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Mexico has introduced new rules to prevent employers avoiding
their profit share and other obligations by using outsourcing and
subcontracting arrangements.
Background
Reformed rules on subcontracting and outsourcing in Mexico were
published on 23 April, 2021 (the ‘Reform’). The Reform
amends several Mexican laws, including the Federal Labour Law,
Social Security Law, National Workers’ Housing Fund Law, Tax
Code, Income Tax Law and Value Added Tax Law.
One of the key drivers of the Reform relates to the obligation
on employer to share 10% of the company’s taxable profits
amongst its employees. For years, it has been common practice for
employers to minimise the financial impact of this legal obligation
by using services entities. In the most common structure, there is
an operating company, which generates the business profit, and a
separate service entity that employs the workers who perform
services for the benefit of the operating company. The operating
company, which commonly has only one employee or no employees at
all, outsources workers from the services company and in some cases
from other third-party contractor entities to perform the work of
its core business. As these workers are not employed by the
operating entity, there is no legal requirement to give them a
profit share from that entity. Instead, their profit share is
generated from the services entity or third party, which typically
has far less profit than the operating company to distribute.
What will change under the Reform?
The intention of the Reform is to prevent improper practices
that have affected the rights of workers and employees in relation
to their seniority, job stability and profit share rights, among
others. Below we set out the most important aspects of the Reform
that corporate groups working under subcontracted based structures
in Mexico should consider.
- Prohibition on subcontracting personnel. This implies that an
individual or entity will not be allowed to supply its own
personnel to benefit another individual or entity. This prohibition
also applies to government agencies and institutions.
- The use of employment agencies or intermediaries that intervene
in recruitment, selection and training activities is now regulated.
These agencies may continue to perform these services but will not
be considered employers.
- The subcontracting of specialised services and tasks that are
not part of the corporate purpose or of the core business activity
of the entity requesting them is allowed. Specialised services and
tasks may be performed by companies of the same corporate group or
by third parties.
- Specialised services providers will now be required to register
in a specific public registry that will be created for this
purpose. The Ministry of Labour and Social Welfare must issue
regulations and guidelines in relation to this registry within 30
calendar days following the enactment of the reform once it is
published in the Federation’s Official Gazette.
- Shared services or activities provided between companies of the
same group will be considered specialised if they are not part of
the corporate purpose or of the core business activity of the
company that benefits from them.
- Formalities and requirements must be observed for individual or
legal entities to subcontract the provision of specialised services
or the execution of specialised tasks. These include executing a
written contract that describes the services or tasks to be
provided and the approximate number of employees that will be
involved.
- There is a cap per employee of three months’ salary or
the average of profits received in the last three years for the
profit share, whichever benefits the employee the most.
- No transmission of assets will be required to transfer
personnel via a substitution of employer if they are moved within
90 days following the enactment of the reform, once published. In
any event, the transfer of personnel must fully honour terms and
conditions of employment, including acknowledgement of
seniority.
- Specialised service providers will have to deliver a report
every four months to the National Housing Fund Institute and to the
Mexican Institute of Social Security containing data relating to
contracts executed with other companies, information on employees
assigned to provide the services and the determination of their
base salary.
- The Reform introduces criteria to adjust the risk
classification for purposes of risk premium insurance for
occupational hazards in the event of transfers of personnel to
companies with a different risk classification.
- Payments related to specialised services or tasks will be
deductible and creditable for the purposes of Income and Value
Added Tax. This does not apply to payments that derive from schemes
that imply subcontracting or supply of personnel.
- There is joint liability in the event of non-compliance.
Next steps
The Reform entered into force the day after its publication in
the Official Gazette. However, as stated above, transitory articles
establish that the transfer of assets will not be a requirement to
carry out a transfer of personnel through employer substitution
during the first 90 calendar days following publication, on the
understanding that the terms and conditions of employment must be
honoured, including full acknowledgement of seniority.
This is interpreted as a three-month grace or transitional
period to transfer personnel to operating entities and to make any
necessary adjustments to subcontracting structures. It starts on 24
April 2021.
Transitional articles also provide that tax and social security
related provisions will enter into force from 1 August 2021. That
means companies have approximately three months to fulfil
their obligations in these matters.
Final considerations
Although the 2012 labour reform regulated the subcontracting
regime in Mexico, its application was very lax except in some
tax-related matters. The 2021 Reform has much more severe
consequences for those who fail to comply with the new
subcontracting rules.
Our recommendation is that you should assess and consider what
measures are necessary to adapt and comply with the Reform are as
soon as possible, given the entry into force of the Reform. For
this, the business and financial impact of implementing changes
that may depending on the subcontracting structure, involve
transfers of personnel to the operating entity, changes to
corporate purposes of both companies and revisions to service
contracts with third parties, must be evaluated.
In general terms, corporate groups in Mexico should therefore
examine their Mexican workforce to develop strategies to adjust to
the new legal obligations. In particular, employers should review
their current workforce structure to understand whether they are
using outsourced labor (and not specialised services) from either a
related services entity or a third-party entity. Employer
organisations should also assess the type of outsourced labour
compared to their corporate purpose and main economic activity to
determine strategies for compliance with the Reform.
It is key for employers in Mexico to prepare for this new legal
scenario from an employment, corporate, and tax perspective as it
is expected that the current administration will enforce the new
rules vigorously.
The content of this article is intended to provide a general
guide to the subject matter. Specialist advice should be sought
about your specific circumstances.
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