Introduction: Understanding contractor disputes in the Brazilian context
As one of Latin America’s most vibrant and diverse economies, with vast pools of highly skilled, working talent, it’s no surprise that HR heads of global companies are looking to increase the hiring of independent contractors in Brazil in 2024.
Independent contractors are flexible, talented, and come without much of the contractual obligations of hiring permanent employees in emerging markets like Brazil. They provide a big growth opportunity for expanding companies looking to make the most of today’s borderless digital era. However, engaging independent contractors isn’t always smooth sailing. Disputes between contracted workers and their host employer are not uncommon, in the Brazilian market, like any employment market.
These disputes are mainly due to the following key reasons:
- The host employer may claim that it has no obligation under Brazilian employment law. toward a particular worker because that worker is classified as an ‘independent contractor’ who is operating a business, as opposed to performing their work as an ‘employee’.
- The host employer may concede that a worker is an ‘employee’ not an ‘independent contractor’ but deny any responsibility under Brazilian labour laws based on the assertion that another entity actually employs that worker.
- The contractor isn’t paid, or there is a late payment.
- There is scope creep. Where the host employer tries to expand the scope of work of the Independent contractor, in the absence of contractual inclusions.
- The contractor breaches their side of the agreement.
- There is no written agreement.
In the second situation listed above, the worker may be supervised by a talent management or a temp firm and hold very little economic power or resources. In this scenario, the company may contend that the temp firm, together with the contractor, jointly employ the worker and therefore, are jointly responsible for complying with Brazil’s labour and employment laws. Not the host company.
Hence, the value of appointing an Employer of Record when engaging contract talent in Brazil, is empirically more sensible than directly hiring them or engaging a temp firm. An Employer of Record is the most cost-effective and influential option for successfully managing contract workers in Brazil, particularly for the management of contractual disputes of this nature.
Today, we’re looking at the role of Employers of Record in managing contractor relationships inBrazil. We’ll cover how to draft firm, compliant contracts; how to leverage Employers of Record to effectively manage those contracts for employers. And finally, we’ll cover practical strategies to prevent and resolve contractor disputes.
The role of Employer of Record (EOR) in managing contractor
Ensuring compliance with Brazilian employment laws
With time zones aligned to North America, a vibrant startup scene, and a ready-to-go pool of skilled contractors and freelancers, Brazil is a popular place to source contractor talent. But complying with employment laws is crucially important. You see, Brazil has very strict local labour laws when it comes to contract worker misclassification. So, compliance with local employment laws is critical. This is where Employers of Record are invaluable. An Employer of Record (EOR) assists organisations expanding into Brazil who are engaging contractors by:
- Employing their independent contractors.
- Providing compliance assistance, including compliant onboarding.
- Helping with contractor classification.
- Managing the contracts under which the worker operates.
- Processing payments in Brazilian currency.
- Managing required Brazilian tax contributions for contractors.
- Offering legal and administrative support.
- Mitigating the risks associated with non-compliance of contract workers.
The Employer of Record is an outsourced company that becomes the legal employer of contract talent in Brazil, on behalf of the third-party client/employer. Employers of Record help with the international expansion of offshore companies looking to expand their footprint into Brazil. They offer a cheaper and easier contracting mechanism in Brazil, than if the client company came in and set up a separate company or subsidiary, themselves. An Employer of Record is a solution by which the contractor engagement processes, such as legal formalities and payments, can be outsourced to a third party: that being, the EOR. By partnering with an EOR to manage skilled independent contractors, the third-party employer will be able enjoy the benefits of engaging contractors without the stress.
Case study: Examples of EOR success in Brazil
Example one: Streamlined workforce transition without disrupting operations
Our client had initially hired a resource based in Minas Gerais, Brazil, in 2021. However, in late 2023, they decided to terminate this worker and replace them with a new employee based in Parana. The client required a seamless transition that would not disrupt their operations locally.
With our expertise and commitment to providing reliable workforce management solutions, we were able to efficiently handle this complex situation. Our Employer of Record (EOR) services played a vital role in ensuring a smooth transition.
Firstly, we facilitated the termination process, ensuring all legal and contractual obligations were met. This relieved our client of the administrative complexities involved in ending the employment of their previous worker.
Additionally, we facilitated the hiring of the new employee, streamlining the onboarding process and ensuring compliance with local labour regulations. Our team managed the necessary paperwork and legal formalities, allowing the client to focus on their core business without disruption.
Furthermore, we coordinated the transfer of equipment from Minas Gerais to Parana seamlessly, without causing any operational interruptions. Our extensive network and logistical expertise enabled us to handle this task efficiently, reducing downtime and maintaining productivity.
Example two: Seamless remote work transition for an Australian client
Our Australian client faced the challenge of relocating their Brazilian worker to Poland while maintaining his ability to work remotely from Brazil. The client required a solution that would not compromise the employee’s work performance or overall well-being.
First and foremost, we hired the Brazilian worker locally, ensuring compliance with all relevant employment regulations and providing him with a solid foundation of benefits. This included comprehensive medical assistance not only for himself but also for his family. Our commitment to employee well-being ensured that their health needs were fully met, fostering a sense of security and peace of mind during this transition.
By facilitating remote work from Brazil for 45 days, we effectively bridged the geographical gap and ensured uninterrupted productivity. Our advanced technology and robust communication platforms enabled seamless collaboration and efficient workflow, enabling the employee to contribute fully to the team in Poland.
Contract management and clarity
When expanding into Brazil with the goal of using independent contract labour, the host organisation must be mindful of ensuring clear terms are established regarding the working contract for engaging the worker: including scope, payment and other important contract variables. This is where the Employer of Record can provide valuable assistance, with local knowledge.
The Employer of Record can help the host employer by establishing and managing the independent contractor’s contract specifications, at the outset of the relationship and throughout the term of the contract. This includes the drafting of effective contracts that include the following:
- General information about all parties: the independent contractor, the host employer and the Employer of Record.
- Details on the scope of work required of the independent contractor. A detailed description of the services the independent contractor is expected to provide, including a timeline for the deliverables.
- Compensation to be paid to the worker, approved by the host employer, and paid by the Employer of Record, including timing, frequency and rate.
- Benefits and liability exclusion. This is a statement that the independent contractor will not receive the same benefits as the company’s employees. Benefits such as pension, health insurance, vacation pay, sick pay or any other statutory benefits or perks that an employee would be entitled to.
- Terms of termination of the contract. The terms of termination of the contract, especially when hiring an independent contractor for a long-term project, should specify conditions, such as the number of days’ notice required.
- Dispute Resolution. To address potential disagreements between the parties, the contractor agreement will typically include a clause detailing the process for dispute resolution to be adopted by all parties. For example, mediation or arbitration.
- Compliance with local Brazilian laws. The contract agreement will typically require the contractor to comply with all relevant Brazilian laws. These include tax laws, labour laws, and health and safety stipulations.
- Severability. Where a specific provision of the contractor’s agreement becomes unenforceable or invalid, this severability clause will ensure that the rest of the contract remains valid for all parties.
- Governing law. This clause states which Brazilian court will have jurisdiction should a legal dispute arise.
- Professional capacity. In this section of the contract, the independent contractor declares that they have the ability, expertise, solutions, methods, and equipment to successfully complete the job.
- Intellectual property protection. The independent contractor agreement must state details of ownership over any intellectual property created by the contractor during the relationship.
- Confidentiality: non-disclosure agreement. A confidentiality clause, or an NDA, states the terms that commits the contractor to keeping the host employer’s business information confidential. This may include business strategies, trade secrets, patents, trademarks, marketing plans and more.
- Non-compete clause. A non-compete clause is a legally binding component of the contract that prohibits the contractor from working with competitors of the host employer. Or, setting up a competing business in the same industry within an agreed, finite time frame.
Dispute resolution mechanisms
Brazilian Employers of Record are locally based entities that are hugely helpful to the host employer in the case of disputes with independent contractors. EORs, with detailed knowledge of Brazilian employment law, tend to employ a number of dispute resolution strategies, the main strategies being:
- Ensuring the contractor classification is correct. Proper classification is essential as it determines the workers’ rights and benefits, under Brazilian law. It’s not uncommon for employers to intentionally misclassify workers as independent contractors in order to avoid statutory obligations such as tax and insurance contributions, overtime or wage rates.
In Brazil, independent contractors are defined as those who work independently of a company and are not subordinate to company regulations or employee benefits, such as working hours, supervision or sick leave.
When employers hire independent contractors in Brazil, they must ensure they are compliant with local laws and employment regulations which is what the EOR will provide.
- Ensure open lines of communications are in place with the host employer. If there is a dispute arising from the independent contractor, the EOR will take on the responsibility of communicating with the employer. Often, disputes arise due to simple misunderstandings or miscommunications.
The EOR will communicate clearly and concisely, the grievance of the independent contractor, and register all related concerns. The EOR will also provide the employer with all relevant documentation and evidence that supports the contractor’s claims. These might include contracts, invoices, timesheets or expense reimbursements.
As the ‘middleman’, the EOR allows any upset to be dispelled, by being the go-between for the contractor and the employer. The focus of the EOR will be to find a resolution, not engage in confrontation. Depending on the nature and severity of the dispute, the EOR may suggest a meeting to explore solutions between themselves and the employer; the contractor and the employer; or all three parties to the relationship.
- Mediation and arbitration are two commonly used, and highly successful, methods engaged to resolve disputes with independent contractors. These options provide a neutral environment for all parties to the dispute to resolve and settle their differences.
Mediation involves an independent third party, a mediator, facilitating the airing of the grievance/s, facilitating negotiations between the parties, and working towards the reaching of an agreement, acceptable to all parties.
Alternatively, arbitration involves the aggrieved party presenting their case to a neutral arbitrator, who, on analysis of the contract/s, the facts and the feedback, will make a binding decision.
Mediation and arbitration are highly recommended options, and have proved to be valuable in Brazil’s employment law jurisdiction. They typically save time, money and negate the need for lengthy court proceedings. Also, in mediation or arbitration, both parties have the opportunity to relay their concerns, in the hope of landing at a middle ground.
- Pending the state of the dispute resolution, and whether common ground, agreement or partial agreement has been reached, the EOR may well recommend that the parties seek legal advice. This is a last resort option, as it signals the breakdown of the relationship. In this situation, the EOR, in consultation with the parties, will engage a local Brazilian employment attorney, experienced in handling independent contractor disputes. The local attorney will be able to clearly define the legal rights of all parties, assess the strength of the grievance based on the contract in place, and explore all legal remedies within the confines of Brazil’s employment law. The attorney may negotiate with the employer on the contractor’s behalf, while taking advice from the Employer of Record. There are multiple pathways that this option can take.
Practical strategies to prevent contractor disputes
To keep your independent contractors working, and not in dispute with your business, follow these guidelines to prevent disputes.
Developing clear and detailed contracts
Aside from the list provided above, under ‘Contract Management and Clarity’, when engaging independent contractors in Brazil, make sure all agreed terms are outlined accurately and in detail.
This means including:
- A detailed scope of work, for a finite period. Brazilian law doesn’t take kindly to contractors who don’t have an ‘end date’ to their contract term: this would be considered a worker misclassification.
- Inclusions of expected contract outcomes. Establishing KPI’s in the contract will ensure the contractor has a clear roadmap for delivery of work and eliminates the potential for scope creep.
- The inclusion of waivers. A waiver clause is a provision that governs the way any party to the contract, can waive a right. This includes the consequences of the waiver.
- Any details of bonuses paid, and on what terms, the nature of bonuses, the timeframes in which these bonuses will be paid, and on what frequency.
- Indemnification. An indemnification clause serves to protect and compensate the hiring company from legal consequences that arise in the case of any breaches of representation by the independent contractor.
Effective communication and regular monitoring
Ongoing and effective communication can pre-empt disputes with independent contractors, as you expand your business in Brazil. We recommend the following steps to maintain quality, open channels of communication.
- Develop a communications plan. A well-defined communications plan, managed by the Employer of Record and agreed to across all parties, is the foundation for an effective contractor relationship. The plan should nominate preferred communications channels, the frequency of information updates, the nature of those updates and the roles of each party to the relationship, including the EOR. This is a guiding document, that ensures everyone is on the same page throughout the duration of the contractor’s term.
- Utilise project management software. Project management tools are excellent communications facilitators, keeping the project updated, live and are the single source of truth for the project. Centralised document sharing, version control, and detailed project updates allow all parties to be across the contractor’s progress, irrespective of the physical location of any party. Project management tools go a long way to supporting a contractor/employer relationship that is dispute-free.
- Conduct regular face-to-face meetings. Regular meetings with the contractor ensure the relationship remains positive, project issues can be discussed, concerns addressed in person, and guidance can be offered where needed. Having an open, regular dialogue with the contractor is a great means of avoiding disputes.
- Create an environment of open communication, through a focus on business culture. When contractors are keen to share ideas, concerns or feedback, you know your culture is a positive one. Whether a startup or established global operation, work to create a culture of sharing and collaborative problem solving. In this way, the organisation will get the most out of their investment in contractors.
- Leverage technology. Take advantage of mobile apps, instant messaging and video conferencing tools to enable real-time communications, no matter where any party is based. This allows independent contractors to feel included, engaged and ‘seen’ in the context of their work. There should be no barriers to communication in today’s digital age.
Implementing a dispute resolution mechanism
Establishing a clear pathway for dispute resolution with independent contractors will help to mitigate the likelihood of disputes evolving into time-sapping, costly exercises. As we mentioned earlier, there are four broad avenues for dispute resolution:
- Ensuring the contract is correct at the outset of the relationship.
- Keeping the lines of communication open.
- Undertaking mediation or arbitration.
- Legal action.
Be clear and transparent about the company’s approach to dispute resolution, including where and how all parties are involved, including the Employer of Record.
Ensuring legal and regulatory compliance
The Employer of Record is responsible for the legal and regulatory compliance of the independent contractor’s services to the organisation. A key benefit of engaging the Employer of Record is the assurance the employer gains from their local knowledge and regulatory compliance expertise. In this way, the Employer of Record offers significant benefits for organisations engaging independent contractors in Brazil. Without them, and in the absence of a team on the ground in Brazil, there is a greater chance of employers breaching contract law, in their Latin American expansion.
As the legal employer of independent contractors in Brazil, the Employer of Record has extensive knowledge and local expertise and takes care of all Brazil compliance aspects of the independent contractor’s engagement. This includes payroll management, taxes, statutory payments, contracts, pay rates and more.
Adherence to Brazilian employment law will be securely covered by the Employer of Record, providing a safety net for compliant contractor engagement.
Conclusion: Streamlining contractor management in Brazil with an Employer of Record
Managing disputes with independent contractors can hugely mitigate the many advantages of engaging these workers. So, it’s worth taking the time to set the framework for your relationship via an Employer of Record.
Keep in mind, companies looking to grow quickly with skilled, experienced talent, hiring contractors in Brazil is a very appealing option.
The Brazilian workforce is well-known for being highly motivated and engaged. The opportunity to work for an international company is often lucrative and assists with career advancement for Brazilian professionals. Therefore, most contractors tend to be determined to fulfil their contract obligations, throughout every aspect of the working arrangement.
By taking the steps outlined here, as well as partnering with a local Employer of Record, independent contractors are a potentially lucrative and worthwhile investment in any organisation’s expansion to Brazil.