Today, May 7, 2015, is the deadline for employers to incorporate outsourced workers into the company's payroll, as required by the Venezuelan Labor Law for Workers (known as LOTTT, for its Spanish-language acronym), enacted in 2012. Among other changes that LOTTT enacted, it severely restricted the practice of outsourcing in Venezuela and imposed on employers an obligation to absorb into their payroll all workers performing activities or services that had been outsourced, regardless of whether the workers initially had been hired by a third party.

Prohibition against Outsourcing

The LOTTT defines outsourcing as deceit or fraud committed by an employer with the intention of distorting, ignoring or obstructing the application of Venezuela's employment laws. To that effect, the LOTTT prohibits the following activities, which are considered outsourcing:

  1. Hiring a legal entity to perform works, services or activities that are permanent in nature, to be performed within the facilities of the contracting company. Such activities must be directly related to the core business of the contracting company, such that if they were not performed, the contracting company's operations would be interrupted or affected;
  2. Using intermediary companies to hire workers in order to evade the contracting company's obligations derived from the employment relationship;
  3. The employer forming legal entities to evade its labor obligations;
  4. Entering into fraudulent contracts or agreements, under the civil or commercial law, with the intention to disguise the labor relationship; and
  5. Any other form of labor-related deceit or fraud.

The Use of Contractors

While outsourcing is prohibited, the LOTTT permits contractors (whether natural persons or legal entities) to perform work or services under contract, as long as they utilize their own resources. The law also allows contractors to hire their own personnel, as long as the personnel work under the contractor's control and supervision.

However, under the law, the contractor (as the service provider) and the contracting company (as the entity benefitting from the services) are deemed to be jointly and severally liable for any obligations owed to the contractor's workers if the activity or service that the workers are performing closely relates to or is of the same nature as the activity in which the contracting company is engaged. The joint and several liability also applies if it is determined that the contractor's work for the contracting company constitutes the contractor's main source of profit. Likewise, the contracting company is subject to such liability regarding a subcontractor's workers, even if the contractor was not authorized to hire the subcontractor to perform the work.

The practical implication of the joint and several liability is that the workers hired by the contractor or subcontractor are entitled to receive the same benefits to which the contracting company's employees would be entitled.

Practical Implications of Outsourcing

Under the LOTTT, entities engaged in outsourcing are required to do as follows:

  1. The company benefitting from the outsourced services must incorporate the outsourced personnel into the company's payroll by May 7, 2015;
  2. Outsourced personnel are entitled to receive the same compensation and benefits that are paid to the employees of the company benefitting from the outsourced services;
  3. Outsourced personnel are protected from dismissal until they are incorporated into the payroll of the company benefitting from the services; and
  4. Entering into fraudulent contracts or agreements, under the civil or commercial law, with the intention to disguise the labor relationship; and
  5. The company benefitting from the services will be considered the actual employer of the outsourced personnel.

Recommendations

Companies should bear in mind that having hired a contractor to perform services under a contract is not sufficient to prevent labor authorities from determining that outsourcing has occurred. Under Venezuelan labor legislation, labor authorities are not obliged to make determinations based on the terms of an agreement between the parties if in fact the services were performed in a way that violated the law.

As such, before hiring a contractor as a third party to perform services, companies should determine if the third party: (i) qualifies as a contractor under the definition of the LOTTT; (ii) performs services independently, with its own resources, having employees under its direct supervision and control; and (iii) assumes all types of risks associated with the activities performed.

In addition, when services are provided under a contract, companies should assess: (i) the nature of the activities being performed by the contractor; (ii) the place where the services are being performed (whether outside or within the contracting company´s premises); (iii) the relevance of the activities performed by the contracting party; iv) the amount of income generated by the contractor for such service; (v) the duration and permanency of the services provided through the third party; and (vi) the benefits granted to the third party's personnel.

Lastly, companies should keep in mind that the contractor and the beneficiary of the services may be held jointly and severally liable for any employment-related obligations owed to the contractor's employees. Therefore, companies should assess the impact of having to incorporate the contractor's personnel into the beneficiary's payroll, in the event that labor authorities determine that outsourcing has occurred in violation of the law.