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Mexico has introduced new rules to prevent employers from circumventing their profit-sharing and other obligations through outsourcing and subcontracting agreements.
On April 23, 2021, reformed subcontracting and outsourcing rules were published in Mexico (the “Reform”). The reform changes several Mexican laws, including federal labor law, social security law, national housing association law, tax code, income tax law, and sales tax law.
One of the main drivers of the reform concerns the employer’s obligation to share 10% of the company’s taxable profits among its employees. For years it has been customary for employers to minimize the financial impact of this legal obligation through the use of service companies. In the most common structure, there is an operating company that generates the business profit and a separate service unit that employs the workers who provide services for the benefit of the operating company. The operating company, which usually has only one or no employees, outsources employees from the service company and in some cases from other third-party companies to carry out the work of its core business. Since these employees are not employed by the operating unit, there is no legal obligation to grant them a profit-sharing option from this unit. Instead, their share of the profits is generated by the service unit or a third party, which usually generates far less profit than the operating company to be marketed.
What will change as part of the reform?
The aim of the reform is to prevent inappropriate practices that have undermined, among other things, the rights of workers and workers with regard to seniority, job stability and profit-sharing rights. The following are the key aspects of the reform that groups of companies operating on a subcontracted basis in Mexico should consider.
- Prohibition of subcontracting. This means that a person or organization may not make their own staff available to help another person or organization. This prohibition also applies to government agencies and institutions.
- The use of employment agencies or intermediaries to intervene in recruiting, selection and training activities is now regulated. These agencies can continue to provide these services but are not considered employers.
- Subcontracting specialized services and tasks that are not part of the corporate purpose or the core business of the company requesting them is permitted. Specialized services and tasks can be carried out by companies in the same group of companies or by third parties.
- Specialized service providers now have to register in a specific public register that is created for this purpose. The Ministry of Labor and Social Affairs must issue regulations and guidelines relating to this register within 30 calendar days of the reform taking effect, once it is published in the Federation Official Gazette.
- Common services or activities performed between companies of the same group are considered specialized if they are not part of the corporate purpose or the core business activity of the company that benefits from them.
- Formalities and requirements must be observed so that individual or legal persons can subcontract the provision of specialized services or the execution of specialized tasks. This includes executing a written contract describing the services or tasks to be performed and the approximate number of employees involved.
- There is a cap of three months’ salary per employee or the average of profit-sharing profits over the past three years, whichever benefits the employee most.
- No asset transfer is required to transfer staff through an employer substitute if they are moved within 90 days of the reform’s entry into force of its publication. In any case, the transfer of staff must fully comply with the terms of employment, including recognition of seniority.
- Specialized service providers are required to submit a report every four months to the National Housing Fund Institute and the Mexican Social Security Institute, which includes data on contracts with other companies, information on the employees responsible for providing the services, and determining their base salary.
- The reform introduces criteria for adapting the risk classification for the purpose of risk premium insurance for occupational risks in the event of personnel transfers to companies with a different risk classification.
- Payments related to specialized services or tasks are deductible and creditable for income tax and VAT purposes. This does not apply to payments originating from systems that imply subcontracting or the provision of staff.
- In the event of non-compliance, there is joint liability.
The reform took effect the day after its publication in the Official Journal. However, as noted above, Temporary Articles provide that the transfer of assets is not required for the first 90 calendar days after publication to carry out a transfer of staff by representative of the employer, provided that the conditions of employment are honored, including full recognition seniority.
This is interpreted as a three-month grace period or transition period in order to transfer personnel to operational units and to make necessary adjustments to structures for subcontracting. It starts on April 24, 2021.
Transitional articles also stipulate that tax and social security regulations will come into force on August 1, 2021. This means companies have around three months to meet them
their obligations in these matters.
Although the 2012 labor reform regulated the subcontracting regime in Mexico, its application was very lax except for a few tax matters. The 2021 reform has more serious consequences for those who fail to comply with the new subcontracting rules.
In view of the entry into force of the reform, we encourage you to evaluate and review as soon as possible what measures are needed to adapt and comply with the reform. This requires assessing the business and financial impact of implementing changes, which, depending on the subcontracting structure, may include staff transfers to the operational unit, changes to the corporate purposes of both companies, and changes to service contracts with third parties.
In general, corporate groups in Mexico should therefore examine their Mexican workforce in order to develop strategies for adapting to the new legal obligations. In particular, employers should review their current workforce to determine whether they are using outsourced labor (and not specialized services) from an affiliate or a third party. Employers’ organizations should also assess the nature of the outsourced workforce in relation to their business purpose and main economic activity in order to define strategies for compliance with the reform.
It is vital for employers in Mexico to prepare for this new legal scenario from an employment, corporate and tax perspective as the current administration is expected to vigorously enforce the new regulations.
The content of this article is intended to provide general guidance on the subject. A professional should be obtained about your particular circumstances.
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