2. Re-Characterisation of Independent Contractors as Employees

a. Laws and Guiding Principles

The re-characterization of an independent contractor as an employee can be determi-ned by a labor court.

In court the independent contractor wishing to establish employee status will need to provide evidence of the four pre-requisites of an employment relationship:

• services rendered on a personal basis;
• on a permanent/habitual basis;
• with subordination; and
• on an onerous basis.

Companies may also be subject to an audit by the Ministry of Labor or social security authorities. Such authorities can assess the existence of an employment relationship and thereafter charge labor and social security contributions.

b. The Legal Consequences of a Re-Characterisation

If an independent contractor is reclassified as an employee, he/she will be entitled to all statutory labor rights described above. The statute of limitations for claiming labor rights in Brazil is five years; however after termination, an employee has only two years from the termination date to file a labor claim.

c. Judicial Remedies Available to Persons Seeking ‘Employee’ Status

Individuals can file a labor claim with labor courts, requesting recognition of their em-ployment status and consequent labor rights.

In Brazil, there are courts which specialise in labor matters, so labor courts are compe-tent to rule on any matter arising from or in relation to an employment relationship, including the recognition of an employment relationship.

Filing a labor claim in Brazil is free of charge for employees. The employee has only to declare the impossibility of paying judicial costs in order to be free of all charge, including judicial costs and attorney's fees. A result of the protective nature of the law and free access to Labor Courts, is that the number of labor claims is significant and it is quite common for the larger employers to have several thousand ongoing labor claims at any given time.

Re-characterization of an independent contractor as an employee is a typical labor claim brought by individuals; however it is also possible to have a public civil action dealing with such a matter. Public civil action is a type of lawsuit, similar to a class action, provi-ded for in the Brazilian Federal Constitution. It is the judicial remedy for the protection of collective interests, such as environmental, social and labor issues. Labor public civil actions can be filed by Prosecutors and by several other official entities (i.e. Federal, State and Municipal Governments, Unions, Bar Association, etc.).

In the last few decades, labor public civil actions have become more common and are frequently filed whenever one of the entities mentioned above becomes aware that a particular employer has not complied with labor regulations. Labor Prosecutors can ini-tiate investigations into companies that use independent contractors for the bulk of their workforce.

Labor public civil actions have become a useful tool in ensuring the adherence by em-ployers to all labor regulations and standards. In addition to requesting compliance with the Labor Code and administrative rulings, most of these lawsuits also request collective moral damage indemnifications.

d. Legal or Administrative Penalties or Damages for the Employers in the Event of Re-Characterisation

Companies can be audited by the Ministry of Labor, which is in charge of auditing labor obligations, and/or the Federal Tax Revenue, which is in charge of auditing obligations related to social security contributions and income tax.

In the event the Ministry of Labor finds that an independent contractor is in fact an employee, the contracting company may be compelled to pay an administrative fine of approximately BRL 400.00 per employee. This fine will be doubled in the case of relapse.

A Federal Tax Revenue inspection may result in the authorities issuing a notice of in-fraction requesting the payment of the social security contributions from the previous five years, and an employer may also incur a penalty to the minimum of 75% and maxi-mum of 225% in the case of fraud, and interest based at the SELIC rate.

In both cases, the Labor Prosecutor can be notified and further investigation into the matter initiated.