Doable outsourcing reforms in Mexican laws

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Alerts and Updates

The Mexican executive intends to come up with another new bill around February 2021, so the provisions of the actual legislation may vary.

On November 12, 2020, the Mexican executive submitted a bill to the Mexican Congress that reforms various laws related to the outsourcing of personnel. Mexican laws that would be reformed if the law were approved by the Mexican Congress include the Federal Labor Law, Social Security Law, National Housing Fund Institute Law, Federal Tax Law, Income Tax Law, and Value Added Tax Law.

This alert addresses some of the key issues that could be reformed if the Mexican Congress passes the law. It is important to note that, as explained below, the Mexican executive intends to come up with another new bill around February 2021, so the provisions of the actual legislation may vary.

Federal Labor Law

According to the bill, Mexican federal labor law would be reformed with the aim of banning the outsourcing of personnel, understood as the activity by which a person, whether a company or an individual, makes their own employees available for the benefit of another person.

Notwithstanding this, the Mexican executive issued a press release on December 7th, 2020 stating that, given the importance of outsourcing personnel, it will take into account the recommendations of stakeholders in various industries and that this intends to take appropriate measures to combat the “unlawful” outsourcing take action that violates workers’ rights, rather than banning outsourcing altogether. The executive also said it had agreed with the private corporate sector to further review the terms of the bill with a view to submitting a new bill to Congress.

Regarding the provision of services and the execution of work by service providers to third parties, the draft law proposes that these activities be provided on a special basis so that they are legal. This means that such activities should differ from the business purpose or the economic activity of the contracting party and should be agreed in a written contract that further defines the purpose of the service or work to be performed and the number of employees who would perform such services or work .

As stipulated in the draft law, the contractual partner is jointly liable with the service provider for the latter’s work obligations towards the employees through whom the services or work are performed. The contractual partner is liable if the service provider violates these obligations.

In order to be able to provide services or perform work, service providers would have to obtain approval from the Mexican Ministry of Labor. This would require proof of compliance with certain conditions such as the specific nature of the service or work to be performed, as well as full compliance with their labor, tax and social security obligations. This permit would have to be renewed every three years.

In addition, the draft law proposes the creation of a register for service providers, which enables the identification and regulation of these persons and provides the relevant authorities with additional elements for inspection and verification. Those who receive the authorization mentioned in the previous paragraph will then be entered in this register.

In terms of intermediaries, the bill would define that number as a person, be it a company or an individual, intervening in the hiring process of staff. This could include, but is not limited to, recruitment, election, training and capacity building. Under no circumstances would intermediaries be considered employers.

Those who breach the potential new rules would face significant fines and other liabilities under the applicable legislation.

Reforms of tax legislation

According to the bill, no tax deductions or accreditations would be made in relation to disbursements related to payments or outsourcing considerations.

Notwithstanding this proposal, if it is demonstrated that the services or work are specialized, disbursements related to the outsourcing for income tax purposes could be deducted and accredited for VAT purposes as long as the payments or considerations are related to services or work, for which the service provider has a permit from the Mexican Ministry of Labor.

According to the invoice, the contractual partner would have to receive the following documents from the service provider:

  • Approval from the Mexican Ministry of Labor.
  • Invoices for the salaries of employees who performed the service or performed the work.
  • Receipt of payment issued by a financial institution related to applicable taxes.
  • Payment of labor fees before the Mexican Social Security Institute and the National Housing Fund Institute for Employees.

This information would also have to be submitted to the tax authorities at the latest on the last day of the following month in which the contracting party paid the consideration for the services or work performed, including the VAT thereof.

It is important that the draft law proposes a further expansion of the number of scenarios in which it is assumed that there is joint liability for tax obligations. One of these new scenarios is that the contractor is jointly liable with the service provider for the taxes that would arise in relation to the employees who perform the services or work.

With regard to VAT, the bill proposes to depart from the obligation to withhold the 6 percent of VAT from the consideration actually paid and related to the service or work performed.

In addition, those who breach the potential new rules would face significant fines and other liabilities under the applicable legislation. In addition, the draft law proposes that the simulated provision of services or the execution of work be considered a criminal offense of tax fraud.

social insurance

Similar to the proposed reforms to Mexico’s federal labor law, the bill proposes to amend Mexico’s social security law to limit outsourcing for specialized services or specialized work that is inconsistent with the business purpose or economic activity of the contractor.

The employer’s register by class would be removed from the bill. This register enables service providers to register their employees according to the economic activity developed in favor of the contractor. The bill stipulates that service providers would have to register, which would require proof that they have the appropriate authorization from the Mexican Ministry of Labor to provide specialized services or work. The Mexican Social Security Institute would enter into information exchange agreements with the Mexican Ministry of Labor related to the service providers.

It is important that the contractual partner is jointly liable with the service provider for the breach of the obligations of this service provider as the employer of the personnel who provide the services or work.

Those who breach the potential new rules would face significant fines and other liabilities under the applicable legislation.

Law for the Institute of the National Housing Fund for Employees

In cases of employer replacement under Mexican law, the draft law provides for joint liability between the new and previous employer for a period of six months. After this period, the responsibility for fulfilling the obligations contained in the law for the Institute of the National Housing Fund for Employees would apply only to the new employer.

The contractual partner is jointly and severally liable for the obligations of the service provider as the employer of the employees through whom the services or work are performed.

In addition, the Institute of the National Housing Fund for Workers would enter into information exchange agreements with the Mexican Ministry of Labor regarding the service providers.