On 23 April 2021, the Mexican government published a decree to prohibit companies from relying solely on subcontracting. The 'outsourcing regulation' is designed to bring more workers into the formal economy and claim back the rights of workers who have not received adequate protection as subcontractors.
The regulation will significantly impact many companies, including those with internal shared services, and those that are being served by a provider with a subcontractor model. With the different pieces of regulation coming into force on or before 1 August 2021, it is vital for companies to act right away and ensure that their structures and processes comply with the new law, ahead of the impending deadline.
The law covers any individual or legal entity providing employees to be supervised and managed by a third-party client and that determines the services and work to be rendered.
The regulation prohibits:
- The subcontracting of personnel – subcontracting being when a company or individual provides or makes available their own workers for the benefit of another in an activity directly related to the main activity of the beneficiary.
- The outsourcing of core activities – the main economic activity from which the company derives the majority of its revenue (for tax purposes).
Companies are jointly liable for outsourcing companies that default on their obligations regarding tax, labour and social security matters, and tax evasion and fraud charges exist for failing to comply. The fines for providing subcontracting services or receiving such services will range from 2,000 to 50,000 times the ‘Unit of Measurement and Update', so between approximately 180,000 and 4,481,000 Mexican pesos (or US$9,000 and US$224,000). The same fine will be applied to the provider of specialised services, or the entity that executes specialised works, without the authorisation of the Ministry of Labour.
The regulation allows:
- The subcontracting of specialised services or the execution of works that are not part of the corporate purpose or the predominant economic activity of the beneficiary, as long as the contractor is registered in the public registry of the Ministry of Labour.
With regard to profit sharing, the amount will have a maximum limit of three months of the worker's salary or the average of the participation received in the last three years, applying the amount that is most favourable to the worker.
The wide-ranging nature of the regulation stresses the importance of assessing what it means for your company.
If your company relies on third-party services to meet seasonal peaks, or your organisation is structured to make the cost of support functions more efficient, the reform to regulate outsourcing activities will very likely have an impact on how you operate and organise to meet your business needs, whether it is having to consider the onboarding of current third-party employees that complement your workforce, or even restructuring your group of companies and having to pay more profit sharing. In any case, the impact will be widespread and you will have to understand what it means for your company.
Time to act
With less than two months before it comes into force, companies operating in Mexico do not have long to ensure that they comply with the demands of the new regulation. This could include undertaking a significant exercise in interpreting the regulation and adjusting payroll and tax compliance processes accordingly.
Companies should address the demands of the regulation without delay and avoid the expected added pressure of needing government assistance as the deadline looms ever larger.
You must act right now. The reform will impact many aspects of your operation and organisation, and, in most cases, you will have to compete for the attention of government agencies flooded by other companies like yours seeking compliance before 1 August 2021.
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TMF Mexico helps companies manage their most important asset: their personnel. We offer a wide range of HR and payroll management solutions that cover almost all aspects of the employee-related administrative issues and meet the requirements of federal and local regulations.
We can conduct a health check, propose remediation plans and help you to execute them.
If you think your company needs support, make an enquiry today.
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.