Contractor or Employee in Brazil
Several companies prefer hiring freelance professionals instead of employees in order to reduce staff expenses. Know in this article the difference between these two working relations and their specific regulations, risks and costs.
Given the complexity of the Brazilian Labor laws, the number of workers registered in accordance to the CLT regime represents less than half of the economic active population. According to IBGE, in 2011, only 46.3% of the Brazilian workforce was registered.
That situation indicates that both companies and workers use other ways to establish working relations, besides the regular employment contract tied by the CLT rules.
There are pros and cons when considering not hiring an employee with signed labor cart. For the company, using alternatives to contract workers means saving money. For the workers, means having more freedom, the possibility of working for several companies and increasing the salary.
As for the cons, companies will not have the professional at their disposal everyday, there is no exclusivity and a constant threat of being sued for breaking the labor laws (the loopholes in the CLT laws often favors the worker's claims).
The independent contractor also deals with disadvantages while working autonomously, what includes lack of benefits and financial insecurity.
Employee and independent contractor
There are basically two legal regimes of hiring employees in Brazil:
1) Employee:
The legal definition of employee by the Labor Code isevery individual (natural person, never a legal entity) that personally renders services on a non eventual basis (continuity), under the employer subordination (obedience to rules and orders given by the employer), and that receives a salary. If one of these requirements is not present in the relationship, it is not an employment relationship.
As in most countries, it is very important to correct classify the relationship to avoid the common issues with independent contractors vs. employee definition. In summary, what defines an employment relation are four characteristics:
- Individuals only (legal entities cannot be employed)
- The work performed is not eventual and is directed the company's core activity
- Under exclusivity and tied to the company
- Under monthly salary
2) Independent Contractor
The independent professional can provide his services to the contracting companies in two ways:
- As an individual person
It is an individual who provides his services to the companies, without working employment link. The difference between employee and an independent contractor lies on the requirements that one must have to be an employee. An individual will be considered an independent contractor and if he or she has independence to perform the work and it is not subordinate to a company’s directives and regulations, and there is no exclusivity in the relationship between the parties. Those professionals are not covered by the labor legislation.
- As an entity
Professionals turned into legal entities are more likely to be contracted as independent workers, because it is safer for the hiring company. In Brazil, the contracting of a legal entity to perform services to other company is known by the acronym PJ (Pessoa Jurídica).
Source of the definition: International HR Forum
The costs of workforce and labor charges
Having registered employees is expensive, the costs go around 65% of the payroll. An employee working for a salary of BRL 1000, for example, will cost BRL 1650 to the company. Not to mention other charges related to the registered employee's benefits, which the company is obliged to provide.
The cost of hiring a freelance professional is much lower. The only requirement is that the worker must be registered at social security as an autonomous professional, and the contracting company must pay 20% of his payroll to INSS.
The cost for hiring a legal entity to perform some activities in a company is zero. That is why autonomous professionals turned into legal entities are preferred over individuals.
Precautions
According to the Brazilian Superior Labor Court there are currently 2.9 million labor suits at implementation stage in the country. The number signs that the Brazilian workers are aware of their rights and the loopholes of the CLT laws that, with the right lawyer, make possible to turn the slightest mistake of the company into a big indemnification.
The most common cause for an autonomous professional to sue his hiring company is when he argues that he worked as a registered employee, going everyday to work and receiving orders. If that is proved to be right, the company will have to pay all the benefits that were not paid during the time the professional worked for the company and collect all the taxes and contributions related.
Hiring independent professionals and legal entities (PJ) to perform some functions in the company is a legal practice, but only if it is not a simple replacement of workers with formal employment ties. Meaning that a company can only hire an independent contractor if the person was called to perform a job with a predetermined schedule, with beginning, middle and end of the activities.
It is also imperative that the professional have no exclusive relation with the company and does not attend every day at the same time to work, receiving constant direct orders from a boss. It is essential for companies hiring independent contractors to take the following precautions in order to avoid being sued:
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Establishing a written contract, registering the service to be provided and the dates of beginning and end of its performance
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Characterize the non-hierarchical subordination and lack of a specific time for the professional related to his entrance and exit from the company
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Obtain a copy of the professional's register at INSS as an autonomous worker or individual taxpayer. If the worker is not registered yet, ask him to provide it
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Obtain a copy of the professional's register at the municipality as an autonomous worker or individual taxpayer where he is domiciled
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Require to the professional receipts of payment related to the payment of the provision of services
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Obtain a copy of gatherings ISSQN (tax on services of any kind) for the months in which he provided services to the contracting company
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Consider as reimbursement the worker's expenses related to benefits (driving, eating, etc..) and keep the receipts of it