Change is difficult, time-consuming and costly — yet for today’s global organizations it is necessary and offers tremendous potential for improved performance. Often, when organizations try to respond to new changes, they get caught in the trap between fear and greed. They'd like the benefits of change, but they're afraid of failure.
That may be the case with Brazil's new eSocial program, which will require wholesale changes to how organizations report employee data to government agencies. To prepare for eSocial, global organizations will need to better define their employee data, have clear system and data specifications, run a variety of test scenarios, and most of all, invest in change management.
In the long-term, the simplify and standardization of employee reporting requirements brought on by eSocial should result in sizable advances in accuracy and efficiency. Successfully deployed, eSocial may also set a blueprint for how other South American countries look to improve reporting processes for employers.
What is eSocial?
eSocial is the Brazilian federal government’s project and system to unify the sending of employer and employee data. This unified system will replace the need to send separate reporting to Social Security, the Internal Revenue Service and Brazil’s Ministry of Labor and Employment. The process seeks to bring standardization and clarity to how organizations collect and report data to the Brazilian government. This rather noble project has parallel legislations in other countries, but what has garnered eSocial more attention is its rather slow and confusing rollout.
This digital fiscal accounting system establishes the provision of information related to labor, social security and fiscal matters, in a single platform. Its implementation was first instituted by Decree No. 8373, dated December 11, 2014, and is now supported and further clarified by subsequent and related regulations.
When Will eSocial Be In Effect?
Until recently, use of the eSocial portal was optional for international employers however it will be mandatory from January 2018. More specifically:
- For employers and taxpayers who, in the year 2016, had a gross profit above R $78 million, the effective date will begin on January 1st, 2018;
- While for other employers and taxpayers, the enforceability starts on July 1st, 2018 - by Resolution No. 02 of August 30th, 2016, of the E-Social Managing Committee.
What Specifically Does eSocial Cover?
Creation of the new eSocial requirements involved many parties, including the Federal Revenue, Ministry of Labor and Employment, Ministry of Social Security, National Institute of Social Security, Caixa Econômica Federal and the Ministry of Planning. Their primary objectives in crafting these requirements were to:
- Enable the granting of social security and labor rights to workers;
- Simplify the fulfillment of employer and government obligations; and
- Improve the quality of information in Social Security, the Internal Revenue Service and Brazil’s Ministry of Labor and Employment.
Some examples of activities that will be covered by the system are:
- various labor events;
- withholding income tax; and
- information on FGTS (unemployment compensation fund system).
The submission of these activities to the system, called “events”, must comply with the stipulated deadlines for each subject. Below are some examples of deadlines for labor events contained in the eSocial Guidance Manual:
- When an employee is hired, the employer must submit this event to the eSocial system before the employee can begin work;
- If a work accident occurs, the employer must draft the “Work Accident Notice”, aka CAT (“comunicado de acidente do trabalho”), and register it no later then one day after the accident; and
- When any employee is dismissed, that event needs to be registered no more than 10 days after dismissal.
How To Submit Information
When submitting information, it will be mandatory to use an ICP-Brazil digital certificate A1 or A3 - similar to a digital corporate taxpayer registry.
Submissions will have three classifications:
- initial events and employee schedules,
- periodic events, and
- non-recurring events.
So what do these classifications mean? For example, the hiring of a professional is considered an initial event (A); a vacation given is a periodic event (B); and a work accident notice is a non-recurring event (C).
Following these classifications, events will need to be submitted in an XML format, which will be validated and stored in the nations eSocial system. Once validations have been applied, the system will respond to each submission with one of the following:
- confirmation of receipt,
- sending confirmation, or
- an error message.
Short and Long Term Implications
This new model of communication and data handling can have positive effects (e.g. automation of information transmission, uniformity of additional obligations, reduction of costs to provide or retrieve information, etc.), but it also involves a cultural change. Employers will need to invest in behavioral transformation for managers, those responsible for HR and Payroll systems that house employee data, and those responsible for the execution of events (e.g. approving a vacation period or a sick day). Organizations will need to adopt a multidisciplinary approach, with technological adjustments, training, and qualification for their professionals.
In addition to the aforementioned cultural change, it will be critical that employers and their vendors establish better integrations between systems and processes that originate relevant information, and that ultimately house source data for event submissions. Just consider how quickly an organization must report a work accident and how challenging this will be without proper integrations capable of generating an XML submission within 24-hours of the event.
Another implication seldom discussed in conversations about eSocial is data quality. Employers can no longer hide data omissions and errors within their HR or Payroll systems, since those errors may get submitted to government agencies via automated integrations. The quality of an organization's employee data will now face greater scrutiny from public agencies. For that reason we recommend organizations start conducting due diligence on their existing employee data to ensure they are in compliance once the eSocial legislation begins to impact their processes.
eSocial impacts how organizations provide information to government agencies. That is why it is advisable for employers to use this implementation period to execute the necessary changes, training, and tests. Below are some suggestions that may assist you in preparing for the eSocial system:
- Digitalize all information on your employees, since the communication will be exclusively electronic.
- Develop a plan of action and training for all departments that may be involved in event reporting.
- Verify the quality of the information that may be sent to eSocial, so that problems with event submissions can be minimized during the initial rollout.
- Prepare a timetable for the implementation of the system.
- Define a budget your organization may need to prepare itself for the new system and process.
We think that eSocial can significantly improve reporting processes, data quality and access across Brazil... just as soon as we are past the initial implementation period. As with any significant change, it may help to speak with experts familiar with eSocial and similar global regulations that require precise coordination across departments and a commitment to change management.