Payroll Tax Reduction
High hiring costs in Brazil make contracting staff expensive. There are, however, methods that can be used to reduce the tax burden on employers associated with their employees.
The Brazilian government levies high taxes and mandates by law certain benefits that all together make hiring a worker in Brazil costly. The standard way to contract and employee is the CLT method, or the Consolidação das Leis do Trabalho, translated as the Consolidation of Labor Laws. The CLT method consequently makes hiring in Brazil a slow and drawn out process. There is a 2nd method commonly used to reduce the tax burden associated with hiring a Brazilian worker colloquially known as PJ, which comes from CNPJ.
The CNPJ and the CNPJ Method
CNPJ stands for Cadastro Nacional da Pessoa Jurídica, or roughly translated as the National Registry of Juristic Person. The CNPJ is the Brazilian version of a TIN or a VATIN used to identify a tax paying entity. It´s what a company or any other non-physical person must obtain in order to begin operations and pay taxes. The CNPJ is used as a sort of a loop hole to avoid the burden of contracting a worker in Brazil.
The CNPJ method is employed by paying an employee’s CNPJ instead of paying them as a regular person. The employee creates a CNPJ and is paid as if he or she was a service provider and not as a regular employee hired by the standard CLT method. That way, the employee does not have rights to the benefits afforded to a CLT employee.
Common Occurrences of CNPJ
The CNPJ method is used to hire employees from low-end workers such as cleaners to high-end workers like directors and managers. The most common uses of the CNPJ method are for workers in the following areas:
- short term conferences and events
- temporary projects
- IT staff
- maintenance staff
- specialized construction staff
Employee Advantages and Disadvantages
Advantages
- Higher gross salary is received. Normally 20%-100% higher than CLT.
- Hourly work schedule permitted allowing an employee flexibility to work more or less than the 44 hour workweek depending on circumstances.
- Opens the door to a potentially greater number of work opportunities.
Disadvantages
- No guaranteed benefits such as vacation, bonus, sick and maternal leave, transportation, reimbursement, etc.
- Can be fired at any time without entitlement to the severance payment or unemployment benefits normally afforded to exiting employees.
- Accounting services required by CNPJ which is an additional cost between 100 to 415 BRL per month.
- Employee is responsible for their own retirement planning since they will not be eligible for the government program without contributions
- Is responsible for the government taxes and contributions levied on this type of transactions roughly 13.33%.
- The 13.33% is comprised of the following:
Employer Advantages and Disadvantages
Advantages
- More freedom to hire and fire employees.
- Employee related taxes are passed on to the employee.
- No employee benefits are required to be paid.
- Employee can be paid hourly instead of strict adherence to the 44 hour workweek.
Disadvantages
- Excludes potential employees that do not want to be hired via the CNPJ method.
- Less guaranteed benefits make the position less attractive.
- Higher turnover among CNPJ employees.
Government Oversight and Legality
The Brazilian government is keen on this method so there are some requirements and restrictions to its use. Hiring an employee via the CNPJ method is a gray area to say the least. It is commonplace but illegal in some cases. For example if the employee is performing the role of a normal employee just remunerated under a CNPJ then issues may arise. The employee can try to claim all their rights they would normally be entitled to under CLT. Moreover, if the Brazilian government shows up at your door for an inspection, there could be legal trouble.
The best way to hedge legal risk in the decision to hire via CNPJ or CLT is clear distinction of employee statuses. Separating departments and paying staff by specific functions is the best way to remain on the up and up. For example, maintaining all of the IT staff or maintenance staff under CNPJ and the sales staff under CLT. Paying staff that perform the core functions of the business as CLT and the support staff as CNPJ is the safest strategy. Potential legal problems arise when you pay two employees, which perform the same function, under different payment methods.
CNPJ Maximization
The CNPJ method has its advantages and disadvantages. Most Brazilians know and prefer not to be employed by the CNPJ. However, the CNPJ method can be made more inciting for the employee by offering certain benefits that are not legally required. For example, the employer may still offer a paid vacation or a bonus. The employer may also tie these sorts of extras to performance instead of making the payments required by law. The CNPJ method is also a good away to hire short-term and long-term temporary workers as well as test driving an employee before hiring them via CLT method. Careful calculation and strategy should be employed before deciding how an employee should be contracted.