Groundbreaking decision on professional services engaged through individual legal entities

The Superior Labour Court (“TST”) has recently passed judgment on a public action by the Public Attorney’s Office, Labour Branch, against an exam clinic, aiming at the prohibition of hiring doctors as individual legal entities, instead of the traditional employment format.

The case is of special interest to legal study because of its thorough review of the still controversial clashing ideas: on one side, the criticism of “pejotiza??o"[1], on the other, the legitimate capacity of regulated professions to engage as independent contractors. Besides, the TST addresses the issue under the novel rule of the Laws 13,429/2017 and 13,467/2017 (the Labor Reform).    In sum, the TST decided that (1) in principle, it is not illegal to engage an individual legal entity to provide professional services of intellectual nature, even if such services are an essential part of the contracting company’s principal business; (2) such legal regimen shall be illegal if “subordination”[2] is detected on a case by case review; (3) after the Reform, all contracts under such legal format is permitted, without exception.    

The case had different judgments between lower court and court of appeals. The lower court judge rejected the claim on grounds of lawful outsourcing. Conversely, the Regional Court of Appeals, reversed the judgment and pronounced the agreements illegal while rejecting the notion of outsourcing (i.e. the agreement through an intermediary company). Instead, the Regional Court found that subordination was necessary because the engaged services (medical diagnosis) is essential to the contracting company’s business (clinic).

Although the Regional Court’s decision is an admirable criticism to the social impact of “pejotiza??o”, it failed to balance such criticism with other relevant elements.

The TST’s decision privileges the harmonization of such conflicting legal arguments by declaring that the engagement of an individual legal entity is not inherently prohibited and that the court shall review factual subordination on a case-by-case basis. Also, it declared that the new laws eliminated the core element of the criticism to “pejotiza??o” by making irrelevant whether the contracted services are essential to the contracting company’s business.

[1] Neologism designating the engagement of professional services through individual legal entities.

[2] Submission to administrative coordination, orders and disciplinary actions.