In the letter
On November 12, 2020, Mexican President Andrés Manuel Lopez Obrador submitted a bill to Congress prohibiting the subcontracting of personnel and regulating the performance of specialized services and work. The bill, if passed, would add the Federal Labor Law (FLL), the Social Insurance Law, the Law of the Institute of the National Workers’ Housing Fund (INFONAVIT), the Federal Tax Code, the Income Tax Law and the Value Reform Tax Law.
- The central theses
- In the deep
- To take action
The central theses
- Subcontracting to staff would be prohibited.
- The provision of specialized services and the execution of work would be limited and the activities of recruitment agencies would also be regulated.
- The ability to provide specialized services would require Ministry of Labor and Social Affairs (STPS) approval and is subject to additional requirements.
- Compliance with the commitments related to subcontracting and the provision of specialized services and work would need to be verified by the STPS and the Mexican Social Security Institute (IMSS). This could result in higher penalties and also report to tax authorities if companies fail to comply.
- The beneficiary of the specialized services and work provided would be jointly and severally liable for labor, social security and tax obligations.
- If contributions are omitted, the tax penalties would increase.
- Subcontracting staff and simulated specialized services and work would be considered a tax crime.
In the deep
If the bill is passed, the provision of personal services – defined as those through which a natural or legal person makes workers available or provides them for the benefit of another party – will be prohibited.
Specialized services and the execution of work are only permitted if they are not part of the corporate purpose or economic activity of the beneficiary and have been approved by the STPS. The parties would have to formalize their relationship by entering into a written contract specifying the number of workers participating in the specialized services or the execution of work.
The work of recruitment agencies would be regulated, which would allow intervention during the recruitment process, including recruitment, selection, education and training. These recruitment agencies would be seen as an intermediary and the beneficiary as an employer.
The Labor Authority could impose fines ranging from US $ 8,476 to US $ 212,000 for subcontracting human resource situations to anyone who: (a) provides and / or benefits from subcontracting services, and (b) provides or benefits from specialized services if these are not authorized by the STPS and do not meet the relevant requirements.
The beneficiary of the specialized services or work is jointly and severally liable to the subcontractors for labor and social security obligations as well as tax obligations.
In addition, the service providers and contractors of special work would have to submit reports to the IMSS and INFONAVIT on contracts, customers, the employees who provide the services or perform the work every three months or four months, as well as compliance with the regulations with social security obligations. Failure to submit reports to IMSS on time will result in fines ranging from USD 2,120 to USD 8,476.
The transfer of assets from the substitute employer to the substitute employer is included in the FLL as a prerequisite for the transfer of employees through an employer replacement. This criterion was taken from previous precedents.
Companies providing personal services and having different employer registration numbers for each class of occupational risk insurance would have to cancel these registrations and, if possible, secure a new registration within 120 days of the reform’s entry into force.
In the case of subcontractors and when employees were originally employed by the Party or when employees provide services that cover the predominant activities of the Party, the deduction for income tax purposes and the crediting of VAT would not be permitted and would instead be an aggravating factor in determining the penalties for omitting tax contributions is taken into account.
Subcontracting personal services leading to tax fraud would be a criminal offense that could be prosecuted as organized crime and preventive detention would be in line with tax reforms that came into effect on January 1, 2020.
For specialized services and the execution of work, companies would have to provide (1) evidence of the approval of the STPS to provide such services and (2) evidence of compliance with tax obligations for those responsible for the provision of the specialized services or execution of the work to be able to deduct the service fee and credit the corresponding VAT.
The bill would go into effect the day after its publication in the Daily Official Gazette, with the exception of the new tax rules that would come into effect on January 1, 2021.
To take action
Companies that sub-contract personnel services and companies that offer and benefit from specialized services and work should closely monitor all developments and review their structures and activities in Mexico in the light of the bill.