Mexico has introduced new rules to prevent employers avoiding their profit share and other obligations by using outsourcing and subcontracting arrangements.
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.
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.
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.