Mexican Government Challenges Employee Insourcing and Outsourcing Structures
On November 12, 2020, the president of Mexico sent a bill to the Congress of the Union proposing amendments to several provisions of the: (i) Federal Labor Law (“Ley Federal del Trabajo“); (ii) Social Security Law (“Ley del Seguro Social“); (iii) Federal Housing Fund Law (“Ley del Infonavit“); (iv) Federal Fiscal Code (“Codigo Fiscal de la Federacion“); (v) Income Tax Law (“Ley del Impuesto Sobre la Renta“); and (vi) Value Added Tax Law (“Ley del Impuesto al Valor Agregado“). The objective of these proposed amendments is to regulate, and in some cases, prohibit, commonly used employee insourcing and outsourcing structures.
Mexican labor laws mandate that employers, among other obligations, provide employees with the following social benefit contributions:
Payment of Social Security taxes to provide employees with universal healthcare coverage;
Payment of Housing Fund Contributions to provide employees access to government-subsidized and financed housing; and,
Sharing of 10% of the employer’s pre-tax profits with their employees.
Additionally, employers are required to withhold federal income taxes applicable to the employees’ wages.
A number of Mexican employers have used insourcing and outsourcing structures to manage profit-sharing obligations, which are uncapped and generally nondeductible for income tax purposes. Under these structures, employees are employed by an affiliated entity (“ElCo”) separate and distinct from the Mexican company’s operations (“OpCo”). The ElCo employers comply with their obligations to make Social Security and housing fund contributions, as well as withhold income taxes from their employees. Additionally, ElCos typically provide all other applicable benefits under local law, as well as additional fringe benefits to compensate for employees not receiving OpCo-related profit-sharing payments.
Scope of the Legislative Proposal
The proposed amendments intend to prohibit the use of ElCos, as well as to regulate the use of employment agencies and other specialized staffing companies. The Mexican government aims to turn the proposals into law within 2020, with an effective date of January 1, 2021.
a. Traditional Insourcing and Outsourcing Services
Under the bill, the leasing of employees by an OpCo from an ElCo is deemed a direct violation of the Federal Labor Law. This means that, for all employment law purposes, an OpCo will be deemed as the employer of the employees leased from the ElCo. This also means that the employees of the ElCo will be entitled to profit-sharing from the OpCo.
Additionally, under the Income Tax Law, any payments made by an OpCo to an ElCo for the leasing of employees will be nondeductible and, under the Value Added Tax Law, the value-added tax paid for those services will not be creditable.
Finally, under the proposed amendments, the use of an ElCo can give rise to criminal liability to both the OpCo and the ElCo, as well as joint liability among them for any unpaid Social Security taxes, housing fund contributions or income taxes not withheld from the employees.
b. Specialized Staffing Companies
The proposed amendments allow for the creation of staffing agencies for specialized personnel. These staffing agencies will need to register with the Mexican Department of Labor and meet certain qualification criteria.
The parameters as to what will be considered as “specialized personnel,” as well as the specific criteria for qualification for these staffing agencies is pending definition and issuance.
c. Employment Agencies
Should the proposed amendments be enacted into law, employment agencies may no longer formally employ temporary personnel, and therefore they will require that their customers formally hire these employees. This will create challenges for both the agencies and their customers, because once a customer hires the temporary employee, the employee would generally be entitled to all benefits and severance compensation when the temporary employment period ends.
Public Reaction and Outlook
Within hours of its release to the public, the proposed legislation has been universally rejected and condemned by the Mexican business community. Further, Mexico’s largest business groups have pledged to undertake lobbying actions with the Congress of the Union to ensure that any bill passed addresses the concerns of the employers that, while using these structures in a non-abusive manner, continue to look after their employees’ best interests.
While the final outcome of the legislative process is yet to be known, it is expected that the proposal will be enacted, and for the use of these insourcing and outsourcing structures to be severely limited. Therefore, we recommend that companies using these structures begin the process of analysis and contingency planning as soon as possible.