The Brazilian Federal Supreme Court (STF) has suspended all ongoing cases in the country that question the legality of “pejotização.”
The STF has decided to hear, under the general repercussion mechanism, a case (Case ARE 1532603) that addresses the existence of an employment relationship between franchising companies and service providers contracted as legal entities (“PJs”).
In practice, this means the Court is expected to establish clear limits for the practice known as “pejotização” — that is, the hiring of individuals through their own legal entities in order to avoid the establishment of an employment relationship.
What is “pejotização”?
Pejotização refers to a trend in labor relations whereby services are provided through a legal entity (“PJ”) instead of through a direct employment contract governed by the Brazilian Labor Code (CLT).
Why does this matter for your business?
The STF’s ruling will have binding effect — in other words, all courts across the country will be required to follow its interpretation. As such, companies that utilize this type of contractual arrangement should closely monitor the Court’s decision and review their contracts to ensure compliance with the limits that will be set.
Our warning:
It is essential to assess in advance the labor risks involved in contracting service providers as legal entities, especially in business models such as franchises, commercial partnerships, and general service provision.
If you have questions on this matter, please contact our team.
Written by Daniel Rangel, Associate Attorney at Drummond Advisors