On March 16, 2007, Law 11,457 (the "Super Revenue" Law, as it is commonly referred to) was published, creating the Federal Revenue Service of Brazil (Receita Federal do Brasil) by uniting the taxes and contributions administered by the former Federal Revenue Service (Receita Federal) with collection of contributions owed to the National Social Security Institute (Instituto Nacional de Seguro Social – INSS). While Law 11,457 was being debated, the Federal Senate proposed Amendment 3, under which the social security agents could not make determinations as to the employment status of workers in the course of audits. This prerogative would fall within the exclusive jurisdiction of the courts, according to the text of the amendment.
As it happens, Amendment 3 was vetoed by the President of the Republic, on the grounds that it would offend the separation of powers since, in theory, the action of the executive branch of government would be subordinated to authorization granted by the judicial branch. The question then is: by declaring a person to be an employee in the course of an audit, wouldn’t the executive branch be usurping a power that belongs to the judicial branch of government?
The courts have not yet formed a consistent opinion on the question. In an appeal in 2005, the Superior Court of Justice (Superior Tribunal de Justiça – STJ) took the position that the social security authorities enjoy full powers to determine whether a person is an employee. It is important to recall that up to the end of 2004, all legal proceedings involving this matter were brought before the federal courts. However, this jurisdiction was transferred to the Labor Courts under Constitutional Amendment no. 45, and as a result the specialized courts now deal with this matter. It seems likely that the Labor Courts will take a different view from the STJ.
In fact, even after Amendment 3 was vetoed, the Labor Courts began to issue judgments finding that the social security authorities had no powers to determine the employment status of a worker during the course of an audit. For example, the Section of the Superior Labor Court (Superior Tribunal do Trabalho, Brazil’s highest court in labor matters) that specializes in individual dispute recently found that when the social security authority determines that a freelance worker is in fact an employee, and that the status of an "independent worker" is simply a façade, in effect it is determining that there is an employment relationship between the service provider and the contracting company, an action that "is obviously an exercise of judicial power, assigned exclusively to the Courts".
The position taken by the Superior Labor Court reflects the effervescent climate in the Congress, where representatives and senators are busy organizing bills to replace Amendment 3, so as to give the courts exclusive powers to determine when service contracts are simply shams, and, consequently, that the service provider is in fact an employee.
There is a third position, which still does not have much support, that distinguishes audits by the INSS from inspections carried out by the Labor Ministry. In this school of thought, although labor standards inspectors do not have the power to determine whether a worker is an employee, social security auditors do not suffer the same limitation, given the veto of Amendment 3.
The question is still very much open to discussion. In practice, companies with sufficient resources are challenging arbitrary decisions by social security agents in the labor courts to invalidate assessments of social security contributions on the grounds that service providers are de facto employees.
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