The Federal Government of Mexico’s long battle to eliminate outsourcing has ended. While the business sector wanted to regulate it to eradicate abusive practices and provide efficiency to the labor market, the Federal Government of Mexico scrapped a tool that open the door to development and gave certainty to investors. For U.S.-based hospitality concerns with operations in Mexico, or plans to expand into the country, this change is consequential and potentially costly, especially if you move too slowly to adapt.
Contributed by Dania Duncan Moreno, partner, Bell Nunnally, Dallas, and Emmanuel Ibarra Castillo, partner, Ramos, Ripoll & Schuster, Mexico City
On April 23, a decree that reforms labor outsourcing in Mexico – defined as providing or making available workers for the benefit of another person or legal entity – was published in the Federation’s Official Gazette. This amends the outsourcing provisions of the Federal Labor Law (FLL), the Social Security Law (SS), the Law of the Institute of the National Housing Fund for Workers (INFONAVIT), the Federal Fiscal Code (FFC), the Income Tax Law and the Value Added Tax Law (VAT). In accordance to these changes to the tax laws, payments corresponding to the outsourcing of personnel, a common practice in the hospitality industry, are now not deductible.
What employers need to know
Companies will have to regulate their outsourcing scheme and transition their personnel from the employment or insourcing agency to employer payroll through an employer substitution (i.e., the hiring entity becomes the worker’s new employer). Those that complete the employer substitution within 90 days (until July 23) do not have to transfer the employment or insourcing agency assets to the employer.
This does not mean that companies have 90 days to restructure, but that the employer substitution will not require the transfer of assets if done during this window, which will remain a requirement after such term elapses. Companies will also have to recognize employees labor rights and seniority period.
Employment agencies or intermediaries involved in the recruitment process of workers will be able to continue to participate but only in the recruitment, selection and training of the workers; they may not be employers of the people they place in companies. The employer will be the entity or person that benefits from the services provided by the worker.
Companies may outsource “specialized services”
Specialized services or execution of specialized works means services not included in the corporate purpose and other than their prevailing economic activity of the beneficiary of the services. The services provided between companies in the same group will be considered “specialized services” if they are not part of the beneficiary’s predominant economic activity or corporate purpose.
Outsourcing companies will have to be duly registered as a provider of specialized services with the Ministry of Labor and Social Security (STPS, for its acronym in Spanish); registration shall be renewed every three years. The income tax law and the VAT law prohibit the deduction or crediting (as appropriate) of taxes related to subcontracting or contractors that are not registered with the STPS. Furthermore, the company that outsource specialized services shall be jointly and severally liable in the event that the outsourcing company does not comply with its employers’ obligations according to the FLL, SS, INFONAVIT and/or tax laws.
Profit sharing
The distribution of profit sharing shall have as a ceiling the equivalent of three months’ salary of the employee or the average received in the last three years; whichever is higher and more beneficial for the worker.
Penalties, fines
Outsourcing companies, operating without STPS registration or outsourcing companies that do not allow the authority to perform audits will be subject to fines of up to 4.434 million pesos. Using simulated outsourcing and insourcing schemes or using deceptive practices to simulate the provision of specialized services or the performance of specialized works would be considered tax fraud, a crime punishable by imprisonment from six months to nine years.
SS, INFONAVIT implications
Outsourcing companies providing specialized services will have to submit every four months a report to the Mexican Institute of Social Security (IMSS) and to the INFONAVIT with data on executed contracts with other companies, worker’s information and base wage determination. Failure to timely submit these reports would subject the contractor to fines ranging from 500 to 2,000 times the UMA value. (UMA, stands for “Unidad de Medida y Actualización” and serves as the basis to calculate obligations and payments and is updated annually in February.) Current UMA value is US$89.62 pesos for 2021, the fines could range between US$2,240 to US$8,962 with an estimate exchange rate of MXP$20 per US dollar.
To monitor compliance with these provisions, the STPS, IMSS and INFONAVIT will coordinate efforts to conduct inspections and share the information among them, as well as report the findings to the tax authorities if they find irregularities. A company that refuses to be audited can face fines for such refusal. If it is found that a company is subcontracting personnel, both the contractor and the beneficiary would be subject to fines ranging from 2,000 to 50,000 times the UMA value—i.e., from US$8,962 to US$224,050.
Additional regulations
The law entered into force and effect on April 24, with the exception of the tax laws, which will take effect on August 1. The STPS must issue general regulations setting forth the requirements and procedures to apply for authorization as a provider of specialized services within the next 30 days following April 23. After these regulations are issued, companies will have 90 calendar days to obtain their registration.
What should employers do?
Hospitality companies with Mexican employees may want to begin reviewing their corporate purpose, preponderant economy activity and procure a self-assessment of the operations of the company to determine if the personnel under any outsourcing agreement is performing services included in their corporate purpose and/or prevailing economic activity. If they are, implement an internal process to directly hire any employee from the employment agency through employment substitution ideally on or before July 23.
In the event that the personnel under any outsourcing agreement is providing specialized services, request the employment agency their registration before the STPS. Review the definition of “companies in the same group” to make sure that both companies are complying with the new regulations.
Hospitality companies operating in Mexico that want to provide services to third parties, need to run an assessment on current corporate structure, review their corporate purpose, preponderant economy activity, job descriptions and services agreements, and register with the STPS as a specialized provider to make sure they will remain able to render specialized services to clients, as well as be able to deduct the cost of the specialized services received.