The disagreements between the Federal Supreme Court (STF) and the Labor Court are nothing new, as the STF has gradually made it clear that its interpretation of the Constitution is one of flexibility in the provision of services, not requiring that the legal relationship be solely that of employee and employer, as defined by the Consolidation of Labor Laws (CLT). This, however, is not the interpretation upheld by the labor judiciary.
This trend of the Supreme Court was already well established in the judgment of Topic 725, in which the court ruled that outsourcing—as well as any form of segmentation of labor activities among different legal entities—is permitted, regardless of the compatibility between the corporate purposes of the companies involved, provided that the subsidiary liability of the contracting company is preserved.
This thesis already emphasized that companies do not need to directly hire workers for their core activities and may, if deemed more advantageous for business purposes, outsource those activities. The ratio decidendi, i.e., the reasoning used by the STF, was based on the constitutional principles of valuing human labor and freedom of enterprise, among others, which support contractual freedom.
Legality and tax impact
By allowing the hiring of services through legal entities, this phenomenon raises questions about legality and tax and social security impacts. On April 14, 2024, Justice Gilmar Mendes ordered the nationwide suspension of all pending labor court cases discussing the recognition of employment relationships. The decision was rendered in the context of Topic 1389, in which the Court will assess the “jurisdiction and burden of proof in cases discussing fraud in civil/commercial service contracts, and the legality of hiring legal entities or independent workers for this purpose.”
It is evident that the matter has not yet been fully judged. In fact, as explained, this was merely a suspension of ongoing proceedings to ensure legal certainty. However, eventually, the Supreme Court will need to fully resolve the issue.
When that happens, the impact will not be limited to labor relations—it will significantly affect the Brazilian tax system as well, including the social security framework, which is currently largely funded by employer-withheld contributions for formally employed workers.
Hiring through a legal entity is permitted
According to the Supreme Court’s recent understanding, hiring services through legal entities is legally allowed, as long as there is no fraud or concealment of an employment relationship, as emphasized in Topic 1389 decisions. However, the Court has also stressed that if there is evidence of fraud or misuse of the contractual arrangement—such as the use of a legal entity to mask an employment relationship—the adopted form may be disregarded, and the employment relationship recognized, triggering corresponding labor and social security obligations.
In the judgment of Topic 725, the STF solidified the understanding that outsourcing and other forms of labor organization are permissible, as long as essential workers’ rights are respected, reaffirming the supremacy of contractual freedom within constitutional limits. The Court reiterated that contractual freedom must be exercised within the bounds of good faith and the social function of the contract, prohibiting the use of legal structures to defraud labor legislation.
Lack of social security contributions
From a tax perspective, the main consequence in cases where pejotização is deemed irregular by the Tax Authority is the failure to collect social security contributions. Hiring workers as legal entities, when used to hide employment relationships, results in the omission of mandatory contributions to social security, directly impacting public revenue.
It is observed that Brazil’s complex tax structure, combined with the availability of simplified tax regimes, often leads companies to choose pejotização as a more economically viable option. Depending on the legal form adopted, the same economic activity may be subject to significantly different tax burdens.
This disparity, especially pronounced in the services sector, makes hiring through legal entities a more economically advantageous alternative compared to the CLT regime. This scenario demonstrates how the current tax base acts as an incentive for pejotização, while simultaneously challenging the balance between contractual freedom and fiscal justice.
Inspection of labor relations
In light of this reality, tax oversight plays a central role in identifying improper characterizations of employment relationships. In this context, the actions of the Administrative Council of Tax Appeals (Carf) are particularly relevant, as it has addressed the issue based on criteria that go beyond mere contractual formalities.
Indeed, Carf, when analyzing potential concealment of employment relationships, has applied the principle of substance over form, prioritizing the actual elements of the labor relationship. This means the tax authority considers the factual elements of the relationship—such as subordination, personal performance, habituality, and compensation—regardless of the legal form adopted. When these elements are present, Carf has tended to recognize the existence of an employment relationship and order the collection of the relevant contributions.
Examples of tax assessments
A notable example is Ruling No. 2101-002.883, in which Carf concluded that despite the formal arrangement of service provision through a legal entity, the absence of autonomy and the presence of subordination characterized an employment relationship, justifying the assessment of social security charges.
In the same vein, in Ruling No. 2201-011.417, the 1st Ordinary Panel of the 2nd Chamber of the 2nd Section upheld a tax assessment against an engineering firm that hired other companies to perform activities related to its core business, claiming they were outsourcing. Relator Fernando Favacho stated that the tax authority must disregard the contractual formalities and collect social contributions related to the worker’s wages when it is found that an employment relationship is masked by contracting through a legal entity.
Similarly, in Ruling No. 2401-011.574, commercial representatives were deemed employees based on the identification of personal service, habituality, subordination, and compensation in their relationship with the hiring party, even though they were formally legal entities. In Ruling No. 1301-006.716, an employment relationship was recognized between partners of legal entities providing editorial services and a contracting media company, resulting in the collection of withholding income tax.
Carf’s stance is not uniform
However, it cannot be said that Carf’s trend has reached a clear level of consistency. There are, in fact, decisions within Carf that show alignment with the Supreme Court’s prevailing jurisprudence. In Ruling No. 2401-011.577, the assessment for social security contributions on payments made to commercial representatives was overturned, based on the understanding that setting sales targets does not constitute subordination, but rather contractual coordination.
The same rationale was applied in Rulings No. 2402-012.457 and No. 2402-012.439, which reflected a more flexible approach regarding the characterization of employment relationships, recognizing the full legitimacy of contracting through legal entities.
Despite growing acceptance, pejotização still raises legal controversy, especially regarding its effects on the sustainability of the social security system and the protection of social rights. The current jurisprudence faces the challenge of balancing the freedom of negotiation provided by the concept with the need to preserve social security duties and labor rights.