Contractor vs Employee – Risks of Misclassifying Workers in Brazil

Understanding labour laws in Brazil continues to be a significant challenge for foreigners. In part four of our Brazil series, we will talk about the practice of using independent contractors instead of employees. This is an important topic since there are some who prefer to use independent contractors as it can alleviate some of the labour and tax considerations that would otherwise have to be managed under a normal employment relationship.  

Outsourcing in Brazil: Understanding the Rules

Brazilian law allows a wide range of activities to be outsourced since the labor reform from six years ago removed the restriction on outsourcing core business functions. However, it is still understood that some activities remain off-limits for outsourcing, for example labor intermediation or to circumvent an employment relationship. The latter being the focus today.

While outsourcing offers flexibility to companies and even individuals, it cannot be used to avoid Brazilian employment laws and benefits that are applicable to full-time employees.

Specifically, the relationship between a contractor and service provider cannot mimic the characteristics of a regular employment contract as this will lead to the relationship being reclassified as an employer/employee relationship and not that of a subcontractor.

Brazilian law defines an employment relationship by four key characteristics:

• Personality: The work is performed by the contractor themself, not by delegates.
• Regularity: The work is on-going and not a one-off project.
• Subordination: The contractor follows the service provider’s instructions and control.
• Onerousness: The contractor receives regular and continuous payment for their services.

If these characteristics are present in the outsourcing agreement, it could be classified as an employee/employer relationship, leading to penalties for the company which can be significant.

The Importance of Proper Outsourcing in Brazil

Understanding the distinction between outsourced services and employee relationships is crucial when planning your outsourcing strategy in Brazil.  Companies are sometimes tempted to circumvent labor laws by replacing employees with individuals who are self-employed through a corporation, as a strategy to reduce labor and payroll costs.

However, authorities scrutinize such arrangements using the four key characteristics of an employment relationship that we listed above. Thus, after the end of the artificial relationship, the individual can take legal action, seeking retroactively earnings and all its reflexes in all labor rights.

The Risks of Misclassifying Workers in Brazil

Failing to properly distinguish between outsourced services and employee relationships can have serious consequences for companies in Brazil.  Beyond potential fines, multiple labor ministry audits and/or lawsuits can significantly impact a company’s ability to obtain essential clearance certificates.  These certificates are often required to participate in government bids or become a vendor for companies with strong labor policies. In essence, misclassifying workers can hinder your ability to do business in Brazil.

Conclusion

In our experience, labour matters are one of the highest risks that foreign companies face when operating in Latin America. It is important that companies understand Brazilian labour laws since they are considerably more employee friendly then other parts of the world. Most cases that are brought to labour courts tend to be won by the employee regardless of the situation.

Using contractors is something that many companies consider when first operating in Brazil since it can reduce costs for the business while employees designated as independent contractors can reduce payroll taxes helping to increase their in-pocket pay.

The reality is that there is always a high probability that the employment relationship could sour at some point. It is at this time when the risk of misclassifying an employee can lead to liability since the employee can be file a labour lawsuit.

For this reason, it is important companies understand situations when a contractor’s agreement is valid and when an employee should be contracted as such.  

Ax Legal helps industrial technology, engineering, and service companies to navigate the legal and commercial aspects of operating their business in Latin America. With deep knowledge of the industrial and natural resource sectors, we provide actionable and practical advice to help streamline our clients’ entries into Latin America, improve how they operate in the region, and to protect their interests.

Over the years, our team of legal and commercial advisors have developed a track record of working with companies of all sizes from Australia, Canada, the U.S., and Europe. The one common factor that connects our clients is that they are leaders in their field, providing innovative technologies and services to the industrial sectors.

To better understand how we can support you in the Region, please contact Cody Mcfarlane at cmm@ax.legal