Publications
- Category: Tax
At the end of last year, Justice Dias Toffoli released for judgment Extraordinary Appeal No. 1.063.187, Topic of general repercussion No. 962, which litigates the levying of Corporate Income Tax (IRPJ) and the Social Contribution on Net Income (CSLL) on amounts received by the taxpayer due to the application of the Selic rate when tax withheld in error is refunded. In the judgment, the Federal Supreme Court (STF) will decide whether the amounts paid to taxpayers due to the application of the Selic rate are subject to income tax
The discussion is of extreme relevance because it has an impact on the majority of cases in which the taxpayer has the right to refund of tax overpayments adjusted for inflation by applying the Selic rate. Also, depending on the extent of the theory to be established by the STF, it may also include interest incurred when collecting judicial deposits (it was requested that RE No. 1.067.056, which relates specifically to the debate on judicial deposits also be selected as a paradigm for the judgment of Topic of general repercussion No. 962).
The topic is also quite current, considering that recently taxpayers have been successful in tax debates (for example, recognition of the non-inclusion of the ICMS in the PIS and Cofins calculation basis) which should generate large amounts of taxes to be reimbursed and, consequently, high figures for adjustment for inflation at the Selic rate.
It is not, however, a new topic before the Supreme Court.
In 2009, at the time of the judgment of Interlocutory Appeal No. 705.941, the STF was of the understanding that the controversy over the taxation of the Selic is infra-constitutional in nature and, consequently, would fall within the jurisdiction of the Superior Court of Appeals (STJ). The STF revised its understanding so to recognize the general repercussion of the matter when the Federal Court of Appeals of the 4th Circuit[1] (TRF4), declaring the partial unconstitutionality of paragraph 1 of article 3 of Law No. 7,713/88, of article 17 of Decree-Law No. 1,598/77, and of article 43, item II and paragraph 1 of the National Tax Code (CTN), ruled out the levying of the IRPJ and CSLL on the amounts calculated at the Selic rate.
The taxpayers' theory is that the amounts received as interest on arrears and adjustment for inflation when the tax withheld in error is reimbursed does not constitute an increase in equity, thus not being included in the IRPJ and CSLL calculation basis, according to the terms of articles 153, III, and 195, I, "c", of the Federal Constitution of 1988. The amounts were said to serve the purpose of merely restoring equity, and not any increase.
The National Treasury argues before the STF that the text of the Constitution does not have a defined concept of profit/income and that its content must be extracted from infra-constitutional legislation, such that there is no offense to the provisions of articles 153, III and 195, I, ‘c’ of the Federal Constitution for the purposes of calling for the jurisdiction of the Supreme Court. It further asserts that in the refunding of the tax withheld in error, since the principal is taxable, it would be legitimate to tax the adjustment for inflation and interest on arrears, in view of the rule that the ancillary follows the principal.
The STJ, for its part, has already reviewed different aspects of the subject from the point of view of both individuals and the legal entities.
In 2012, at the time of the judgment of REsp No. 1.227.133, for example, the 1st Section of the STJ, under the system for dealing with repetitive appeals, established the understanding that only interest on arrears on the amounts due in the context of termination of employment contract would not be subject to Personal Income Tax (IRPF).
The same 1st Section again reviewed the issue in the judgment of REsp No. 1.089.720, at which time the theory was established that interest is not subject to IR taxation when the money to which it refers is exempt or outside of the field of application of the tax.
The following year, the 1st Section once more reviewed the issue, this time focusing on legal entities. In the judgment of REsp No. 1.138.695 it was understood that:
- interest on the return of judicial deposits is of a remuneratory nature and does not escape taxation by the IRPJ and CSLL, since they make up the sphere of taxpayer's available equity; and
- the interest accrued on the refund of the tax withheld in error, notwithstanding the finding that they are interest on arrears, are included in the IRPJ and CSLL calculation basis, given their nature as lost profits, which make up the company's operating profit.
This last judgment was extremely important because, in addition to being submitted to the system for repetitive appeals, it addressed situations involving legal entities. Thus, according to the STJ, the amounts resulting from the application of the Selic rate received by legal entities, whether due to refund of tax withheld in error or due to the withdrawing of judicial deposits, are subject to IRPJ and CSLL taxation.
The decision by the STJ deserves to be re-examined.
Firstly, there is no way to confer the nature of lost profits to interest on arrears, since its inherent purpose is only to recover a loss suffered in the creditor's assets, which is far from the idea of remuneration of capital.
Interest on arrears aims to recover the direct damage to the creditor’s assets, under the terms of article 407 of the Civil Code (CC/02), which must be respected by the tax legislation, as directed by article 110 of the CTN.
In addition, the assertion that interest on arrears has the nature of compensation for “lost profits" is contrary to the definition already reiterated by other panels of the STJ.
The concept of “lost profits" established by the panels[2] that make up the 2nd Section of the STJ, dedicated to private law, is based on the possibility of objectively predicting what the injured party failed to received, according to concrete, sure, and specific elements of the interrupted profitability. This premise does not allow for the inclusion of interest on arrears into the category of lost profits, since: (i) such interest does not correspond to what the taxpayer would effectively fail to earn; and (ii) interest on arrears is quantified in the same way for all taxpayers, without taking into account the factual situation of each case.
In addition, the STJ made an undue differentiation of the nature of the interest in cases of judicial deposits and refunds of tax withheld in error. The court held that interest on deposits is remunerative, while interest on refunds constitutes interest on arrears.
In so doing, it disregarded the fact that the relationship established by judicial deposits is essentially the same as that formed with the restitution of undue payments. In both cases, taxpayers were deprived of funds, which remain in the hands of the National Treasury, and the latter is responsible for adjusting the amounts for inflation at the time of restitution. Adopting this assumption, the 3rd Panel of the STJ,[3] in a case under private law, found that interest on arrears is due upon the return of the judicial deposit.
In any event, regardless of the criticism, the STJ's unfavorable understanding is the current position and has been used by the National Treasury to justify taxation of the amounts.
With the recognition by the STF of this subject’s general repercussion, the topic has returned to the agenda for discussion, with the possibility of a different final decision in favor of the taxpayer.
Despite not having ordered a nation-wide stay in the cases that deal with this matter (as provided for in article 1,035, paragraph 5, of the Code of Civil Procedure of 2015), in some cases the STJ[4] chose to order a stay in special appeals that reviewed the matter, signaling the possibility of reversing the current understanding.
As may be seen, although the discussion on the taxation of the amounts received as interest and adjustment for inflation due to the application of the Selic rate is not a new one for the courts of appeal, a future judgment on the matter by the Federal Supreme Court makes possible a change in the unfavorable understanding previously adopted.
It is incumbent on taxpayers to bring this discussion to the Judiciary to challenge the levying of the IRPJ and CSLL on amounts received in this regard when tax withheld in error is refunded or when judicial deposits are withdrawn.
[1] (TRF4, ARGINC 5025380-97.2014.4.04.0000, Special Court, opinion drafted by Otávio Roberto Pamplona)
[2] (REsp 1129538/PA, opinion drafted by Justice Honildo Amaral de Mello Castro, 4th Panel, decided on December 1, 2009, published in the Electronic Gazette of the Judiciary on December 14, 2009, and Resp 846.455/MS, opinion drafted by Justice Sidnei Benetti, 3rd Panel, decided on March 10, 2009, published in the Electronic Gazette of the Judiciary on April 22, 2009, among others).
[3] (AgRg no Resp 1264669/PR, opinion drafted by Justice Massami Uyeda, 3rd Panel, decided on October 4, 2011, published in the Electronic Gazette of the Judiciary on October 14, 2011)
[4] (Special Appeal 1431112/RS, opinion drafted by Justice Regina Helena Costa, 1st Panel, decided on August 23, 2018, published in the Electronic Gazette of the Judiciary on August 31, 2018)
- Category: Real estate
Signed on March 23, 2016, Law No. 16,402/16 governs the subdivision, use, and occupation of land in the municipality of São Paulo (Zoning Law). In relation to the previous law, it has brought in a series of changes, such as the establishment of maximum size limits for lots, reduction in the requirement of car parking spaces, minimum number of bicycle parking spaces, widening of sidewalks, and expansion of special environmental protection areas.
But with no doubts one of the most debated points of the Zoning Law during the last few months was article 162, which stipulates, as a rule of transition for the law, that the processes for licensing construction, building, and activities and projects for subdividing lots, filed until March 22, 2016 (date of publication of the law) will be reviewed under the aegis of the previous urban planning law, in force at the time of the filing of the administrative application, and not the legislation in force at the time of its review, thus respecting the called "right of filing".
The matter is definitively not settled and was legally challenged by the Attorney-General's Office of the State of São Paulo, which filed on February 21, 2018, a direct action of unconstitutionality (ADIN) questioning the application of the right of filing (also provided in the Strategic Master Plan of the City of São Paulo), arguing that it violates relevant environmental issues and authorizes the execution of real estate projects that do not meet the urban planning requirements of the current legislation.
Initially, on February 26, 2018, the suspension of article 162 was granted in an injunction, which paralyzed a large number of administrative proceedings filed in the City of São Paulo. However, on May 16, 2018, the injunction was overturned by the Special Entity of the Court of Appeals of the State of São Paulo with 16 votes against 7.
The session of judgment of the ADIn, originally scheduled for March 20, 2019, was suspended after a decision was handed down by appellate judges Getúlio Evaristo dos Santos Neto, Pereira Calças and Xavier de Aquino of the Court of Appeals of the State of São Paulo (TJ-SP), to be resumed on March 27 of this year.
With 17 in favor and 8 against, the right of filing provided in the Zoning Law and in the Strategic Master Plan of the City of São Paulo was ruled constitutional. The decision of TJ-SP, which is not definitive, ensures, for the moment, that the projects will continue to be evaluated and approved in accordance with the legislation in force at the time of their filing.
The judgment guaranteed more certainty for real estate developers, whose projects were drafted and filed under the aegis of the previous law, but will actually be brought to an end while the Zoning Law is in force, a situation that, however, will continue to suffer strong opposition from the urban planning sector.
The discussion is not exhausted, however, with the decision on the ADIn and, certainly, the Attorney-General’s Office will appeal to the higher court in order to safeguard its rights and reverse the current understanding on the matter. Meanwhile, the Municipality of São Paulo will maintain the analysis and approval of real estate licensing, respecting the provisions of the Zoning Law on the right of filing and thus giving more predictability and certainty to the sector.
- Category: Social security
Supplementary pension entities are created with the purpose of managing financial assets of third parties, seeking better income for their investments that ensure the granting of retirement benefits.
As such, supplementary pension entities are managers of third-party funds, with no income or profit, since any surplus ascertained must be fully transferred to the pension plans.
In this context, just as these entities do not make profit, since, by law, they have to revert their surpluses into the pension plans themselves, when there is a deficit, those responsible for settling it are also the beneficiaries.
Lately, the news articles that supplementary pension entities have shown deficits in their accounts have been frequent. Regardless of the reasons for these results, the fact is that both normal and extraordinary contributions are identical in nature, since both are designed to shore up the solidity and financial health of these entities so that their associates may, at the time, enjoy the benefits of supplementary retirement.
Therefore, the mandatory distinction made by the Federal Revenue Service of Brazil (RFB) in the tax treatment of these normal and extraordinary contributions is absolutely misplaced. In repeated responses to consultations, like Cosit No. 354/17, the RFB has taken the position that only normal contributions could be deducted from the calculation of individual income tax.
In order to find grounds to validate this forced and haphazard differentiation in the tax treatment granted to normal and extraordinary contributions, the RFB maintains that:
"Thus, per the principle of strict legality in tax matters (paragraph 6 of article 150 of the Federal Constitution of 1988), it is found that the contributions discounted from the amounts paid as supplementary retirement, by private supplementary pension funds, intended to defray deficits, cannot be deducted from the individual income tax calculation basis. These contributions do not have the same nature as that of normal contributions.”
In our understanding, it is impossible to integrate the legal norm with a purpose to merely collect taxes. In effect, Complementary Law No. 109/2001, when dealing with the modalities of contributions to supplementary pension entities, makes no distinction as to the nature of the contribution.
On the contrary, in passing the complementary law, the legislature stated that contributions intended to create reserves are classified as normal or extraordinary, both of which " will have the purpose of providing for payment of retirement benefits":
“Article 19. Contributions intended for the creation of reserves will have the purpose of providing for the payment of retirement benefits, observing the specificities set forth in this Complementary Law.
Sole paragraph. The contributions mentioned in the head paragraph are classified as:
I - normal, those intended for paying the benefits provided for in the respective plan; and
II - extraordinary, those intended for the payment of deficits, past service, and other purposes not included in the normal contribution.”
As set forth in the text, normal or extraordinary contributions are species of the same genus. Both are designed to keep the entity healthy and in order, because only then may their associates benefit from the pensions that they long for desire.
Also in the tax law that grants the deductibility of contributions to supplementary pension plans there is no distinction between normal and extraordinary contributions. When dealing with deductible payments in determining the calculation basis for the individual income tax, Law No. 9.250/95 thus establishes:
“Article 4. In determining the calculation basis subject to the monthly levy of income tax, the following may be deducted:
(...)
V - contributions to private pension entities domiciled in the country, whose burden has been that of the taxpayer, intended to pay for complementary benefits similar to those of Social Security;”
It is concluded, therefore, that these contributions, normal or extraordinary, are species of the same genus, since both are intended to "provide the payment of retirement benefits."
That being the case, there has been an intense race to the Judiciary to recognize the deductibility of extraordinary contributions to cover deficits incurred by private pension entities, observing the percentile allowed by the legislation (e.g., 12% of total income computed in the determination of the calculation basis of the tax due, according to article 11 of Law 9,532/97).
Some decisions handed down by several judicial sections of Brazil have already ruled out the non-deductability of these extraordinary contributions, such as that handed by Appellate Judge Ângela Catão, of TRF-1st Circuit {Federal Court of Appeals of the 1st Circuit}:
"Therefore, no income tax is levied on the amounts paid to the fund in the form of extraordinary contributions instituted as a result of the plan's deficit, since it does not create an increase in equity, such that taxpayers are entitled to deduct the respective amount from the income tax calculation basis.”
In the same sense, the National Harmonization Panel of the Special Federal Courts (TNU) established that " contributions by the beneficiary for the reorganization of the finances of the closed-end private pension entity may be deducted from the income tax calculation basis, but within the legally established limit (article 11 of Law No. 9,532/97).”
Based on the foregoing, we believe that there are solid and consistent legal grounds for overruling the limitations on the deductibility of extraordinary contributions paid to supplementary pension entities.
- Category: Corporate
Presidential Decree No. 876, published on March 14 of this year, amended Law No. 8,934/1994, which deals with the public registration of business companies, among other matters. The main change was the inclusion of new paragraphs in articles 42 and 63 of the law, which, for the most part, aim to create mechanisms that accelerate the process of creation and registration, especially for limited liability companies and sole proprietor limited liability companies (Eireli). According to the explanatory memorandum of MP 876, the measure "is consistent with the need to reduce red tape and the number of days to form a company in Brazil."
According to the new wording of Law No. 8,934, articles of incorporation for individual entrepreneurs, limited liability companies, and Eirelis must be recorded with the competent board of trade automatically, provided that: (i) prior consultations on the feasibility of the business name and viability of location are approved; and (ii) the standard incorporation template established by the National Department of Business Registration and Integration is used. By means of automatic authorization to record the incorporation act, the registration numbers with the National Register of Corporate Taxpayers (CNPJ) and the state registration of the competent revenue service must also be issued, when this body is prompted by the board of trade, and according to the corporate purpose of the business entity subject to registration.
Within two business days, counting from the automatic authorization to record the incorporation act, the board of trade must review the legal formalities of the process and, if there is an insurmountable error, the registration must be canceled, together with the enrollments issued. If a curable defect is identified, the board of trade must specify the relevant requirements, which shall not affect the registration granted.
It should be clarified, however, that, depending on the corporate purpose designated for the business entity, the automatic authorization to record incorporation acts referred to in MP 876 presupposes fulfillment of prior procedures with environmental, state, municipal, and regulatory bodies, among others, which may take some time.
In addition to the automatic authorization mechanism, MP 876 brought in new wording for Law No. 8,934 so as to establish that authentication of documents presented to the board of trade will be waived when a lawyer or accountant of the interested party affirms, under personal liability, the authenticity of the copy of the respective document. The explanatory memorandum of MP 876 claims that this amendment "meets the ideals of simplification and de-bureaucratization, while reducing the possibility of fraud or at least facilitates holding those responsible criminally liable in the event that it occurs."
The intention to reduce red tape of business registration in Brazil and to reduce the time for forming companies is commendable and necessary, but the effectiveness of this measures will depend on the adaptation of the boards of trade. The presidential decree produces immediate effects, but depends on the approval of the National Congress in order to be converted definitively into law. Its term of duration is 60 days, extendable once for the same period.
- Category: Intellectual property
With the approval of Law No. 13,709/2018, the Brazilian General Data Protection Law (LGPD), practically all sectors of the economy, both public and private, must take measures to adapt their activities to the new legal requirements regarding the processing of personal data.
One of the sectors that will be most directly affected by the new law will be advertising and marketing, especially in relation to the targeted advertising model based on behavioral analysis, that individualizes and segment thesegments ads according to target-audience profiles.
To create these profiles, it is necessary to process a large volume and a wide variety of data, such as Web browsing history, use of App usage, shopping habits, geolocation data, IP address, network data, registration of date and time of therecords for actions performed actions, time spent on each page, links clicked, and searches performed.
NowadaysCurrently, these data are usually collected and processed freely, often without the consent or even the knowledge of the data subjects (i.e., the person to whom the data refer). In some cases, the argument for this practice is that such data are not, strictly speaking, personal data, since they are not able to identify a person, despite the definition provided in article 14 of Decree No. 8,771/2016, which provides for the regulationregulations of Law No. 12,965/2014 (the Brazilian Civil Rights Framework for the Internet). This model, however, will need to be revised to adjust to the LGPD, which will come into effect in August 2020.
Under the new law, the processing of personal data may only be performed in one of the ten hypothesisscenarios provided for in its article 7.[1] In addition, it will be necessary to take into account the provisions of article 12, paragraph 2 of the LGPD, according to which the data used to form the behavioral profile of a particular individual, if identified, may be considered a personal data.
It should be noted that none of the legal basis that legitimize processing of personal data has a preponderance or greater importance in relation to the others, and a case-by-case analysis must be carried out in order to identify the one that best suits a particular situation.
The analysis of this article is limited to the hypothesisscenarios of items I and IX (the consent of the data subject and the legitimate interest of the controller), because they are the most commonly invoked to substantiate the processing of data for the purposes of behavior analysis and targeted advertising. Other hypothesisscenarios would very rarely apply for this purpose.
Regarding the legitimate interest of the controllers, the LGPD expressly states that they may only substantiate the processing of personal data for legitimate purposes, including, for example, support and promotion of the controller’s activities (i.e., the person responsible for the decisions concerning the processing of personal data), provided that such treatment does not entail a disproportionate violation of the fundamental rights and freedoms of the data subject.
Thus, it would be possible to question legitimate interest as a legal basis for the processing of personal data for the purposes of behavioral analysis and the provision of targeted advertising, since, by the very nature of the data, the respective collection and treatment could be considered too intrusive, disproportionately violating the privacy and intimacy of their data subjects.
A recent decision in this sense was handed down by the French National Data Protection Commission (CNIL), which ordered Google to pay a fine of 50 million euros on the grounds that the company processed data for the purposes of behavioral analysis and targeted advertising without adequate grounds based on one of the authorizing hypothesisscenarios for authorization provided for in the GDPR (the European General Data Protection Regulation, which inspired the LGPD).
According to CNIL, "if the large volume of data processed allows to ascertain the massive and intrusive nature of the performed processing performed, the very nature of some of the data described, such as geolocation or content consulted, reinforces this understanding. Taken in isolation, it is likely that collecting each of these pieces of data will accurately reveal many of the most intimate aspects of people's lives, including their lifestyle, their tastes, their contacts, their opinions, or even their travels. The result of combining these data reinforces considerably the massive and intrusive nature of the processing operations in question."[2]
In the light of this understanding, it seems to us, in principle, that, although legitimate interest may be used as a legal basis for the collection and processing of more specific and less invasive data, when it comes to massive processing of large amounts of data of a more intrusive nature, such as is the case of Google, it is more advisable to obtain prior consent from the data subjects as a legal basis for the processing operation performed for behavioral analysis and targeted advertising. However, as already pointed out, the choice of the legal basis to substantiate the data processing must always be made on a case-by-case basis, analyzing, among other issues, the type and quantity of data collected, the feasibility of obtaining consent, and the risks arising from each choice.
The LGPD establishes that consent as a legal basis for the data processing must be free, informed, and unequivocal, in addition to being provided in writing or by other means that demonstrate the intention of the data subject, otherwise it will not be considered valid. Consent must also relate to specified purposes, such that generic authorizations for the processing of personal data are considered void.
In other words, for the consent to be considered valid and therefore capable of legitimizing the data processing, it is essential that the data subject have easy access to information on the processing, which should be made available in a clear, appropriate and ostensiveprominent manner, including information about the types of data processed, the specific purpose of the processing, the form and duration of the processing, the identification of the controller responsible for the processing decisions, the resulting consequences, the impacts on the data subjects, and the degree of intrusion in their private lives.
In the case of Google mentioned earlier, CNIL found that the consent obtained was not valid, since the information regarding the processing were spread out across various documents, which made access difficult for the data subjects. In addition, the information was too generic, and this prevented the data subjects from understanding with sufficient clarity the particular consequences of the processing and evaluating the extent of the processing and the degree of intrusion into their private lives.
CNIL also found that, in order for the consent to be considered valid, it would require a positive act by the data subject, not just pre-selected opt-ins. I.e., according to CNIL’s understanding, it is imperative that the data subjects themselves select the checkbox, expressly providing their consent.
Lastly, CNIL reiterated that the consent should be given in a specific and separate manner for each processing purpose (through specific and separate opt-ins for each purpose), which means that selecting one single “I agree” checkbox regarding the whole privacy policy is considered too generic and, therefore, void. In relation to this point, it should be emphasized that the LGPD, unlike the GDPR, only requires specific consent in exceptional situations (such as in the case of processing of sensitive data or international transfer of data). Thus, in theory, there is nothing in Brazilian law that prevents a single “I agree” with the whole privacy policy.
Although this CNIL decision was reached on the basis of the GDPR, it constitutes a very relevant precedent, which may be used as an interpretative benchmark for the application of the LGPD, bearing in mind the similarities and differences between the two legislations.
It is, therefore, of the utmost importance that targeted advertising and marketing companies carefully monitor the issues discussed in this article and adapt their activities to the new requirements of the LGPD, in order to ensure that the processing of personal data carried out by them is always based on one of the legal hypothesis,provisions, in order to avoid the application of sanctions, which include fines of up to 2% of the total revenues of the company, group, or conglomerate in Brazil, in its last fiscal year, limited to R$ 50 million per infraction.
[1] Article 7. The processing of personal data may only be carried out in the following hypothesisscenarios:
I - upon the provision of consent by the data subject;
II - for the fulfillment by the controller of a legal or regulatory obligation;
III - by the public administration, for the processing and shared use of data that are necessary for the execution of public policies provided for in laws, regulations, or based on contracts, agreements or similar instruments, subject to the provisions of Chapter IV of this Law;
IV - to carry out studies by a research body, therein guaranteeing, wherever possible, the anonymization of personal data;
V - when necessary for the execution ofperformance under a contract or preliminary procedures relating to a contract to which the data subject is a party, at the request of the data subject;
VI - for the regular exercise of rights in judicial, administrative, or arbitration proceedings, in accordance with Law No. 9,307, of September 23, 1996 (the Arbitration Law);
VII - for the protection of life or physical safety of the data subject or a third party;
VIII - for the protection of health, in the context of a procedure performed by health care professionals or health authorities;
IX - when necessary to meet the legitimate interests of the controller or a third party, except in cases in which the data subject's fundamental rights and freedoms require the protection of personal data; or
X - for the protection of credit, including as set forth in the provisions of the relevant legislation.
[2] Free translation. Original text: “Par ailleurs, si le très grand nombre de données traitées permet de caractériser à lui seul le caractère massif et intrusif des traitements opérés, la nature même de certaines des données décrites, telles que les données de géolocalisation ou les contenus consultés, renforce ce constat. Considérée isolément, la collecte de chacune de ces données est susceptible de révéler avec un degré de précision important de nombreux aspects parmi les plus intimes de la vie des personnes, dont leurs habitudes de vie, leurs goûts, leurs contacts, leurs opinions ou encore leurs déplacements. Le résultat de la combinaison entre elles de ces données renforce considérablement le caractère massif et intrusif des traitements dont il est question” (COMMISSION NATIONALE DE L'INFORMATIQUE ET DES LIBERTÉS (CNIL) - DELIBERATION No. SAN-2019-001 OF JANUARY 21, 2019).
- Category: Labor and employment
When one speaks of startups, one of the first things that comes to mind is the informality of the work environment compared to that of traditional businesses. Flexible work schedules and stripped-down offices, coupled with the possibility of rapid career advancement, are often startups’ greatest attraction in recruiting talent in the job market. However, not all informality is positive for business.
In the field of labor law, there is a hazardous informality on the part of startups related to the lack of structure in the hiring of labor, which may often expose the company to risks of recognition of an employment relationship.[1]
Although the differences between startups and the common business model are clear, there are no relevant distinctions from a purely labor standpoint, since startups need to follow labor laws from the very beginning of their creation even before they become operational, just like any company.
Early on, entrepreneurs needs to understand the best form of hiring for their business model, considering all the positions, from the top management to the operational team.
By top management, one means executives, that is, potential partners, directors, officers, and managers. These people are essential for the success of the business and indispensable in the idealization of the project, organization/structuring of ideas, and, thereafter, in the management of the startup. Thinking about reducing labor costs, many startups eventually include all these professionals as partners. However, not all of them qualify as such, and their inclusion in the corporate framework may attract unnecessary labor liabilities and hinder the attraction of investments or a potential sale. Only those professionals who incur the risks of the startup’s business should be included as partners.
Hiring official officers to be appointed in the corporate documents may be an alternative for management professionals. The absence of labor laws in this relationship guarantees parties greater freedom in negotiating the terms of the agreement between them.
Startups may also opt for other types of hiring for both managers and operational professionals, such as self-employed persons, legal entities (PJ), and third-party contractors, always remembering that the Labor Reform allowed the outsourcing of core business activity (a company’s main activity). However, if the requirements for an employment relationship have been met, especially direct subordination, are present, the outsourced party shall be entitled to receive all labor rights applicable to an employee.
The key here is also to analyze direct subordination regardless of the form of hiring, either for positions of formal officers to be appointed in the corporate documents or outsourcing (PJs, self-employed persons, and third-party contractors).
The hiring of official officers to be appointed in the corporate documents should be limited to de facto officers, who have autonomy within their area to make decisions, thus guaranteeing some degree of independence between them and the company.
Likewise, the use of self-employed persons and PJs should be limited to one-off/partial activities, without direct management/subordination, in order to ensure that workers without an employment relationship maintain their autonomy.
The Labor Reform also brought in another hiring alternative by allowing companies to start hiring on-demand professionals, so-called intermittent employees. As intermittent employees are paid only for the work performed, in proportion to the days and hours worked, this modality has proved to be a good option to meet specific demands or peak workload.
Therefore, in order to balance informality in the workplace with legal certainty, startups should analyze how best to hire labor, therein mitigating potential risks of direct subordination to those hired outside the system established by the Consolidated Labor Laws.
Click here to see the other articles in this series
[1] There is a risk of an employment relationship when the requirements of subordination, onerousness, habituality, and personality are present in the relationship held between the parties.