Independent contractor contract length allowed
There is no prohibition on the use of genuine independent contractors. However, if the elements listed under what makes someone an employee are present in the relationship, employers can receive hefty fines and the contractor is reclassified as an employee.
Fixed-term contract limitation
Fixed-term contracts are allowed for only those services whose nature justifies the predetermination of the term, never exceeding two years. The contract can be extended for one additional term of up to two years. Further renewal would result in the contract’s becoming effective for an indefinite term.
What makes someone an employee
In Brazil, the principle of “Prevalence of Facts” is applicable when analysing whether someone is an employee. That means that facts and actions prevail over any documents executed by the employer and employee/contractor.
The following characteristics mark an employer and employee relationship:
- rendering services to the company on a permanent basis
- dependency on the company for remuneration
- inability to appoint other professionals to assist or to provide the service (The job must be carried out by the employee.)
- lack of power to decide how the work is done and what the work hours are
Employee versus contractor
Employers deduct employees’ social contributions to pay it to the government, while contractors have to be in charge of the deductions themselves. The number of contributions of either an employee or a contractor is the same.
Employers have no obligation to give benefits to contractors but are obliged to provide employees with FGTS (severance fund), 30 days of paid annual vacation, a one-third premium on the vacation pay, 13th month salary, transportation voucher, and overtime pay.
When it comes to termination, employees get a minimum 30 days’ notice plus 3 days per year of work. This can be paid in lieu. Contractors get 8 or 4 days’ notice depending on the frequency with which they are paid for their services; however, their contracts can provide a longer term, with 30 days being the usual notice period. Moreover, employees are entitled to severance pay, pay for unused vacation, and the vested fraction of their 13th month salary, while contractors aren’t entitled to any of these benefits.
Penalties for misclassification
Penalties for misclassification are very common, since filing labour claims is free of charge for employees. In the event the Ministry of Labour rules that an employee has been misclassified, the company may be fined BRL 400,000 per employee, with the fine doubling in case of a relapse.
Moreover, the Federal Tax Revenue may force employers to backpay for all the statutory rights that the employee hasn’t received over the years of service, with an interest penalty ranging between 75% and 225%.