results from an obligation established by law, an employment agreement, a collective bargaining agreement, or another instrument that makes the payment mandatory.
2. Performance exceeding ordinary expectations
The award should recognize performance that exceeds what would ordinarily be expected from the employee.
The administrative interpretation currently adopted places particular emphasis on this requirement.
Therefore, depending on the circumstances, simply performing normal job duties or achieving ordinarily expected targets may not be sufficient for a payment to qualify as an award.
Can a company establish objective award criteria?
Yes.
The existence of an internal incentive or award policy does not, by itself, prevent a payment from qualifying as an award.
Companies may establish objective criteria for granting awards.
However, attention should be given to whether those criteria result from contractual obligations, collective bargaining agreements, or other arrangements that remove the employer’s discretion to grant the award.
In other words, having objective criteria does not necessarily eliminate employer discretion, but the structure and implementation of the program should be carefully considered.
Defining expected performance
Another important aspect is the company’s ability to objectively demonstrate what level of performance was normally expected and how the employee exceeded that expectation.
Consider, for example, an employee who was hired specifically to develop process improvements.
In this case, implementing improvements may already form part of the duties ordinarily expected from that employee.
Therefore, the fact that an improvement was implemented does not, by itself, determine whether a related payment qualifies as an award.
The assessment will depend on the specific circumstances, including the employee’s responsibilities and the criteria established by the company.
Factors commonly considered
In practice, certain characteristics are commonly considered relevant when assessing the nature of these payments, including:
- payments made on a very frequent basis;
- automatic awards;
- payments linked solely to routine duties or procedures; and
- the absence of objective criteria demonstrating performance above what is normally expected.
The significance of each factor will depend on the particular circumstances of each award program.
The importance of documentation
Companies that maintain employee award programs may find it useful to periodically review both their internal policies and the documentation supporting these payments.
Relevant aspects generally include:
- the existence of genuine employer discretion;
- the absence of a contractual, legal, or collectively negotiated obligation to make the payment;
- objective evidence that the employee’s performance exceeded what was ordinarily expected; and
- appropriate documentation supporting these elements.
The appropriate documentation may vary according to the specific characteristics of each company and award program.
Conclusion
The Brazilian Labor Reform introduced important changes to the treatment of employee awards. When the applicable legal requirements are satisfied, awards are not considered part of an employee’s remuneration and are not subject to labor or social security charges.
However, simply referring to a payment as an “award” does not automatically determine its treatment.
Its classification depends on compliance with the legal requirements, genuine employer discretion, evidence of performance exceeding ordinary expectations, and the specific circumstances of each program.
Companies that maintain employee award programs may therefore wish to periodically review their policies, criteria, and supporting documentation.
ORGATEC specializes in supporting Japanese companies operating in Brazil, providing accounting and tax assistance and helping Japanese businesses understand and navigate the particularities of the Brazilian business environment.
If your company has an employee award program or has questions regarding accounting and tax matters in Brazil, please contact ORGATEC.