Mexico’s government recently made a series of legislative changes impacting corporations who use outsourcing to supplement their workforces. ‘Outsourcing personnel’ is prohibited, while the ‘subcontracting of specialized services’ is allowed. The changes protect worker’s rights; however, they will also likely increase labor costs for employers. On Saturday, April 24th, 2021, the new provisions regarding labor subcontracting in Mexico come into effect.
Overview of the Decree
Through a Presidential Decree published on April 23rd, 2021, various provisions for the following laws were amended, added, and repealed:
- Federal Labor Law
- Social Security Law
- Law of the Institute of the National Housing Fund for Workers
- Fiscal Code of the Federation
- Income Tax Law
- Law on Value Added Tax
- Federal Law of Workers at the Service of the State
Background and motives
The main objective for companies that provide outsourcing services is to lower their clients’ payroll costs. One of the controversies related to outsourcing is that they do not offer labor benefits to their employees, and jobs are less secure.
The primary reason the government enacted the law is to avoid violation of workers’ rights since many companies in Mexico hire the vast majority of their specialized and non-specialized personnel through outsourcing. This means many workers who participated in the economic activity of the company could not receive benefits that by law correspond to them, such as profit sharing, social security or generation of seniority, since they are fired in a short time or when their company name changed (see the summary of changes for further explanation on this point).
The new laws were also created because of the impact outsourcing had on Mexico’s social security institutions. A company that hires its personnel through outsourcing can afford to under-register (and register) its employees with a lower salary than employees actually receive, which corresponds to lower pensions. The last reason is the negative impact on public finances, such as tax and quota evasion to the IMSS and Infonavit, which weakens state health services.
The types of outsourcing and insourcing affected by the reforms include:
- In-site Outsourcing: The staff works at the contracting company’s facilities with resources provided by the contracted company so that the client company can monitor the work of the outsourced employees.
- Off-site Outsourcing: The staff works outside the facilities of the client company, such as telephone service.
- Insourcing: When the company internalizes a function that was being performed outside the company, but that represents a competitive and monetary advantage once it is internalized.
- Bi-sourcing: a combination of outsourcing and insourcing.
Dates and deadlines in which each of the reforms included will come into force
Private companies that require this type of hiring must comply with the reform measures within 90 (ninety) days after the publication of the decree. This means they must modify their payroll and employee templates before July 23rd, 2021. Changes to social security obligations begin in August 2021 (as stated in articles 4, 5 and 6). In addition, government agencies and institutions must also abide by the new decree with the exception of subcontracting specialized services or works. However, they have the remainder of the year to standardize to avoid extra costs for the current or subsequent fiscal year.
Summary of changes
Central axis. The outsourcing of personnel is prohibited, as is the case with insourcing schemes (this is when a company creates another company name to manage the group’s human capital through it). This measure is applicable to private and government companies.
Scheme allowed. Companies may subcontract specialized services and works that are not part of their main corporate purpose or economic activity.
Group exception. The services or works provided between the companies of the same group will be considered as specialized as long as they are not part of the corporate purpose or the predominant activity of the company that receives them. The measure applies to business groups listed on the stock market.
Bounded agencies. Employment agencies may only participate in the recruitment, selection, training and coaching of personnel, but may not be employers of the people they place in the companies.
Shared responsibility. The company that subcontracts services or works will be jointly and severally liable in the event that the contracting party does not comply with its employer obligations (SAT, IMSS, Infonavit).
Official register. Outsourcing companies will have to register and form part of a STPS (Secretaría del Trabajo y Previsión Social – Ministry of Labor and Social Welfare) registry; the registration will be renewed every three years. The agency will have thirty days after the reform to issue the corresponding rules.
Sporadic reports. The subcontracting companies will have to submit reports to the IMSS and Infonavit every four months with the data from the contracts signed with other companies, workers’ information, and the determination of the base salary. The institutions will have two months after the reform is published to issue the corresponding rules.
Information crossing. The Infonavit and the IMSS will be empowered to report directly to the STPS if obligations are breached by companies in the sector.
Scrupulous inspections. The subcontracting company that does not allow the inspection of the labor authorities, and does not present the requested information, may be fined up to 448,100 pesos.
Equal fines. Companies that operate or subcontract services without having the STPS registration will be subject to fines of up to 4.5 million pesos.
Fiscal padlock. Only subcontracting payments for services or works that are not part of the business name or preponderant activity of a company may be deductible or creditable.
Jail sentence. Using simulated outsourcing and insourcing schemes will be considered tax fraud, a crime punishable by jail.
Transition scheme. After the reform is published in the Official Gazette of the Federation, companies will have a period of three months to transfer their own subcontracted personnel to their payrolls.
Guaranteed seniority. The companies that assume themselves as employers of the subcontracted personnel will have to recognize their labor rights and seniority period.
Cap on PTU (Profit Sharing). The profit sharing will have as a maximum limit the equivalent of three months of salary or the average received in the last three years, whichever is higher.
When the reasons for the proposal were presented on November 12th, 2020 before the Chamber of Deputies of the Congress of the Union by the President, it was said that “It seeks to strengthen employment, which will be achieved with a policy that eliminates those practices that damage the labor rights of workers and that diminish the obligations of employers to recognize their prerogatives … “, leaving exclusively the possibility that individuals or legal entities “hire only the provision of specialized services or the execution of specialized works.” It is also mentioned that with this current labor regime, problems such as abusive or simulated practices have come to the detriment of the rights of workers and decrease the labor and fiscal obligations of employers with respect to them, and not the activity itself consisting of the outsourcing of personnel.
In short, the treatment initiative seeks to settle accounts with those who have used outsourcing as a means to evade their labor and tax obligations, making innocents pay for culprits, prohibiting the development of an activity that in itself does not cause any harm and only damages to the extent that it is exploited or used in an abusive or fraudulent way.
Effects on private initiative
Companies must recognize workers who carry out primary activities as their own (related to corporate purpose and predominant economic activity).
Because the practice prohibited by the published decree is in itself harmless, there is a feeling of injustice among employers who are in charge of deducting taxes for the subcontracting of personnel. The reform initiative establishes the legal requirements that taxpayers must comply with, in order to give tax credit and deduction effects to the specialized services and works provided by suppliers. In case of non-compliance, employers will not be able to give tax effects to subcontracting services, and therefore it may be considered that they would be committing the crime of tax fraud in the form of a qualified offense. This is controversial, since the practice by itself does not imply an affectation or restriction of individual or collective rights, or guarantees, and does not alter the public order or the common good.
At the same time, the measure implies that many companies will have to change the way they work and will be more regulated than before. Many are already beginning to make modifications and adding workers who previously worked in the company to their payroll through specialized outsourcing.
Impact on workers
Many workers will get better benefits once they are transferred to directly hired (rehired) by the company they are serving. Unfortunately, many others who provide less essential services will lose their income or be formally rehired for very low wages.
Those who can provide services through outsourcing of specialized services must follow the established norms and will need to become listed in the register of specialized service providers, as well as have the authorization of the Ministry of Labor and Social Welfare to carry out those activities in particular.
Consequences on the economy
Those who fail to be hired as personnel by the companies they provide their services to will lose their income and will have to find another means of income. Companies will have to make budget adjustments in order to comply with the measures and continue with their activities, but not without first negatively impacting the quality, competitiveness and costs of their services. As a consequence, foreign investment will probably be reduced.
What are the types of outsourcing? (2020, July 27th). Evaluating Software. https://www.evaluandosoftware.com/modalidades-del-outsourcing/
Domínguez, P. (2020, November 12th). Why does outsourcing affect workers? The STPS explains it. Grupo Milenio. https://www.milenio.com/negocios/como-afecta-el-outsourcing-a-los-trabajadores
Muñoz, M. (January 25th, 2021). What is the main problem of the initiative that seeks to prohibit the outsourcing of personnel? Nexos. Recovered from: https://eljuegodelacorte.nexos.com.mx/cual-es-el-problema-central-de-la-iniciativa-que-busca-prohibir-la-subcontratacion-outsourcing-de-personal/
Juárez, B., Morales, F. (April 24th, 2021). Job subcontracting is already illegal, outsourcing reform published in the Official Gazette of the Federation (DOF). Recovered from: https://factorcapitalhumano.com/leyes-y-gobierno/subcontratacion-laboral-ya-es-ilegal-publican-reforma-de-outsourcing-en-el-dof/2021/04/
The details of the decree dealt with in this text are found on the page of the Official Gazette of the Federation (DOF) and can be found in the following link: http://dof.gob.mx/nota_detalle.php?codigo=5616745&fecha=23/04/2021
The current Federal Labor Law is in the following link: