Employment classification risk for non-profit entities in Brazil
The pros and cons of hiring an individual as an employee or independent contractor
When incorporated in accordance with the laws of their own countries, foreign organizations can legally operate in Brazil upon receiving authorization from the Brazilian Ministry of Justice. Once this authorization is granted, an organization can request its corporate taxpayers’ registration from the Brazilian Ministry of Economy (CNPJ/ME) and then open a branch office as a foreign non-profit entity authorized to operate in Brazil.
Another possible pathway for foreign organizations to conduct activities in Brazil is via the incorporation of a local non-profit entity. According to the Brazilian Civil Code, this can take the form of an association or a foundation.
Unlike other corporate entities, associations and foundations cannot distribute their profits to members. However, they may obtain government designations allowing, for example, access to further tax benefits, contracts with public authorities for managing public assets, or the granting of benefits to their donors.
Both of these forms present advantages and disadvantages. Foundations are more commonly used to maintain a legacy of public interest, subject to the oversight of the public prosecutor’s office. On the other hand, associations allow for a more dynamic way of functioning and are also not subject to specific oversight.
In any case, whether a foreign entity branch office, a foundation or an association, the entity must have at least one legal representative or an executive officer. This must be an individual permanently residing in Brazil – and if a non-citizen, the individual must hold a relevant permanent visa – who will legally represent the organization in an executive administrative role.
All organizations may hire other individuals as “employees” or “independent contractors” for the development of their activities, as long as limitations established by Brazilian employment law are met. Non-profit entities should also periodically evaluate if the chosen method is adequate for the circumstances, considering the activities that are being undertaken and the factual characteristics of the relationship, while bearing in mind the labor risks detailed below.
Employment classification in Brazil
Non-profit entities must pay special attention to Brazilian legislation before hiring an individual as an employee or independent contractor.
The cost of hiring is often one of the determining factors that leads a non-profit entity to hire someone as an independent contractor.
Although cost is certainly an important factor and should be taken into consideration before hiring an individual, non-profit entities must ensure the selected form of employment meets limitations established by Brazilian employment law.
Employee vs. Independent Contractor
Brazilian employment law sets specific requirements for an individual to be classified as an employee, including:
- The individual is a natural person (a legal entity cannot be classified as an employee);
- The individual works on a regular and continuing basis (usually three times a week, at a minimum);
- The individual is subordinate to the employer (works under control of the employer);
- The individual receives compensation for services provided; and
- The individual provides services on a personal basis (i.e. the individual cannot be replaced by another worker).
In classifying an employee, the case law also considers economic dependence as an element of subordination (e.g. work material and equipment are provided by the non-profit entity; or all or part of the costs related to the performance of the individual’s activities are paid by the non-profit entity).
Furthermore, ‘exclusivity’ is not a statutory element that determines classification as an employee, however it may contribute the existence of those elements that enable an employment relationship.
In contrast, an independent contractor provides services on a non-employment basis.
The terms and conditions of the contract are governed by applicable Brazilian law, depending on the nature of the services (e.g. service agreement subject to civil law; or agency agreement subject to civil law or sales agency law; etc.) and when they are provided within Brazilian territory.
Forms of Hiring vs. Reality
The case law will consider the classification of employment in accordance with the reality of the situation. Thus, regardless of the form which may have been used to contract a service provider (service agreement, consulting agreement, agency agreement etc.), the reality of the situation tends to take precedence over any document signed by the relevant parties.
Ultimately, if services are rendered within Brazilian territory and the necessary statutory elements are present, the court will recognize the existence of an employment relationship and award applicable entitlements to the individual (e.g. vacation, vacation bonus, 13th salary, overtime, severance fund deposits, severance fund penalty etc.) as per Brazilian employment law and collective bargaining agreement, as well as penalties (interests) and potential damage compensation.
Foreign non-profit entities may carry out activities and register with the applicable tax and corporate regulatory authorities, while keeping their non-profit status in Brazil. This can be done either by opening a branch office, providing that authorization has been obtained to operate in Brazil; or incorporating a new non-profit entity in the form of an association or a foundation under Brazilian law.
Both formats present advantages and disadvantages and should be evaluated according to the foreign organization’s needs. Regardless, the foreign entity branch office or new legal entity must have at least one officer acting as its legal representative in Brazil.
All organizations may hire other individuals as “employees” or “independent contractors” for the development of their activities, provided that the limitations established by Brazilian employment law are met.
Non-profit entities should carefully analyze which type of engagement is more appropriate when hiring an individual. If the preferred option is to hire the person as an independent contractor, the entity must make sure this relationship will not exceed limits established by Brazilian employment law, and will comply with all requirements provided by the Brazilian service provider law.
This caution should not cease at the moment of hiring. Non-profit entities should also pay regular attention to ensure any relationship with an independent contractor does not meet the same conditions corresponding to an employee relationship. This is highly important when considering the potential financial risks arising from the recognition of an employee relationship, and the subsequent awarding of all applicable employee entitlements.