Brazil: Highest Labor Court Clears Franchisor from Vicarious Liability for Employment Law Obligations

In a recent decision, Brazil’s Superior Labor Court (“Tribunal Superior do Trabalho” or “TST”), the highest labor court in the nation, unanimously held that a franchisor was not vicariously liable for the franchisee’s alleged non-compliance with employment obligations.  This decision (docketed as Case No. TST-RR-1170-78.2011.5.03.0077) represents a decisive victory for employers. 

Under Brazilian law (Law 8.955/94), a franchise is the system through which a franchisor assigns to a franchisee the right to use the trademark or patent, distribute exclusively or semi-exclusively the products and services, and use the technology of implementing and managing the business or the operational system developed or owned by the franchisor, with direct or indirect compensation, but without creating an employment relationship.  Franchising, therefore, allows for a shifting of the legal responsibility from the franchisor to the franchisee (i.e., the operator of the franchised business) where the franchisee exerts the control over the acts or omissions that allegedly caused the injury. 

In the U.S., however, the National Labor Relation Board (“NLRB”) is taking a different approach.  As we recently reported, the NLRB, the U.S. federal agency charged with, among other things, enforcing federal laws that protect the right of employees against unfair labor practices, recently authorized the issuance of a formal legal complaint against a franchisor and some of its franchisees, for alleged unfair labor practices.  The Board is currently investigating the charges, but the franchisor may be charged as a joint employer should a complaint be issued.  If the NLRB adopts this position, it would represent a direct attack on franchise law in the United States, holding the gates wide open for third parties to bring claims against franchisors, holding them vicariously liable for the injuries caused by the franchisees. 

In contrast, Brazil's TST has been consistently siding with franchisors on the theory that the franchisor-franchisee relationship is not grounded on a dependent relationship.  The TST recognizes that franchisees run their business independently from franchisors.  Generally, the agreement between these two parties grants the franchisees the right to hire, fire, and manage their workforce, and shifts the operational risks inherent in the business to the franchisees.  While the franchisor is entitled to set standards and guidelines for the franchisees and generally provides systems and technology for the franchise, the franchisor generally is not allowed to directly interfere in the day-to-day operation of the franchise. 

The fact that the TST upholds the independence of these parties in their relationship is particularly interesting for Brazil because the labor courts have labeled some business arrangements as “outsourcing” and have imposed subsidiary liability.  Because Brazilian law does not regulate outsourcing, its legality and reach currently are being shaped by court decisions that in part are inconsistent one from the others.  Given the uncertainties about the legality of certain outsourcing arrangements, companies that outsource certain parts and functions of their business frequently face claims of direct employment from outsourced employees, as well as moral damages for illegal outsourcing. 

The outsourcing debate continues in Brazil, but at least franchisors seem to be safe from vicarious liability for the time being.

Information contained in this publication is intended for informational purposes only and does not constitute legal advice or opinion, nor is it a substitute for the professional judgment of an attorney.