Law Reform Initiative on Labor Outsourcing in Mexico

November 11, the President announced a Law Initiative to modify the Federal Labor Law, the Social Security Law, the Law of the Institute of the National Housing Fund for Workers, the Tax Code of the Federation, the Income Tax Law and the Value Added Tax Law, to regulate the following aspects:

  1. The outsourcing (or subcontracting) of personnel.
  2. Specialized services and specialized works.
  3. Employment agencies.

Although the aforementioned Initiative still has to be submitted to the legislative process, we consider it convenient to comment on the main aspects.

Update on Labor Outsourcing in Mexico

On April 5th, 2021, the Government announced that an agreement was reached with the private sector. Accordingly, these are the following understandings:

  • The prohibition to outsource personnel is confirmed;
  • The outsourcing of services or specialized works are allowed provided that the Ministry of Labor authorizes the provider. 
  • Shared services between companies of the same business group are allowed, provided that such services are not included in the business purpose of the beneficiary and that the companies providing shared services are registered as a specialized service company.
  • A limit on the amount for distribution of profits is established.

What Are the Reasons to "eliminate" outsourcing in Mexico?

According to the explanatory memorandum, the reforms seek to eliminate practices that damage the labor rights of workers and that reduce the fiscal and labor obligations of employers.

According to the President, this objective would be achieved if the subcontracting of personnel is prohibited and precise rules are established to contract only the provision of specialized services or the execution of specialized works. Only thus, according to the President, will it be possible to eradicate these practices that operate through various forms of simulation to the detriment of workers and the public budget.

According to the initiative, the reform of the Federal Labor Law of 2012 was insufficient to prevent the improper practices of some employers in labor, social security, tax, and criminal matters; consequently, simulated outsourcing schemes proliferated and grew, such as:

• The transfer of workers from a company (contractor) to another expressly created (contractor), with the sole purpose of the latter being in charge of handling and paying payroll under different and less favorable conditions.

• The registration of workers with a lower salary than they receive, which causes their retirement to be calculated according to the salary registered with the IMSS and not with the salary they receive.

 

Jorge Montes, Taxation in Mexico, Taxes, Income Tax, VAT, IMMEX, Doing Business in Mexico

Jorge Montes

DBM Contributor

Public Accountant based in Guadalajara with ample experience in tax matters. 

Rafael Alday, VTZ, Lawyer, Labor

Rafael Alday

DBM Contributor

Mexican attorney based in Monterrey with ample experience in labor law.

Increase in Outsourced or Subcontracted Personnel in Mexico

Outsourcing in Mexico, Employees

Overview of the Initial Reform Project on Labor Outsourcing

In this context, the reforms proposed by the President of Mexico to the different laws are discussed below:.

Mexican Federal Labor Law

Repeal of the Subcontracting or Outsourcing Regime

As a first point, the initiative proposes to eliminate the rules that currently define and regulate labor subcontracting, that is, the repeal of articles 15A, 15B, 15C, and 15D of the Federal Labor Law is proposed.

“Prohibition” of Outsourcing (Amendment to article 13)

The second point to highlight is the prohibition of the subcontracting of personnel or outsourcing, consisting in that a natural or legal person provides or makes available their workers for the benefit of another.

Authorized “Subcontracting” (Amendment to article 14)

Notwithstanding the foregoing, the initiative establishes the “non-equalization” of the subcontracting of personnel, that is, the following cases will not be considered as subcontracting of personnel:

  • the provision of specialized services; y
  • the execution of specialized works.

The reform initiative conditions that specialized services or works may not be part of the corporate purpose or economic activity of the beneficiary (for example, cleaning services, security, transportation, industrial dining room, etc.)

In all cases, the company or natural person that requires these services or execution of specialized works must have a written contract and that will be considered a joint employer responsible for the employees that the contractor provides. The contract, by the way, must detail the number of workers who will participate, the term, and the specific purpose.

Authorization of the Ministry of Labor

Another essential point is that the reform initiative establishes that the contractor must have the authorization of the Ministry of Labor, contemplating the creation of a registry of specialized service providers.

With the aforementioned authorization, the reform initiative aims for contractor companies to prove the specialized nature of the services they provide or the works they carry out, before entering into a contract. At the same time, the authorization will serve as a mechanism so that they are up to date with the fulfillment of their labor, fiscal, and social security obligations.

Employer Substitution

The initiative proposes to add a paragraph to article 41 of the LFT so that the employer substitution can be applied, the goods object of the company or establishment must also be transferred to the substitute employer, in such a way that if this does not happen the employer substitution does not operate.

Intermediary

Additionally, it is proposed to introduce the definition of intermediary, understood as the natural or legal person who intervenes in the hiring of personnel to provide services to an employer. These intermediation services can include recruitment, selection, training, training, among others. In no case will the intermediary be considered a patron, since this character belongs to those who benefit from the services.

Visits or Labor Inspections

The reform initiative proposes to toughen procedural measures in visits or labor inspections. For example, the presumption of not having the documentation required by the labor authority, just one notification per instruction, regardless of the financial penalties in this regard (Article 1004-A).

Sanctions

Finally, the reform initiative aims to establish fines from 2,000 (173,000 MN) to 50,000 (4,344,000 MN) UMAS for those companies that subcontract personnel in the terms not allowed by this project, without prejudice to the other responsibilities and corresponding sanctions in other areas ( art. 1004-C).

Mexican Social Security Law and Outsourcing

The initiative contemplates reforming the Social Security Law to bring it in line with the amendments to the Federal Labor Law. We also highlight the following key points:

Joint liability of the Beneficiary

The natural or legal person that contracts the provision of services or the execution of specialized works will be jointly liable with the workers used to execute said services or works if the contractor company fails to comply with its obligations in terms of social security.

Ongoing Compliance for Contractors

The contractors authorized by the Ministry of Labor to provide specialized services or the execution of specialized works must report quarterly to the IMSS all contracts that they have, with details of the workers, the service provider company, and the contracting company. Also, the exchange of information between the IMSS and the Ministry of Labor is established.

Elimination of the Administrative Facility

The initiative proposes to eliminate the administrative facility that was granted to companies that provide personnel services to open an employer registry by a class at the national level, through which the different workers who were provided to the ultimate beneficiaries of the service are registered, depending on of the economic activity carried out by each of the beneficiaries.

Sanctions

In addition to the foregoing, it is proposed to increase the amounts of the penalties imposed for the failure to present or the late submission of various information that must be submitted by companies that provide personnel services.

Institute of the National Fund of Housing for Workers

Like the Social Security Law, it is proposed to reform the INFONAVIT Law following the previous proposals in the same restrictive senses and for the presentation of information before said authority.

Again, the initiative contemplates that the natural or legal person that contracts the provision of services or the execution of works will be jointly liable with the workers used to execute said contracts if the contractor company fails to comply with the obligations in terms of social security.

In the event of employer substitution, the substituted employer will be jointly and severally liable with the new one for the obligations derived from this Law, arising before the date of the substitution, up to a term of six months.

Federal Tax Code and Outsourcing

Subcontracting of Personnel and Tax Receipts

A definition in tax matters is added for the figure of the subcontracting of personnel, taking into consideration the initiative project, and it is proposed to establish that, in general, the tax receipts that have been issued as a result of the subcontracting of personnel. 

Contributions withheld from workers

To guarantee that the contributions withheld from workers are reported to the Federation Treasury, it is proposed to incorporate a new assumption of responsibility. In summary, the legal entities or natural persons, who receive services or contract specialized works, will be responsible for the contributions that would have been caused by the workers with whom the service is provided by the contractor.

Recidivism

Also, it is proposed to incorporate a case of recidivism – which, therefore, should be treated as an aggravating factor to impose fines – for deducting or crediting illegal services.

Tax fraud: Simulation of the provision of services or specialized works

Finally, it is proposed to establish that the conduct consisting of using simulated schemes for the provision of specialized services or the execution of specialized works or carrying out the subcontracting of personnel, constitutes qualifiers in the commission of the crime of tax fraud and its equivalents.

New Tax Violation and Penalty

Likewise, it is proposed to add an infringement case and its sanction if the contractor does not provide the contractor (i.e. beneficiary) with the information necessary for the expense to be deductible or the creditable transferred tax under the Law on Income Tax.

Income Tax Law and Outsourcing

The initiative conditions the deduction of payments for the provision of specialized services or the execution of specialized works. For this purpose, the contractor (i.e. beneficiary) must obtain from the contractor certain information and, in turn, the contractor will be obliged to deliver a copy of:

  • The current authorization is issued by the Ministry of Labor.
  • Tax receipts for the payment of wages of the workers who have provided the service or executed the work.
  • The full statement of tax withholdings made to said workers.
  • Payment of worker-employer fees to the Mexican Institute of Social Security, as well as payment of contributions to the Institute of the National Housing Fund for Workers.

Consistent with the proposed changes to the Federal Tax Code, it is proposed to specify in this Income Tax Law that the corresponding payments for the outsourcing of personnel will not be deductible.

Value Added Tax Law and Outsourcing

Subcontracting: VAT transferred not creditable

According to the aforementioned, it is stated that the payments made for the subcontracting of personnel do not have any tax effect. Therefore, it is necessary to repeal the assumption of withholding for services established in article 1-A, section IV, of the VAT Law, because a withholding obligation is established that would be unnecessary. In this sense, it is specified that the tax that is transferred to the taxpayer for the provision of personnel services will in no case be creditable.

Requirements for Creditable VAT

In addition to the above, the initiative establishes that the VAT transferred to the contractor (i.e. beneficiary) for the provision of specialized services may be creditable if the following requirements are met:

  • The contractor must obtain from the contractor a simple copy of the authorization of the Federal Labor Law, of the declaration of the value-added tax, and the acknowledgment of receipt of the payment corresponding to the period in which the contractor made the payment of the consideration and the tax. to the added value that was transferred.
  • The contractor will be obliged to provide the contractor with a copy of the aforementioned documentation, which must be delivered during the month following the one in which the contractor has made the payment of the consideration for the service received and the value-added tax that is paid. has moved.

Entry into Force: When Could These Proposed Changes Apply?

If the initiative is approved, the modifications to the Federal Labor Law, the Social Security Law, and the INFONAVIT Law would enter into force the day after its publication, while the modifications to the Federal Tax Code, Income Tax Law, and VAT Law, would enter into force on January 1, 2021.

As of the date of entry into force, natural or legal persons that provide specialized services or carry out specialized works must obtain authorization from the Ministry of Labor within six months, counted from the publication of the general rules corresponding.

For their part, those employers who, before the entry into force of this Decree, have requested the IMSS to assign one or more employer registers per class, to register their workers nationwide, will have a period of 120 days natural counted from the entry into force of the legal reforms, to terminate said employer registers and, if appropriate, request the aforementioned Institute to grant an employer register in terms of the provisions of the Regulation.

Conclusion

Indeed, this initiative aims to eradicate the outsourcing of personnel, which would have a significant impact on productivity and, therefore, on the economy of companies. We estimate that companies will become more “bureaucratic”, forcing employers to have strong human resource management departments. As noted in DBM’s labor guide, employees of a company are entitled to profit-sharing rights, so this initiative may entail additional economic burdens for employers with intensive labor activities.

Being a highly restrictive proposal and if it becomes law, we consider that it is likely the loss of thousands of formal jobs as well as a negative impact on the productive chains of export sectors, such as automotive, aerospace, electronics, among others, that use outsource legally their labor force as part of your daily processes.

Regardless, we suggest that the Initiative in question be reviewed in its entirety to identify other topics that may be of interest to each particular case.