Those doing business in Mexico are beginning to feel the impact of some amendments to its labor laws.
The changes, put in place in April 2021, affect how companies contract or outsource staff to Mexico. Essentially, the amendments effectively prohibit Mexican employers from contracting out their staff.
Below are the main points of the changes and how these changes will affect stakeholders who contract or outsource personnel to Mexico.
What laws have changed?
The changes affect a number of Mexican laws. Among them are these:
- Federal Labor Law (Ley Federal del Trabajo or LFT);
- the Law on the Mexican Social Security Institute (Ley del Instituto Mexicano del Seguro Social);
- the National Institute of Workers’ Housing Fund Act (Ley del Instituto del Fondo Nacional de la Vivienda para los Trabajadores);
- the Mexican Federal Tax Code (Código Fiscal de la Federación);
- the Income Tax Law (Ley del Impuesto sobre la Renta);
- the Value Added Tax Law (Ley del Impuesto al Valor Agregado); and
- the Federal Law of State Workers (Ley Federal de los Trabajadores al Servicio del Estado) regulating Section B) of Article 123 of the Mexican Political Constitution and the Regulation of Article XIII bis of Section B of Article 123 of the Constitution relating to subcontracting.
General ban on outsourcing of personnel
The Amendments generally prohibit employers from contracting out staff to carry out their corporate purpose or core business – what is referred to in the Amendments as contracting out staff. The LFT specifies that there is subcontracting of personnel when a person (an individual or an entity) provides or makes available its employees for the benefit of another.
Specialized services – the exception
As an exception to the prohibition provided above, the amendments allow the subcontracting of personnel for “specialized” services or services “intended for specialized activities”. Specialized services must not be part of the main activity of the entity, that is to say the main social object and the predominant economic activities of the entity. The entrepreneur providing specialized services must register with the Ministry of Labor and Social Welfare (Secretariat of Trabajo and Social Forecast). Registration is valid for three years and must be renewed thereafter.
Joint and several liability
The amendments impose joint liability on the person who hires (individual or entity) in the event of the contractor’s failure or violation of any mandatory requirement of all obligations related to the employees of the contractor.
Substitution of employer
In Mexico, employer substitution occurs when employers transfer their business and their rights and obligations regarding the employment relationship of transferred employees to a third party, who will be the new or replacement employer. This new or replacement employer must recognize all labor rights and benefits of existing employees.
In order to complete employer substitution, the amendments require that assets be transferred from the former employer to the new or successor employer.
Employee profit sharing (participación en las utilidades)
As a reminder, companies based in Mexico must share part of their profits with their employees. The amendments establish a cap on these profit-sharing obligations. Specifically, each employee will receive the greater of (i) their three months salary; or (ii) the average profit sharing the employee has received over the past three years.
Potential consequences of non-compliance
In the event of non-compliance, employers and contractors could be subject to fines ranging from 2,000 to 50,000 times the Mexican Unit of Measurement and Update (UMA, its acronym in Spanish). In addition, non-compliant employers and contractors would not be able to benefit from certain tax advantages, such as VAT deductions and credits. Other consequences of non-compliance may also involve criminal prosecution for fraud.
In sum, the amendments’ general ban on personal contracting has a significant impact on Mexican companies and on any foreign company doing business in Mexico. Stakeholders should assess their compliance with the changes and closely monitor any developments.
If you have any questions, please contact the authors of this article or email us at [email protected]
An earlier version of this article was published by DLA Piper on February 14, 2022.