Brazil's Finance Minister, Dario Durigan, on Monday (Aug. 24) defended cracking down on the practice known as pejotização as a way to contain the country's growing Social Security deficit. He made the remarks in an interview with Broadcast, the real-time news service of Agência Estado, speaking once again as a representative of President Luiz Inácio Lula da Silva's reelection campaign, according to G1. Lula is seeking a fourth term.

Pejotização is the systematic hiring of workers as legal entities (from pessoa jurídica, or PJ) instead of formal employees with registered contracts. The model is legal in many activities, but it becomes controversial when used to replace the formal employment ties set out in Brazilian labor law. According to Durigan, studies show some companies have moved formally hired workers into PJ arrangements, which would be deepening the pension system's shortfall. Some of these workers are hired as individual microentrepreneurs (MEI), a status that carries a reduced social security contribution.

Durigan said the economic team is studying a rule that would cap the share of a company's workforce hired as contractors:

"We could have a rule in the country setting a percentage of what a company hires as contractors. If it is 10%, the company is outsourcing a service, that is within the rules of the game, it is ok. Now, a company that has 80% of its workforce as contractors could eventually be required to pay a social security contribution to level the field and offer its workers a future that is a bit more protected from a social welfare standpoint."

According to the minister, such a proposal could be sent to the National Congress in a possible new Lula administration. "We have already had some debates along these lines", he added.

Labor minister raised the issue in June

Labor Minister Luiz Marinho had already addressed the issue. In late June, he said the MEI status cannot be used for labor fraud and that a microentrepreneur cannot have the characteristics of a formally employed worker. As an example, he cited a hospital that bids out the outsourcing of a service whose contractor then hires MEIs as de facto employees. According to Marinho, the practice could drain resources from Social Security, from the FGTS (an employer-funded severance guarantee fund) and from the so-called Sistema S, a network of training institutions such as Senai, Sesi and Senac financed by payroll contributions.

At the time, Marinho said he hoped the Supreme Federal Court (STF), which is hearing a case on pejotização in the economy, will not allow this kind of hiring. "We cannot use the MEI as labor fraud, the person must be an entrepreneur", he told journalists.