On Friday April 23, 2021, a decree reforming labor outsourcing in Mexico was published in the Federation Gazette. This new decree changes the outsourcing provisions of the Federal Labor Law (FLL), the Social Insurance Law, the Law of the Institute of the National Housing Fund for Employees, the Federal Tax Code (FFC), the Income Tax Law and the Value Added Tax Law.
The new language of the law expressly prohibits subcontracting, defined as the practice of making or making available workers for the benefit of another person or legal entity.
Further, a contractor could provide services or perform specialized work that is not part of the beneficiary’s corporate purpose or economic activities, as long as the provider is properly registered as a specialized service provider with the Ministry of Labor and Social Welfare (STPS, abbreviation for Spanish).
In addition, the beneficiary is jointly and severally liable for breaches by the contractor of labor, social security or tax laws.
The reform also takes into account, as specialized services, those joint or complementary services that are provided between companies in the same group of companies when these services are not part of the business purpose or economic activities of the beneficiary.
The law provides 90 days (until July 23) for an employer attempting to hire employees through staff replacement directly from the recruiting agencies or the insourcing company (i.e. the hiring agency becomes the employee’s new employer) without transferring any assets. This does not mean that companies have 90 days to restructure employees from a recruiting agency and put them on their own payroll. However, the replacement of the employer does not require the transfer of assets if done in this window, which is still required after this period has expired.
The decree also introduces a rule on profit-sharing. In the past, profit sharing in Mexico meant that 10% of the company’s pre-tax profit was distributed among employees according to very specific rules. While the same 10% now applies, profit sharing is capped at three months of the employee’s salary or the average amount each employee has received over the past three years, so profit sharing may be less than 10%.
The contractors now have new obligations, including regularly reporting their contracts for the provision of specialized services to the Mexican Social Security Institute (IMSS) and to the Institute of the National Housing Fund for Workers (Infonavit). If these contracts are not submitted on time, the contractor will be fined 500 to 2,000 times the UMA value. (The UMA, which stands for “Unidad de Medida y Actualización”, serves as the basis for calculating obligations and payments and is updated annually in February.) With a current UMA value of 89.62 Pesos for 2021, the fines could be between $ 44,810 and $ 179,240 are pesos (or from $ 2,240 to $ 8,962).
On the other hand, income tax laws and VAT laws prohibit the deduction or crediting (if any) of taxes related to subcontracting or contractors who are not registered with the STPS.
To monitor compliance with these regulations, STPS, IMSS and Infonavit will coordinate efforts to conduct inspections and share information between the three government agencies and report the results to tax authorities if they discover any irregularities. A company that refuses to be inspected will be asked to provide the required information directly to the requesting authority and there is the potential for a fine for such refusal. If a company is found to be subcontracting staff, both the contractor and the beneficiary (customer) will be fined between 2,000 and 50,000 times the UMA value, that is, between $ 179,240 and 4,481,000 Pesos (or $ 8,962 to $ 224,050). .
Importantly, the use of misleading practices to simulate the provision of specialized services or the execution of specialized work or the subcontracting of staff would constitute tax fraud. The sentence would likely be three months to nine years’ imprisonment, depending on the level of fraud.
The law goes into effect and will take effect on April 24, 2021, with the exception of the tax laws that come into effect on August 1, 2021.
The STPS must issue general rules within the next 30 days after the law is published, specifying the requirements and procedures for applying for accreditation as a provider of specialized services. After these regulations are in place, companies have up to 90 calendar days to register as a specialist provider.
Although the reform did not give employers time to restructure their business operations, the main consequences of non-compliance are: 1) fines from the STPS in the event of an inspection and 2) the ability to deduct taxes.
Companies operating in Mexico wishing to provide services to third parties must conduct an assessment of the current corporate structure, articles of association, job descriptions and service agreements and register with the STPS as a specialist provider to ensure that they are still able to provide services provide specialized services to clients as well as be able to deduct the cost of specialized services received.