Franchising and Joint Employer Liability in Brazil
Under the Brazilian Labor Code, companies of the same corporate or economic group are construed jointly and severally liable for labor obligations.
By Luiz Henrique do Amaral
The joint employer doctrine has more recently become a critical issue for the franchising industry in many jurisdictions. In Brazil, such an issue has also come to the attention of franchisors due to recent labor actions by the employees of franchisees that attempt to seek compensation for labor liability from the franchisors regarding certain labor obligations and payments, which have not been duly paid by the franchisees.
In the past, there were court disputes against the franchisors alleging a labor relationship with the franchisees. Due to a clear provision under the Franchise Disclosure Act, such claims have been consistently set aside considering that franchisees are independent-business entrepreneurs and the franchise agreement should not constitute or result in a labor contract.
Nowadays, the issue has shifted. The current labor disputes have been prompted by employees of the franchisees suing the franchisors directly or jointly and claiming that the franchise agreement has a nature of a subcontract in that the employees of the franchisees operate in the benefit of the franchise system and the franchisors should be liable for labor claims together with the franchisees.
Disclosure Document Obligations
The Franchise Disclosure Act (Franchise Law 8.955) entered in force in July 1994 to establish the obligations of delivery by the franchisor of a franchise disclosure document (COF) to any prospective franchisee with information on the franchise and the business opportunity. This law does not regulate relationships or set forth liabilities on any of the parties.
Yet, it does contain a definition of franchise as “a system whereby a franchisor licenses to the franchisee the right to use a trademark or patent, along with the right to distribute products or services on an exclusive or semi-exclusive basis and possibly, the right to use the know-how related to the establishment and management of a business or operating system developed or used by the franchisor, in exchange for direct or indirect compensation, without, however, an employment relationship (Article 2).”
Under Brazilian Civil Code (Law 10.406), a co-liability is found when there is more than one creditor, each with the right to the whole debt and co-liability is not presumed, as it results from the law or the will of the parties (Articles 264, 265).
The Labor Court interpreting the above provision has been concluding that it expressly mentions that franchise does not characterize an employment relationship between franchisor and franchisees (or franchisee’s employees and franchisor), provided that no hierarchical subordination or control of the franchisee’s employees is carried out by franchisor.
Indeed, the Brazilian Labor Code stipulates that if one or more legal entities having an independent corporate identity are nevertheless carried on under the same direction, supervision or management, thereby constituting an economic group, the main legal entity and each of the subordinated legal entities shall be jointly liable for the purposes of employment relationships (Article 2, Paragraph 2º). Indeed, under the code, companies of the same corporate or economic group are construed jointly and severally liable for labor obligations.
Definitions of Terms
Following such understanding, it is important to highlight the definitions of the terms of “control,” “direction,” “supervision,” and “management,” according to the Brazilian Labor Courts’ standpoint:
Control: (i.) When a company holds the majority of the shares of another; (ii.) when there are common employees, administrators, directors or shareholders among the companies; or (iii.) when the companies operate in the same place or have the same economic purpose.
Direction: Consists of the real-ization of control through the directive power of the employer conducting the economic activity to achieve its goals.
Management: It is characterized when a company has organizational interference in another company.
Supervision or Coordination: It consists of the interference of the company or its partner(s) on the activities and purposes of another company, being sufficient the existence of a relational nexus between these companies and the community of interests, characterized by the composition of members of a company as shareholders of another company, interconnection of economic activity, and use of the same employees in order to achieve its objectives.
Jurisdiction of Labor Courts
Brazilian Labor Courts are federal courts established exclusively to analyze legal issues related to employment and labor relationships and have the competent jurisdiction to appreciate individual labor claims and collective labor claims.
Generally, Brazilian Labor Courts commonly consider companies of the same corporate and/or economic group, their shareholders and management boards and individuals (officers and directors) liable for labor obligations of employees.
In practice, when an employee files a labor claim against a company which is a member of corporate or economic group, Brazilian Labor Courts commonly disregard legal entities and find them as belonging to the same corporate and/or economic group.
Recent research of the Brazilian Superior Labor Courts’ cases show that the excessive interference or control of the franchisor in connection with the franchisee's business and management may determine joint liability of the franchisor regarding the franchisee's employees.
In such cases, franchisors determining working hours of the franchisee’s employees and the amount to be paid, selection or approval of the franchisee’s employees or even when the franchisor directly manages the franchisee’s business by selecting management individuals, may be considered as examples of excessive control or interference.
The research also demonstrated that the interference of the franchisor in the franchisee's business management may disguise an outsourcing relationship and recognize the secondary liability of the franchisor, in certain cases (depending upon the level of interference).
Labor Class Actions
Labor class actions are available by labor unions and the Federal Prosecution Office aiming to avoid any violation of labor rights of a specific category of employees and the ruling on such class actions must be applied to all employees of this specific category.
The precedents on class actions concerning franchising show claims usually filed against franchisors and franchisees for recognition of employment relationships, due to excessive overtime, collective mental distress claims, non-payment of wages or benefits.
The class action filed against McDonald’s by the Federal Prosecution Office in Brazil is considered an example of this sort of collective claims and was influenced by international movement of unions around the world and sought to force the franchisor to recognize the violation of Brazilian Labor Law by franchisees.
The Brazilian master franchisee of McDonald’s and Federal Prosecution Office have executed a settlement, called Term of Adjustment of Conduct, in which the franchisor has undertaken to adjust the situation of McDonald’s franchisees’ employees and forced the change in labor practice by the entire franchise chain.
The above scenario allows us to conclude that Brazilian Labor Courts tend to find a labor joint liability by franchisors regarding franchisees’ employees, in the event there are excessive control practices that would result in labor interference, such as working hours’ determination, wage fixing and selection and training of employees.
New Franchise Act Proceeding
In an attempt to prevent such joint employer liability in franchising, the Brazilian Franchise Association (ABF) has been supporting a bill for a new franchise act under discussion in Congress. This bill has passed in the House of Representatives and now proceeds in the Senate with a positive perspective of approval.
This bill has an express provision to solve the issue: “a franchise shall not characterize a consumer relationship, ‘economic group,’ nor characterize an employment relationship, between the franchisor and the franchisee or the franchisee’s employees, even during the training period.”
The expectation is that with the passage of this bill and the enactment of a new Franchise Disclosure Act, the instability and legal risks concerning the franchising activity in relation to the joint employer doctrine will be solved and put definitively to rest.
Luiz Henrique do Amaral is a specialist in Intellectual Property matters in Brazil. He is an expert in franchising, serving as an advisor for numerous national and foreign franchises.