Opinion, by Sam Flowers
RIO DE JANEIRO, BRAZIL – The real cost of labor in Brazil is much higher than it appears at first glance. A worker’s salary is one small part of what an employer will actually spend. The main drivers of high labor costs are the various employment taxes and entitlements required by law, and the significant time and effort required to train and manage employees.
It is widely suggested that when you estimate the cost of hiring an employee in Brazil you must include eighty to a hundred percent of their salary in order to arrive at the true cost of hiring the individual.
Which means that if the employee will earn R$1,000, the actual cost to the employer will be R$1,800 to R$2,000. The first few times I read or heard this I assumed and hoped it was an exaggeration – well, it is not!
The extra eighty to a hundred percent occurs as a result of a list of taxes and entitlements that are paid on behalf of employees. Specifically, all employers are required by law to pay:
• A social security tax known as INSS (twenty percent)
• Pension contributions known as FGTS (six percent)
• One full month’s salary as a bonus at the end of year, known as the “thirteenth salary” (paid proportionally for the part of the year worked)
• One month’s vacation per year paid at 1.33 times a month’s salary
• An allowance for one meal/lunch per day worked (typically R$20 per day)
• Daily transportation costs to and from work (typically ~$R5 – R$10 per day)
Other costs like health insurance benefits are not required by law but may be necessary to compete for the best staff.
Small businesses may avoid or reduce some of these costs. Social security (INSS) is significantly reduced for Brazilian owned companies with revenues below a certain threshold. Another option to reduce required costs is hiring workers informally, but the associated risks are significant and this option is increasingly unattractive.
Besides taxes and entitlements, the other main drivers of labor costs are the time and effort required to train and manage employees. This is harder to quantify and will vary by type of business, but the costs are real and significant.
The easiest way to understand the nature and impact of these costs is to consider the experience of myself and several other business people I know.
• The head of one restaurant company with six highly successful stores in Rio told me he personally spends 97 percent of his time dealing with employee issues. He also has three lawyers on retainer to deal with employee lawsuits.
• Several former business owners told me they decided to close or sell their businesses mainly because they found it too difficult to deal with having employees.
• Training costs at my restaurant are extremely high because employee turnover is also high. In two years my staff of 8-9 employees has turned over the equivalent of six times. And while I worry that my hiring and management skills are awful, I confirmed with other restaurants and service businesses that this high level of turnover is fairly typical.
The labor supply in Brazil is too small to meet growing demand and most experts predict this gap will increase. Given the tight labor market, high turnover and its associated costs will be a problem for a while.
You could easily devote a book to the challenges of dealing with labor in Brazil. Many people told me that labor would be the most difficult thing about operating a business here and they were 100 percent right.
I do not have many solutions to offer yet since I am learning as I go, but I can at least alert you to reserve a lot of time and resources for managing staff.
Sam Flowers is an American living in Rio de Janeiro who created and founded the Gringo Café in Ipanema in 2010. A former executive and consultant with twenty years experience in Corporate Strategy, Brand Marketing and Finance, Sam also offers consulting services to foreign businesses and people entering or adapting to Brazil. Contact Sam at firstname.lastname@example.org.