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.
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.