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Article | Global News Briefs

Mexico: Draft legislation to ban subcontracting of employees

Total Rewards|Future of Work|Health and Benefits
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By Eduardo Hori Cicero | February 9, 2021

Draft legislation to prohibit outsourcing or insourcing workers will result in increased labor costs for employers.

Employer Action Code: Monitor

Draft amendments to the Federal Labor Law (and other income tax and social security legislation) would prohibit the subcontracting of personnel, both through the use of outsourcing companies and through the common practice of insourcing (i.e., subcontracting personnel from a separate entity within the employer’s affiliated group). A narrowly defined and highly regulated exception may apply for the provision of special work or services not related to the receiving company’s core business.

The Labor Law was amended in 2012 and 2017 to restrict the activities of outsourcing companies to ensure they are used solely to meet specific and temporary operational needs. In the government’s view, however, companies still often use outsourcing and insourcing, instead of direct employment, as a means to reduce their employment obligations (e.g., profit sharing, providing benefits) and possibly reduce their tax obligations. According to the Ministry of Labor and Social Security (MLSS), the estimated number of subcontracted workers grew from 1 million in 2003 to 4.6 million in 2018. In percentage terms, subcontracted workers accounted for 18% of all workers in formal employment in 2018, up from roughly 5% in 2003, according to the National Institute of Statistics and Geography data.

Key details

The reforms would:

  • Prohibit the subcontracting of outsourced or insourced personnel.
  • Allow the provision of workers who have specific skills for specialized services/roles or for the execution of specialized work outside the scope of the receiving company’s core business or economic activity; however, such provision would have to be authorized in advance by the MLSS, subject to renewal every three years, and the supplying entity would have to be registered with the MLSS. 
  • Require that a company benefiting from labor-related services (e.g., personnel recruitment, selection and training) provided by an intermediary company be considered the employer and therefore responsible for matters such as compensation, profit sharing, benefits and social security contributions.
  • Eliminate corporate income tax deductions for payment of subcontracted workers, which in turn would disallow value-added tax (VAT) deductions or credits on payment for those services. The costs of specialized service providers would be deductible, subject to documentation of authorization, tax and VAT receipts, and proof of withholding for income tax and social security contributions. Subcontracting of services deemed to have resulted in tax fraud would be considered a felony and subject to criminal penalties.  

Employer implications

The proposed reforms were initially intended to come into force at the start of 2021, but congressional debate has now been deferred to June 2021 due to pushback from the business community that the changes would result in significant job losses due to associated operational disruption and increased labor costs. If the law is approved, employers using outsourcing or insourcing arrangements would need to prepare for the termination of those agreements. The financial and legal impacts would be substantial to say the least. Affected companies should start to consider the actions they would need to take to comply, as well as the related implications for their employee compensation and benefit programs and costs.

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Eduardo Hori Cicero

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