Mexico’s executive branch intends to submit another new bill around February 2021, so the terms of the actual legislation may vary.

On November 12, 2020, Mexico’s executive branch submitted a bill to the Mexican Congress that intends to reform various laws with respect to outsourcing of personnel. The Mexican laws that would be reformed should the bill be approved by the Mexican Congress include the Federal Labor Law, the Social Security Law, the Law for the Institute of the National Housing Fund for Employees, the Federal Tax Law, the Income Tax Law and the Value Added Tax Law.

This Alert reviews some of the most relevant matters that could be reformed should the Mexican Congress pass the bill. It is important to take into consideration that, as explained below, Mexico’s executive branch intends to submit another new bill around February 2021, so the terms of the actual legislation may vary.

Federal Labor Law

Pursuant to the bill, the Mexican Federal Labor Law would be reformed with the purpose of prohibiting outsourcing of personnel, understood as the activity by which a person, whether an entity or an individual, provides its own employees for the benefit of another person.

Notwithstanding the above, on December 7, 2020, the Mexican executive branch issued a press statement in which it established that, given the importance of outsourcing of personnel, it will take into consideration the recommendations of actors of different industries, and that its intention is to take appropriate measures to combat “wrongful” outsourcing by which employees’ rights are infringed, rather than prohibiting outsourcing altogether. The executive branch further stated that it has agreed with the private business sector to continue reviewing the terms of the bill with the purpose of submitting a new bill before Congress.

With respect to the rendering of services and the execution of works by services providers to third parties, the bill proposes that these activities should be provided on a specialized basis for them to be legal. This means that such activities should be different to the corporate purpose or to the economic activity of the contracting party, and they should be agreed to in a written contract that should further establish the purpose of the services or works to be provided, as well as the number of workers that would carry out such services or works.

As established under the bill, the contracting party would be jointly liable with the services provider for the labor obligations of the latter in relation to the employees through which the services or works are provided. The contracting party would be liable in case the services provider is in breach of said obligations.

In order to be able to provide services or execute works, services providers would be required to obtain an authorization from the Mexican Ministry of Labor. This would require demonstrating compliance with certain conditions such as the specialized character of the services or works to be performed, as well as full compliance with their labor, tax and Social Security obligations. This authorization would need to be renewed every three years.

Additionally, the bill proposes the creation of a registry for services providers that would allow the identification and regulation of such persons, further providing elements for inspection and review for the corresponding authorities. Those obtaining authorization mentioned in the preceding paragraph would then be registered in this registry.

With respect to intermediaries, the bill would define this figure as a person, whether an entity or an individual, that intervenes in the hiring process of personnel. This could include recruitment, election, training and capacity training, among others. Intermediaries would not be considered as employers under any circumstances.

Those in breach of the potential new regulations would be subject to substantial fines and other liabilities as per the applicable legislation.

Reforms to Tax Legislation

Pursuant to the bill, no tax deductions or accreditations would be made with respect to disbursements related to payments or considerations made for outsourcing of personnel.

Notwithstanding this proposal, if it is demonstrated that the services or works have the character of being specialized, disbursements related to the outsourcing could be deducted for purposes of income tax and accredited for purposes of the value added tax, as long as the payments or considerations are related to services or works for which the service provider has an authorization from the Mexican Ministry of Labor.

Under the bill, the contracting party would have to obtain the following documentation from the services provider:

• Authorization issued by the Mexican Ministry of Labor.
• Invoices for the salaries of the employees that provided the service or executed the work.
• Payment receipt issued by a financial institution with respect to the corresponding taxes.
• Payment of employment fees before the Mexican Institute of Social Security and the Institute of the National Housing Fund for Employees.

This information would further need to be filed with the tax authorities by the services provider, at the latest, on the last day of the following month in which the contracting party made the payment of the consideration for the services or works that were provided, including the value added tax thereof.

Importantly, the bill further proposes expanding the number of scenarios whereby it would be considered that there is joint liability for tax obligations. One of these new scenarios consists in the contracting party being jointly liable with the services provider for the taxes that would be caused with respect to the employees providing the services or works.

With respect to the value added tax, the bill proposes to derogate the obligation to retain the 6 percent of the value added tax of the considerations effectively paid and related to the services or works provided.  

Additionally, those in breach of the potential new regulations would be subject to substantial fines and other liabilities as per the applicable legislation. Furthermore, the bill proposes to consider simulated rendering of services or execution of works as a crime of tax fraud.

Social Security

Similarly to the proposed reforms to the Mexican Federal Labor Law, the bill proposes to amend the Mexican Social Security Law to limit outsourcing for specialized services or specialized works that are not the contracting party’s corporate purpose or economic activity.

The employer’s registry by class would be eliminated under the bill. This registry allows services providers to register their employees pursuant to the economic activity developed in benefit of the contracting party. The bill establishes that services providers would need to register, which would require demonstrating that they have the corresponding authorization from the Mexican Ministry of Labor to provide specialized services or works. The Mexican Institute for Social Security would execute information exchange agreements with the Mexican Ministry of Labor with respect to the services providers.

Importantly, the contracting party would be jointly liable with the services provider for the breach of such services provider’s obligations as an employer of the personnel providing the services or works.

Those in breach of the potential new regulations would be subject to substantial fines and other liabilities as per the applicable legislation.

Law for the Institute of the National Housing Fund for Employees

In cases of employer substitution per Mexican law, the bill proposes incorporating joint liability between the new and former employers for a period of six months. Once this period has ended, the responsibility of 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 contracting party would be jointly liable for the services provider’s obligations as an employer of those employees through which the services or works are provided.

Additionally, the Institute of the National Housing Fund for Employees would execute information exchange agreements with the Mexican Ministry of Labor with respect to the services providers. 

For More Information

If you would like further information about this Alert or other matters pertaining outsourcing or labor issues in Mexico, please contact Eduardo Ramos-Gómez, Rosa M. Ertze, Miguel de Leon Perez, Luis Duhart, any of the attorneys in our Mexico Business Group or the attorney in the firm with whom you are regularly in contact.

Disclaimer: This Alert has been prepared and published for informational purposes only and is not offered, nor should be construed, as legal advice. For more information, please see the firm's full disclaimer.