Outsourcing: a new paradigm

Legal background
Unconstitutionality of Precedent 331
Comment

In a recent decision, the Supreme Court addressed an important question relating to the day-to-day activities of companies operating in Brazil: is the outsourcing of services allowed without restriction or should it be limited to non-core business activities, as set out by Precedent 331 of the Superior Labour Court?

Legal background

In 1986, in the absence of specific legal rules governing the outsourcing of services in general, the Superior Labour Court, after repeated decisions, concluded that only non-core business activities could be outsourced in Brazil, resulting in Precedent 256.

In 1993 Precedent 256 was replaced with Precedent 331, which, despite being updated periodically by the Superior Labour Court, continued to allow outsourcing that involved non-core business activities.

Consequently, any company that outsourced services relating to its core business activities could be liable for the payment of awards granted to an employee of an outsourcing services company in the context of an employment lawsuit filed by such employee as if it had been the direct employer of such employee.

However, Precedent 331 did not preclude discussions on outsourcing arrangements in Brazil because it did not propose a specific test to determine what activities can be considered 'non-core business activities'. As a result, regional labour courts and labour judges had too much leeway to interpret Precedent 331, which gave rise to an undesired level of subjectivity in decisions, inequal treatment of parties in identical situations and, ultimately, legal uncertainty.

Unconstitutionality of Precedent 331

The constitutionality of Precedent 331 was therefore challenged before the Supreme Court. It was argued that limiting outsourcing to non-core business activities was a violation of various constitutional principles, including those that guaranteed companies the right to:

• freely organise their activities in a competitive market (ie, the economic freedom and free competition principles); and
• act in a way that was not expressly prohibited by law (ie, the strict legality principle).

As such, the limitation imposed by Precedent 331 represented an unconstitutional interference of the judiciary branch in the means of production, since the Constitution does not determine that companies must adopt a specific business model to carry out their activities (and therefore does not prevent them from relying on outsourcing arrangements).

Critics of outsourcing argued that the lack of restrictions on outsourcing would lead to:

• poorer working conditions;
• lower compensation for outsourced employees; and
• weaker trade unions.

However, the Supreme Court agreed that there is no preset business model under which companies must carry out their activities in the Constitution; therefore, the adoption of flexible business strategies such as outsourcing is constitutional. The court also held that there is no rationality in the differentiation between core and non-core business activities that could justify limiting outsourcing arrangements to non-core business activities.

Moreover, the Supreme Court added that if it was assumed that poorer working conditions were an inexorable consequence of outsourcing arrangements, it would make no sense to allow the outsourcing of non-core business activities while prohibiting the outsourcing of core business activities, as both (by definition) could be detrimental to employees and therefore banned.

Based on these considerations, the Supreme Court concluded that a direct correlation between outsourcing and poorer working conditions could not be established.

The Supreme Court also remarked that parties' freedom to hire employees (whether in the context of outsourcing arrangements or not) would always be strictly limited by the Constitution: all employees, including those of an outsourcing services company, will be entitled to basic rights that cannot be waived in any circumstances, including a minimum wage, holiday allowance and weekly time off. Accordingly, the assumption that the employees of an outsourcing services company would be deprived of basic rights could not be made and was unwarranted.

Therefore, the Supreme Court considered that a generic prohibition on the outsourcing of core business activities based on a court's interpretation of 'core business activities' and 'non-core business activities' interfered with economic freedom and free competition, thereby creating – in violation of the strict legality principle – a prohibition not set out by law which would limit the ability of businesses to organise themselves freely.

Comment

This decision is relevant because it will affect the standards adopted by the Brazilian labour courts in relation to outsourcing. It also brings greater legal certainty by eliminating the leeway of labour judges to determine whether a defendant's activity can be considered part of its core business (when there are no objective legal parameters to do so), which, as highlighted above, has resulted in anti-isonomic treatment for companies and individuals that have litigated this matter in courts, as well as unnecessary litigation.

From a practical standpoint, the Supreme Court's decision affects all pending lawsuits in which Precedent 331 has been used as a basis to establish a direct employment relationship between the employees of an outsourcing services company and the companies retaining such outsourced services.

Further, the decision conceptually reinforces Law 13.429/2017, which expressly states that there is no employment relationship between the workers or shareholders of service vendors and a company that retains such vendors. Given the contents of Precedent 331, the legal community wonders how the Superior Labour Court will react in such cases.

However, this decision does not mean that unrestricted outsourcing is free of legal risk in Brazil.

The Superior Labour Code maintained that if a relationship meets the code's requirements – notably, the subordination of the individual to a company or another individual – an employment relationship between the parties will exist.

Further, while companies that outsource services should not, by default, risk being held directly responsible for honouring the employment rights of employees of companies to which they outsource services, they are still liable to do so if such companies do not (secondary liability).

Companies that rely on outsourced services must also monitor the economic capacity of the companies that they retain to ensure that they comply with all of the obligations resulting from the employment relationships with their employees. Companies in Brazil must therefore continue to exercise caution when outsourcing activities to third-party employees.

For further information on this topic please contact Patricia Barboza or Luiz Paulo Pieruccetti at CGM Advogados by telephone (+55 11 2394 8900) or email (patricia.barboza@cgmlaw.com.br or luiz.pieruccetti@cgmlaw.com.br). The CGM Advogados website can be accessed at cgmlaw.com.br.