Employee Vs. Contractor: How to Classify Workers in Brazil (Quiz included) [2024]
Brazil is ranked as one of the easiest countries in the world for doing business, so it's no surprise that companies are looking to Brazil for their next hires. But hiring workers in Brazil comes with an important caveat: You have to be able to correctly classify them as employees or contractors according to Brazilian labor laws.
Misclassifying workers in Brazil can result in steep fines, back taxes, and other penalties—and misclassification claims can be common, since workers in Brazil can file labor claims free of charge. Staying on the right side of the law is critical, and this guide can help.
Before you hire independent contractors in Brazil, learn about how to classify your workers correctly—and stay compliant with Brazilian labor and employment laws—with our guide.
Classifying workers in Brazil
As in many countries, Brazil categorizes employees and contractors differently—and classifying them correctly can be the difference between smoothly running your global team and racking up huge fines and penalties (more on those below).
What is an employee in Brazil?
In Brazil, an employee is defined as a person who performs work for a company, organization, or individual under the direction and supervision of an employer in exchange for remuneration. The Brazilian Labor Code (Consolidação das Leis do Trabalho or CLT) defines an employee as "any person who provides services to another person, under the terms of an employment contract, whether explicit or implicit, oral or written, for a fixed or indefinite term."
The CLT establishes various rights and obligations for both employees and employers. Employers are required to register their employees with the government and pay various taxes and contributions related to their employment. Employees are entitled to statutory benefits, including:
- Minimum wage
- Maximum working hours
- Overtime pay
- Severance pay
- Vacation pay
- Sick leave
- Social security benefits
- 13th-month salary
What is a contractor in Brazil?
In Brazil, an independent contractor is known as a "prestador de serviços" or "serviço autônomo" and is defined as a self-employed individual who provides services to one or more clients without any employment relationship or subordination. Independent contractors are not considered employees and do not have the same rights and benefits as employees under local laws and the Brazilian Labor Code.
The relationship between independent contractors and their clients is governed by a contract, which should specify the scope of the services to be provided, the payment terms, and any other relevant details. Independent contractors are responsible for paying their own taxes and social security contributions and are not entitled to benefits such as minimum wage, overtime pay, vacation time, or sick leave.
While Brazil doesn't prohibit any types of businesses from engaging independent contractors, some professions and roles should be filled by employees, including engineers, lawyers, and medical workers.
It's important to note that the distinction between employees and independent contractors can sometimes be complex and subject to interpretation. In some cases, the Brazilian Labor Courts may reclassify an independent contractor as an employee if the relationship between the parties meets the criteria for an employment relationship under the law.
Worker classification overview: Employees vs contractors in Brazil
Contractors
Employees
High level of control. Contractors should be able to choose when and how they work.
Less control. Employers can give directions to their employees on when and how to work.
Provide their own equipment and tools.
Employer provides equipment and tools.
Receive payments after submitting invoices for work.
Receive pay on a regular schedule. This can be a weekly, bi-weekly, or monthly salary.
Not entitled to statutory benefits. Benefits may still be provided but should be negotiated between the contractor and their client.
Entitled to statutory benefits including minimum wage, paid time off, parental leave, etc.
Not subject to disciplinary action for misconduct. Instead, the contractor agreement can be freely terminated.
Can be subject to disciplinary action for misconduct.
Cannot be exclusive. Non-competes are often unenforceable for contractors.
Can be engaged by one employer exclusively.
Cannot be engaged indefinitely. Indefinite contracts are presumed to be employee contracts under Brazilian law. Instead, contractors should have per-project engagements.
Can be engaged indefinitely.
Types of contractors in Brazil
When hiring contractors, it’s important to remember that there are different types of contractors in Brazil:
- Individual independent contractors
- Entities
Learn about each type in more detail below.
Individual independent contractors
An individual independent contractor is a sole proprietor who works as an individual without an employment relationship with their client(s). Sole proprietors are not covered by labor laws and are responsible for paying their taxes and providing for or negotiating their benefits.
Entities
On the other hand, an entity or legal entity in Brazil is a company or organization that has its own legal personality and is separate from its owners or shareholders. This can include corporations, partnerships, limited liability companies, and other forms of business entities.
Legal entities can be contracted on a per-project basis, similar to an independent contractor, and in some cases, businesses prefer to contract with legal entities because there's less risk of misclassification than with a sole proprietor.
Penalties for misclassifying workers in Brazil
Businesses found to have misclassified employees as contractors in Brazil face serious financial risk. The penalties for misclassifying workers in Brazil can vary depending on the specific circumstances of the case, the number of workers affected, and the severity of the violation.
Here are some of the potential costs, fines, and penalties:
- Fines: Companies found guilty of misclassifying workers can be fined by government agencies responsible for enforcing labor laws. The amount of the fine can vary depending on the severity of the violation but can range from a few thousand to several million BRL. Fines are doubled for employers who have been found guilty of misclassification before.
- Payment of back wages and benefits: Companies may be required to pay back wages and employee benefits to workers who were misclassified as independent contractors. This can include overtime pay, vacation time, sick leave, and other entitlements that would have been provided to employees under the Brazilian Labor Code.
- Payment of back taxes: Companies may be required to repay taxes that the misclassified employee paid, including FGTS contributions and more, plus a 75% penalty on social security contributions due.
- Court-ordered changes to employment practices: In some cases, courts may order companies to change their employment practices and recognize workers as employees. This can include providing benefits such as minimum wage, overtime pay, and social security contributions, as well as complying with other regulations related to employment.
- Legal and administrative costs: Companies may also incur legal and administrative costs related to defending themselves against allegations of misclassification and complying with court orders or settlements.
Disclaimer: Rippling and its affiliates do not provide tax, accounting, or legal advice. This material has been prepared for informational purposes only, and is not intended to provide or be relied on for tax, accounting, or legal advice. You should consult your own tax, accounting, and legal advisors before engaging in any related activities or transactions.
