Mutual Termination and Rescission of a Contract: When and How to End a Civil Agreement

This page is a translation of the original Portuguese text, provided for convenience. It deals with Brazilian law. If there is any discrepancy, the Portuguese version prevails. Read the original in Portuguese

An employment contract can end in very different ways, and each one carries its own financial consequences for employee and employer. From dismissal without cause to a consensual termination agreement, and including termination for breach, the amount of severance pay, the application of penalties, access to the FGTS (Brazil’s Length-of-Service Guarantee Fund) and the right to unemployment insurance all vary.

The Ways an Employment Contract Can End

Brazilian labor law provides for several ways to end an employment relationship, each with its own requirements and effects. How the contract ends determines which amounts are paid in the final settlement and which party bears the cost of the separation.

The most common scenarios are dismissal without cause, resignation, dismissal for cause, constructive dismissal (known in Brazil as indirect termination), and a mutual agreement between the parties, which was introduced by the 2017 labor reform. There is also the natural expiration of a fixed-term contract and termination due to mutual fault, provided for in Article 484 of the CLT (Brazil’s Consolidated Labor Laws).

This classification is not merely theoretical. Brazil’s Consolidated Labor Laws, the CLT, assign a specific set of rights to each type of termination. Dismissal without cause entitles the worker to the full package of severance payments, while resignation and dismissal for cause significantly reduce what the worker receives.

Understanding these differences is the first step toward calculating correctly what you are owed and avoiding unfavorable agreements. Many labor disputes arise precisely from disagreement over which type of termination applies to the case at hand.

Dismissal Without Cause and Resignation

Dismissal without cause is the type of termination that protects the worker the most. When the employer makes the decision alone, and the employee has given no reason for it, the separation triggers payment of the unpaid wage balance, advance notice, the 13th-month salary and prorated vacation pay plus one-third, along with a forty percent penalty on the FGTS.

In this scenario, the worker can also withdraw the full balance of the FGTS account and apply for unemployment insurance, as long as the legal requirements are met. This is the scenario in which the employer bears the highest cost of ending the contract.

Resignation, by contrast, starts with the employee. The employee receives the unpaid wage balance, the 13th-month salary and prorated vacation pay with the constitutional one-third, but loses the FGTS penalty, cannot withdraw the fund balance and has no right to unemployment insurance. If the employee does not work through the notice period, the corresponding amount may be deducted from the final payments.

The distinction between the two situations matters because, although both end the employment relationship without blaming anyone for serious misconduct, the financial effects are opposite. In a dismissal without cause, the employer pays the maximum amount; in a resignation, the employee gives up a significant part of what would otherwise be owed.

Brazil’s Consolidated Labor Laws, the CLT, assign a specific set of rights to each type of termination.

Termination for Breach: Dismissal for Cause and Constructive Dismissal

Termination for breach assumes that one of the parties violated essential obligations of the contract. When the employee commits serious misconduct, the employer may dismiss for cause under Article 482 of the CLT, which covers conduct such as dishonesty, negligence, insubordination and job abandonment.

Once dismissal for cause is established, the worker receives only the unpaid wage balance and any accrued vacation pay plus one-third. The worker loses advance notice, the prorated 13th-month salary, prorated vacation pay, the FGTS penalty, and access to both the fund withdrawal and unemployment insurance.

The breach can also come from the employer. Repeated late payment of wages, demanding work beyond the employee’s capacity, or excessively harsh treatment allow the employee to seek constructive dismissal under Article 483 of the CLT, sometimes called “dismissal for cause by the employer.” Recognition, however, usually depends on a court decision.

When constructive dismissal is upheld, the employee receives exactly the same payments as in a dismissal without cause: advance notice, the 13th-month salary and prorated vacation pay, the forty percent penalty on the FGTS, release of the fund withdrawal and eligibility for unemployment insurance. This type of termination shifts the entire cost of the separation to the employer.

Consensual Termination and Article 484-A of the CLT

Before the labor reform, there was no legal provision for an agreement to end an employment contract. This encouraged sham terminations, an improper practice in which the parties pretended there had been a dismissal just to release the FGTS. Law 13.467 of 2017 created consensual termination in Article 484-A of the CLT to bring transparency to this reality.

Under the agreement, employee and employer share the costs of the separation. Advance notice, when paid in lieu of working it, is paid at half value, as is the FGTS penalty, which drops from forty to twenty percent. The remaining amounts, such as the unpaid wage balance, the 13th-month salary and prorated vacation pay, are paid in full.

A worker who chooses consensual termination may withdraw up to eighty percent of the FGTS balance, but does not receive unemployment insurance. This is the central trade-off of the agreement: the reduced burden on the employer corresponds to a partial loss of protections for the employee, which is why the employee’s agreement must be voluntary and informed.

It is worth noting that consensual termination requires a genuine expression of the employee’s will. Forced agreements, in which the worker is pressured to accept the separation, can be challenged in the Labor Courts and converted into a dismissal without cause, with payment of the differences.

Penalties, Deadlines and Return of Amounts

Labor penalties serve different purposes. The forty percent penalty on FGTS deposits, owed in a dismissal without cause and in a constructive dismissal, works as compensation for an unjustified break in the relationship. In a consensual termination, the percentage is cut in half, and it does not apply at all when the employee initiates the separation.

There is also the penalty under Article 477 of the CLT, which applies when the employer fails to pay the termination amounts within the legal deadline of ten days from the end of the contract. The amount equals one month of the worker’s salary and goes to the worker, in addition to the amounts already owed.

It is important to distinguish the FGTS penalty, which is compensatory in nature, from the Article 477 penalty, which is punitive and sanctions late payment. The first depends on the type of termination; the second applies whenever payment is made after the deadline, regardless of how the contract ended.

Returning money comes up only in specific situations. Improper deductions made during the contract, advances that were not offset, or overpayments can be settled at termination. On the employee’s side, advance notice not worked in a resignation can be deducted from the total owed.

Comparison Table and Practical Consequences

The table below summarizes how each type of termination affects the worker’s payments, focusing on the most significant parts of the final settlement. Reading the columns together helps show why the choice of termination type is often a matter of negotiation and, not infrequently, of litigation.

The comparison shows that dismissal without cause and constructive dismissal are the most favorable types of termination for the employee, while dismissal for cause and resignation limit the settlement to the bare minimum. Consensual termination falls in the middle, balancing the interests of both parties and reducing the risk of fraud.

Frequently Asked Questions

What is the difference between consensual termination and termination for breach?

Consensual termination, provided for in Article 484-A of the CLT, is an agreement in which both parties agree to end the contract and share the costs, with reduced payments. Termination for breach results from serious misconduct: if the employee is at fault, dismissal for cause applies, with loss of rights; if the employer is at fault, the employee may seek constructive dismissal, which preserves the worker’s full severance payments. When it is unclear which type applies, an analysis of the facts and the evidence is decisive.

Does someone who makes an agreement under the CLT get unemployment insurance?

No. Consensual termination under Article 484-A allows withdrawal of up to eighty percent of the FGTS and payment of half of the advance notice and half of the fund penalty, but it expressly excludes unemployment insurance. This is one of the main differences from dismissal without cause, which guarantees the benefit to workers who meet the requirements.

How long does the employer have to pay termination amounts?

The deadline is ten days from the end of the contract, under Article 477 of the CLT. Missing it results in a penalty equal to one month of the employee’s salary, paid to the employee. Late payment may also lead to monetary adjustment and interest on the outstanding amounts, which can be claimed in the Labor Courts.

As informações deste artigo são de caráter informativo e não substituem consulta jurídica individualizada. Cada caso possui particularidades que exigem análise específica.