Mexico: New Bill aims to reform Outsourcing Rules, Regulations and Practices

Senator Napoleon Gomez Urrutia from Morena’s party, introduced a Bill to reform the Federal Labour Law seeking to regulate Sections 13 and 15, regarding outsourcing, limiting it to temporality, to activities not related to the core business and to eliminate in-sourcing.

In case this reform is approved, it would significantly impact the costs of doing business in Mexico.

STATEMENT OF LEGISLATIVE INTENT.

The Statement of the Bill is focused on the elimination of the alleged current practice, to simulate that employees are not a formal part of the company in which they work and to artificially create a fictitious labour relationship that directly affects their labour rights, denying them the right to profit sharing and, furthermore, to defraud the tax authority with invoices issued from this simulation. These practices, in accordance to the Statement, are illegal and, in some instances, of a criminal nature.

The purpose of this Bill is to distinguish what is considered illegal and criminal outsourcing, from those legally subcontracted services, as provided for in the Federal Labour and Social Security Laws;  services that the Bill recognises as essential to the country’s development.

It is important to highlight that the Statement considers an outsourcing to be lawful when its end is to provide specialised services by a contractor, with its own employees, in activities that are not essential to the contracting party’s business, but are still required. In other words, the Bill’s intent is to consider as legal, only those outsourced services that are not part of the “core business” of their beneficiary.

The Bill highlights the following issues derived from illegal outsourcing:

1. Tax and labour abuse harming employees and public finance.
2. The lack of labour inspections.
3. The use of legal artifices to reduce employees’ salaries and benefits.
4. Job precariousness.
5. Tax and social security elusion.
6. Social welfare affectation.
7. Schemes offering benefits without foundation and justification to contracting parties and employees.
8. Employees’ impossibility to attain a decent retirement, regarding their permanent entry and exit for the labour market, as well as their social contributions with a minimum wage, even if they really perceived a salary over the minimum.
9. Profit sharing affectation.
10. Virtual companies, with no assets, selling schemes without care and respect strategies.
11. General Managers with low salaries.
12. Simulated labour relationships, for example, fake commission agents.
13. Ghost companies.
14. Companies disappearing just a few months after they are created.

Another important aspect of this Bill is that it considers a criminal immunity program for those contracting parties that incurred criminal behaviours affecting employees and the tax authority, if they, voluntarily, compensated the damage caused.

As it can be appreciated, the Bill limits outsourcing to a company’s non-essential activities, a situation that is already stated in Sections 13 and 15 of the Federal Labour Law.

The reforms to Section 15-A, consequently, in essence, regulate in detail what is already provided in the above-mentioned Sections 13 and 15, in the following terms: a) establish the concept of essential activity; b) avoid simulation; c) forbid “in-sourcing”; and d) establish criminal penalties.

After reviewing the Section’s text proposed in the Bill, we conclude that the currently regulated outsourcing provided in Section 15-A, has effectively disappeared.

If the proposed reform initiative is approved, companies will be required to initiate a comprehensive review of their existing outsourcing agreements in order to avoid responsibilities ranging from profit sharing payments to employees to the imposition of criminal penalties. Furthermore, such companies will have to terminate their in-sourcing agreements, which could, as a consequence, result in increased operational costs.