On November 12, 2020, Mexican President Andrés Manuel López Obrador released a draft outsourcing reform bill (the “Proposed Bill”) which would impact both the outsourcing and insourcing of jobs practically across all industries in Mexico. Most notably, the Proposed Bill would:

• Ban outsourcing or insourcing of personnel by private companies except if (i) the services rendered by the subcontracted personnel are specialized in nature and are not related to the main business activity of the company, and (ii) the contractor has been approved by and registered with Mexico’s Ministry of Labor as a provider of specialized services.
• Impose significant monetary fines on both the company and the contractor in case of infringement, including fines which currently would amount to approximately $4.4 million pesos (nearly $220,000 USD).
• Impose joint liability on the company for any wages, labor costs or social security contributions not paid by an unauthorized contractor.
• Prohibit companies from deducting, for income tax purposes, any payments made to an unauthorized contractor.
• Prohibit companies from taking a credit with respect to any value added tax paid to an unauthorized contractor.
• Scale up illegal outsourcing or insourcing as tax fraud or evasion subject to criminal liability.

According to the Proposed Bill, one of its main objectives is to combat the use of fraudulent and abusive practices which have led companies to circumvent the payment of taxes and statutory labor benefits, including mandatory profit-sharing obligations and social security, retirement and housing contributions.

The private sector including multinational companies have widely criticized the Proposed Bill and urged the Mexican government to amend it. On December 9, 2020, a tri-party agreement was signed by the private sector, the workers’ sector and the Mexican Government requesting the Mexican Congress to defer the discussion and approval of the Proposed Bill to the month of February 2021. As a condition to implement the proposed reforms, businesses have proposed the Mexican government to redefine the employee profit-sharing system into a more equitable system including by incorporating a cap of one-month of salary, tying profit sharing to employee performance or allowing a differentiated payment based on the salary of each employee.

The Proposed Bill contemplates the reforms becoming effective immediately upon publication and multinational companies have also expressed concerns about this implementation timeline underscoring the fact that at least six months are needed to take the measures required to comply with the proposed amendments. Such measures would include corporate reorganizations including mergers and transferring personnel between affiliates all of which requires massive and intensive administrative work and filings with Mexico’s labor and social security agencies.

It remains to be seen which path this proposed outsourcing/insourcing bill will follow. Companies within all industries in Mexico may want to consider evaluating their current corporate structures and begin evaluation options.