On Friday, April 23, 2021, a decree that reforms labor outsourcing in Mexico was published in the Federation’s Official Gazette. This new decree amends the outsourcing provisions of the Federal Labor Law (FLL), the Social Security Law, the Law of the Institute of the National Housing Fund for Workers, the Federal Fiscal Code (FFC), the Income Tax Law and the Value Added Tax Law.
The new language of the law expressly prohibits subcontracting, defined as the practice of providing or making available workers for the benefit of another person or legal entity.
Further, a contractor would be allowed to provide services or perform specialized works that are not part of the corporate purpose or the economic activities of the beneficiary as long as the provider is duly registered as a provider of specialized services with the Ministry of Labor and Social Welfare (STPS, for its acronym in Spanish).
Moreover, the beneficiary would be jointly and severally liable for any of the contractor’s violations under the labor, social security, or tax laws.
The reform also considers as specialized services those shared or complementary services rendered between entities of the same corporate group if such services are not part of the beneficiary’s corporate purpose or its economic activities.
The law provides 90 days (until July 23) for an employer that seeks to directly hire any employees from the staffing agencies or insourcing company through employer substitution (i.e., the hiring entity becomes the worker’s new employer) without the transfer of assets. This does not mean that companies have 90 days to restructure and bring employees to their own payroll from a staffing agency, 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.
The decree also introduces a rule regarding profit sharing. Historically, profit sharing in Mexico involves taking 10% of the pretax earnings of the company and distributing it among the employees following very specific rules. Now, while the same 10% applies, profit sharing will be capped to three months of the workers’ salary or the average amount received by each worker during the last three years so the profit sharing may end up being less than 10%.
Contractors now have new obligations, including to periodically report their contracts for the provision of specialized services to the Mexican Institute of Social Security (IMSS) and to the Institute of the National Housing Fund for Workers (Infonavit). Failure to timely submit these contracts would subject the contractor to fines ranging from 500 to 2,000 times the UMA value. (UMA, which stands for “Unidad de Medida y Actualización”, serves as the basis to calculate obligations and payments and is updated annually in February.) With the current UMA value of $89.62 pesos for 2021, the fines could range between $44,810 and $179,240 pesos (or from US$2,240 to US$8,962).
On another front, the income tax laws and the value added tax laws prohibit the deduction or crediting (as appropriate) of taxes related to subcontracting or contractors that are not registered with the STPS.
To monitor compliance with these provisions, the STPS, IMSS and Infonavit will coordinate efforts to conduct inspections and share the information among the three government agencies, as well as report the findings to the tax authorities if they find irregularities. A company that refuses to be inspected would be summoned to present the required information directly to the requesting authority, and face the possibility of being fined for such refusal. If it is found that a company is subcontracting personnel, both the contractor and the beneficiary (customer) would be subject to fines ranging from 2,000 to 50,000 times the UMA value—i.e., from $179,240 to $4,481,000 pesos (or US$8,962 to US$224,050).
Importantly, using deceptive practices to simulate the provision of specialized services or the performance of specialized works, or subcontracting personnel, would constitute tax fraud. The penalty likely would be imprisonment from three months to nine years, depending on the amount of fraud.
The law enters into force and effect on April 24, 2021, with the exception of the tax laws, which will take effect on August 1, 2021.
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 publication of the law. After these regulations are issued, companies will have up to 90 calendar days to obtain their registration as specialized providers.
Though the reform provided no time for employers to restructure their operations, the most relevant consequences of not being compliant with the law are: 1) fines from the STPS in case of an inspection, and 2) the ability to deduct taxes.
Companies operating in Mexico that want to provide any services to third parties need to run an assessment on current corporate structure, bylaws, 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.