Legal implications of engaging an employer of record in Brazil

Neil Montgomery
Montgomery & Associados, São Paulo
neil.montgomery@montgomery.adv.br

Drielle Amate Matta
Montgomery & Associados, São Paulo
drielle.amate@montgomery.adv.br

Patricia Guanciale
Montgomery & Associados, São Paulo
patricia.guanciale@montgomery.adv.br

Rebeca Ferreira Duarte Cid
Montgomery & Associados, São Paulo
rebeca.cid@montgomery.adv.br

Introduction

In Brazil, an employer of record (EOR) can be regarded as an ‘interposed or intermediary company’ (empresa interposta, in Portuguese), the purpose of which is to employ a workforce to be supplied to another legal entity (the EOR’s client) and whose activity will effectively be directed and managed by the latter (which, sometimes, even actively participates in the applicant recruitment process).

Although hiring workers under the EOR model can be an attractive strategy for a company’s global expansion, since it potentially reduces the costs and bureaucracy associated with establishing a subsidiary in Brazil and may provide the multinational company with the ability to test the local waters until it is certain it wishes to set up shop in that jurisdiction, this form of engaging workers, strictly from an employment law perspective, will encounter many barriers.

The barriers to consider

In accordance with Brazilian employment laws, since labour cannot be treated as a commodity[1] (pursuant to the principle of non-commercialisation of labour), the intermediation of the workforce is seen as an attempt to defraud the employment relationship as per Article 9 of the Brazilian Consolidation of Labour Laws (CLT) – the main body of Brazilian employment laws – and in violation of the social value of labour, which is regarded as one of the foundations of the Federative Republic of Brazil, as provided for in Clause IV, Article 1 of the Brazilian Federal Constitution.

In Brazil, one of the main elements characterising an employment relationship is legal subordination, that is, the employee’s submission to the employer’s directive power over the way they will perform their activities. Thus, the engagement of an employee through an EOR is contrary to such rationale since the legal subordination will relate to the EOR’s client and not the EOR itself.

Hence, the problem at hand is that the reality of the facts will always prevail over any documents stating the contrary and, in the EOR scenario, there is no mere provision of services by means of a contract between two legal entities, but rather the ‘borrowing’ of workers, with the intermediary company (EOR) only ‘providing’ workers, who perform their activities under subordination, direction and supervision by the EOR’s client and not the EOR itself.

Although legislative changes have been introduced and case law has evolved since the Labour Law Reform of 2017, the legal and judicial understanding on the illegality of hiring a workforce via an intermediary company remains unaltered. This is because although the elements that reflect the employment relationship with the EOR’s client are all present, the employment agreement is formally established with another legal entity. Such a triangular relationship subjects the employee to a situation of legal insecurity, since the worker hired by the EOR may not be entitled to the same rights and benefits as the EOR client’s employees and enforcement against the foreign company may prove to be a challenge because it is located overseas.

The main risk arising from this model is the recognition of the employment relationship directly with the EOR’s client (which engaged the EOR to ‘borrow’ the employees) in a judicial labour claim. In this scenario, the rules applied to the EOR client’s employees will apply to the employee hired by the EOR, which includes the benefits, salary, career progress and compensation schemes, etc.

However, the risks are not limited to the judicial sphere and the EOR’s client may be the target of an administrative assessment by the Brazilian Ministry of Labour and Employment or an investigation by the Public Labour Prosecutor’s Office. The Public Labour Prosecutor’s Office also has jurisdiction to file public civil actions, if irregularities are found and the EOR’s client refuses to correct the scenario (which would entail incorporating a local subsidiary to hire the workers as fully fledged employees), which may culminate in the payment of a fine by the EOR’s client pursuant to a judicial ruling, along with damages.

It is important to take into account that the risk is materialised once the EOR’s client decides to establish a Brazilian subsidiary, thus making it possible for the workers and the Brazilian labour authorities to hold such a company liable in the Brazilian labour courts. Although, in theory, the EOR’s client, as a foreign company, can be the target of and a party to judicial and administrative proceedings commenced in Brazil, the processing and enforcement of such proceedings are still quite difficult and time consuming. This seldom leads to the successful enforcement of a Brazilian judicial labour decision.

The exception and, consequently, the legally authorised intermediation of workforce is by using staffing agencies (which are responsible for providing workers to other companies on a temporary basis). This model is permitted for the transitory replacement of permanent staff or to meet a supplementary demand for services.

Establishing a subsidiary

It follows from the above that for foreign companies to operate in Brazil in full compliance with Brazilian employment laws, it is necessary for them to establish a subsidiary so that they can hire employees or service providers under such local legal entity.

Upon the incorporation of a subsidiary in Brazil, the engagement of workers can be carried out in many formats: employees hired under the CLT provisions (fully fledged employees) who in turn can be hired for a fixed term, for an indefinite term, through ‘zero hour’ intermittent contracts or part-time contracts, etc; independent contractors who provide specific services with the autonomy of outsourced workers; and temporary workers. For each intended format for operation in Brazil, a different kind of engagement can be used.

Furthermore, despite the bureaucracy involved in incorporating a subsidiary in Brazil, there are ways to simplify the daily operation of foreign companies. One example is through companies providing legal representation for the Brazilian subsidiaries of foreign companies. It is also possible to outsource services such as human resources (HR)/the payroll department, accounting, among others.

Conclusion

Although potentially risky from a legal perspective insofar as such companies can be seen as intermediaries, a practice which is not permitted by Brazilian law, many foreign entities not willing to establish a local presence by incorporating a Brazilian subsidiary and that prefer not to adopt a direct form of engagement with local workers as independent contractors, use EORs to engage local workers as fully fledged employees, while ensuring all the applicable Brazilian employment rights and entitlements are provided. The engagement of a local EOR does not remove the risk of local workers, engaged by such entities as employees, seeking the recognition of their relationship as actually being one of employment with the foreign entity or with the foreign entity’s local clients in instances where the local workers provide services to local customers. That being said, while the engagement of an EOR would allow for local workers to receive Brazilian employment rights and entitlements (that a foreign company would otherwise not be able to provide since it lacks the in-country presence required for such a purpose), such engagement could be challenged in court and by the Brazilian authorities.