"Pejotização," Function Deviation, and Employment Relationship Requalification: Legal Risks and Business Impacts in Brazil Today

The Brazilian business environment has undergone significant transformations in labor relations, driven by economic shifts, technological advances, and new forms of productive organization. In this context, practices such as "pejotização" (the practice of hiring workers as legal entities—i.e., as if they were independent contractors operating through their own company—instead of formal employees) and function deviation (when an employee performs duties different from those they were hired for) have gained prominence, either as flexibilization alternatives or as strategies to reduce operational costs. However, these practices have increasingly come under legal scrutiny, especially given the rise in labor inspections, complaints, and court rulings that requalify civil-law arrangements as employment relationships governed by the Consolidação das Leis do Trabalho (CLT, Brazil's Labor Code).

Recent data presented by the Ministry of Finance during a hearing before the Chamber of Deputies highlight the significant fiscal impact of pejotização, underscoring state concern over the erosion of the tax and social security base. At the same time, the notable increase in function deviation complaints across various regions of the country reinforces the need for heightened corporate attention. This scenario demands that managers develop a strategic and legally grounded understanding of the risks involved, along with best practices to mitigate them.

Pejotização in Brazil: Concept, Limits, and Legal Repercussions

Pejotização consists of hiring workers through a legal entity (pessoa jurídica) in place of a formal employment relationship. Although Brazilian law permits the engagement of independent service providers, the problem arises when this structure is used to disguise what is actually an employment relationship—characterized by the elements set out in Articles 2 and 3 of the CLT, namely personal service, habituality, remuneration, and subordination.

The 2017 Labor Reform introduced greater flexibility into contractual relationships, but it did not eliminate the possibility of recognizing an employment relationship when the legal requirements are present. In this regard, case law from the Tribunal Superior do Trabalho (Superior Labor Court) and the Superior Tribunal de Justiça (Superior Court of Justice) has repeatedly affirmed that the contractual form does not prevail over the reality of the facts—a principle known as primazia da realidade (primacy of reality).

Additionally, the Conselho Administrativo de Recursos Fiscais (CARF, Administrative Council of Tax Appeals) has reviewed cases in which pejotização generates significant tax repercussions, particularly regarding social security contributions. Requalification of the relationship can result in retroactive tax assessments, fines, and charges, substantially increasing companies' financial liabilities.

The Ministry of Finance's recent statement reinforces this understanding by pointing out that pejotização can undermine tax collection, which is likely to intensify inspections and enforcement actions by the relevant authorities.

Function Deviation: Rising Complaints and Implications for Businesses

Function deviation (desvio de função) occurs when an employee performs duties different from those they were hired for, without a corresponding adjustment to their contract or salary. This practice, often overlooked in day-to-day business operations, has become the subject of growing litigation.

The significant increase in complaints in certain regions of the country reflects greater worker awareness and more assertive action by regulatory bodies. From a legal standpoint, function deviation can give rise to claims for salary differences, related effects on other labor entitlements, and even damages for moral harm, depending on the circumstances.

Labor case law has recognized that habitually performing different duties constitutes an unlawful unilateral contract change (alteração contratual lesiva), which is prohibited under Article 468 of the CLT. For companies, this represents not only a financial risk but also a significant reputational impact, especially in a landscape of greater transparency and public exposure.

Employment Relationship Requalification: Trends in the Higher Courts

The requalification of legal relationships has become a well-established trend in Brazil's higher courts. When reviewing cases involving pejotização, the Tribunal Superior do Trabalho has consistently applied the principle of primazia da realidade, recognizing an employment relationship whenever structural subordination is evident.

The Superior Tribunal de Justiça, for its part, has addressed the issue from a tax perspective, upholding tax assessments where contractual simulation is found. Meanwhile, the CARF has reinforced the possibility of disregarding legal entity status for tax purposes when the adopted structure is aimed solely at reducing charges.

This convergence between the labor and tax spheres increases legal risk for companies, which now face not only individual lawsuits but also administrative assessments with substantial financial impact.

Economic and Strategic Impacts for Businesses

The risks arising from irregular pejotização and function deviation go beyond the legal sphere, directly affecting business strategy. Requalification of employment relationships can generate significant labor liabilities, strain cash flow, and undermine a company's investment capacity.

Moreover, increased inspections and data cross-referencing by government agencies raise the likelihood that irregularities will be detected. Technological advances in the analysis of tax and labor data have enabled more efficient government enforcement, narrowing the room for informal practices.

From a corporate governance standpoint, adopting practices aligned with labor and tax legislation is essential to ensure sustainability and legal certainty. Companies that invest in labor compliance tend to reduce risks and strengthen their market position.

The current scenario shows that practices such as pejotização and function deviation, when adopted improperly, pose significant risks for Brazilian companies. The coordinated action of the higher courts, the CARF, and government agencies points to a trend toward greater rigor in analyzing these situations.

Given this context, it is essential for business owners and managers to adopt a preventive stance—reviewing contractual structures, adjusting internal practices, and seeking alignment with current legislation. A clear understanding of the legal boundaries and practical implications of these practices is essential for sound strategic decision-making.

Specialized legal counsel plays an important role in this scenario, helping identify risks, implement best practices, and build a safer and more sustainable business environment.