Mexican Labor Reform and USMCA Labor RequirementsBy Alejandro Enríquez | Tue, 08/11/2020 - 06:00
Q: To what extent was the Mexican Labor Reform of May 2019 a prerequisite for USMCA?
A: It is an understatement to portray it as an element the US demanded from Mexico. However, there was a conjuncture of different political moments in both countries that culminated in the reform. The Labor Reform of May 2019 is also the result of a secondary regulation dictated by the constitutional amendment introduced in 2017. These changes were necessary for Mexico to comply with international labor standards in order to access certain international trade agreements. Mexico had ratified ILO Convention 87, relating to freedom of association and during the early days of this administration the country ratified Convention 98, relating to recognition of effective rights in collective negotiation. To acknowledge the country’s obligations, the country needed to change its practices, the federal law and the constitution.
Q: What is the essence of the Labor Reform of May 2019?
A: Unfortunately, labor affairs in Mexico have been characterized as being conflict-oriented. This is rooted in the legal framework and the mindset of the actors involved in labor justice. The Labor Reform changed the orientation from a focus on conflict to focusing on conciliation. Lawyers, companies, unions and workers should understand this comprehensive change in mindset. The reform is clear in regard to conciliation. There is a moment prior to judicial conflict where the parties involved are required to try to conciliate before appearing before the courts. This is a right step toward changing the conflict mindset, while also saving costs and allocating responsibilities.
Q: What are some of the implications of the reform for companies?
A: Companies should focus on training their teams in preventive measures and conciliation. Their members should be ready not only to be more efficient, but to have an understanding of labor psychology and how to improve the working environment.
The second challenge is to move on to effective and true union representation. Companies in Mexico were actually immersed in this aspect of the reform until COVID-19 paused it. The law says that in a four-year-period, the collective relations between companies and unions should be legitimized through an election within the union. To agree a collective bargaining agreement, a majority of the union members must support it. The reform also establishes that in order to request the execution of a collective bargaining agreement, the union will previously need to gather the support of at least 30 percent of the union workers, which is similar to the US labor system.
Q: What important labor commitments has Mexico agreed to in USMCA?
A: USMCA Chapter 23 acknowledged labor rights with which the three countries should comply, which by the way are rights to which no one can object; these can be considered labor human rights. Among them are freedom of association, collective negotiation rights, prohibition of forced and child labor, elimination of discrimination and respecting minimum working conditions. Mexico is committed to these rights, albeit aware of the reality the country faces. For instance, USMCA dictates that the three parties shall commit to revise collective bargaining agreements, which is the equivalent to the Mexican Labor Reform’s legitimation process.
The other major commitment Mexico made in the agreement was to have clear impartiality in labor justice, which means compliance with 2017’s constitutional amendment. The amendment states that labor justice will be imparted by specialized courts in the judicial branch instead of the Conciliation and Arbitration Boards dependent on the executive power. In the Conciliation and Arbitration Boards, the three parties, executive government, business and unions, would settle disputes, but often there was a conflict of interest due to the way representatives were appointed. Boards are still operating as there is a transition period for the implementation of the reform but due to COVID-19, the backlog is increasing considerably and specialized courts are not formally established yet. The period for implementation will depend on the state level. Currently 8 states are expected to start functioning during 4Q20.
Q: How will the dispute settlement mechanisms established in USMCA address labor matters?
A: Any of the three countries can state a claim as to whether or not another party is complying with its obligations in creating the necessary reforms and implementing them. If Mexico, for instance, fails to comply, the other parties can bring a claim through the general dispute settlement mechanism established in Chapter 31.
However, modifications were introduced during December 2019 to address political and economic concerns. The US demanded that the specifics on environmental and intellectual property, among other topics, be reconsidered. Regarding labor rights, it asked for more guarantees that labor issues would be truly addressed by the Mexican government. Most of the changes passed as they were proposed due to the political scenario in the US and Mexico. These changes implied stronger burdens of proof for Mexico and led to the creation of the facility-specific rapid response labor mechanism, which is a more agile dispute settlement mechanism regarding labor rights. Burden of proof is especially important as the amendment established that “For purposes of dispute settlement, a panel shall presume that a failure is in a manner affecting trade or investment between the Parties, unless the responding Party demonstrates otherwise.” This leads us to think that there is a strong possibility that claims will be made since parties will have to demonstrate claims are not founded.
Q: What are the implications of the facility-specific rapid response labor mechanism?
A: This mechanism was included in USMCA’s protocol of amendment and its scope addresses labor rights, specifically freedom of association (freedom of unionization) and freedom of collective negotiation. For this mechanism to get actual results, the Parties will have to follow the established procedure. Having a new mechanism that is actually swift can be disconcerting. Compared to the general dispute settlement processes, which can take up to a year and a half, this new mechanism aims to solve a dispute within six months.
The mechanism is facility-specific, which at first may seem to apply to only a few industries. In reality, it applies to most economic activities since a vast percentage of corporations have collective bargaining agreements, active or not. Moreover, the amendment established priority sectors, which originally involved manufacturing and mining activities, but the final text states that a priority sector “means a sector that produces manufactured goods, supplies services or involves mining.” This definition is considerably vague and its scope can include many other economic activities. Facilities are defined as covered facilities, which in practice could have different implications. In Mexico, collective contracts are negotiated between unions and companies, as the legal person, rather than for a specific workplace or site.
Q: How will a party activate the mechanism?
A: For Mexico to present a case against the US, there needs to be a domestic ruling by the National Labor Relations Board (NLRB), while the US only needs an allegation to present a case against Mexico. Under these conditions, Mexico can expect that there will be a greater number of claims made by the US in this regard.
Q: What are the consequences of failing to comply with the stated labor rights?
A: The mechanism is designed to address breaches at specific facilities. I genuinely believe that this scheme intends to ensure companies respect workers’ rights since this will ultimately benefit the people and the region.
As for the consequences of denying labor rights, there are sanctions, or remedies, that are not really specific. Annex 31-A, article 10 establishes different remedies that “may include suspension of preferential tariff treatment for goods manufactured at the Covered Facility or the imposition of penalties on goods manufactured at or services provided by the Covered Facility.” While the former is clear in the sense that preferential tariffs would cease, the latter remains ambiguous as “penalties” are not defined. Lastly, if there is a case where a facility has received ongoing denial of rights determinations, the consequences can be more severe, including the denial of entry of their related goods.
Q: What are the potential risks for companies regarding their relationships with unions?
A: Establishing a connection between allowing workers to freely elect their union representatives and the potential economic impact this could have is not an easy task. Businesses have pointed out that denial of rights are not necessarily a result of company wrongdoing since internal union disputes can ultimately affect manufacturing activities. On the one hand, companies cannot interfere with the creation of unions but if the unions fail to meet labor rights, companies are ultimately penalized.
Training is required on the do’s and don’ts within the relationship between companies and unions bound by a collective bargaining agreement. Companies are just starting to become familiarized with these new standards. For instance, there are around 450,000 collective contracts in Mexico and, according to Mexico’s Ministry of Labor, just less than 200 contracts have been legitimized.
Q: How will this mechanism relate to the new labor value content (LVC) rule established by USMCA?
A: Despite its labor component, LVC is not part of the mechanism, unless the unions want to bring it to the table as a violation of collective labor rights. However, if for the union the current working conditions remain the same, the union is not really affected by the actual wage. Failing to comply with LVC is a trade violation to the treaty that can be solved through other dispute settlement mechanisms. There is however, the unlikely possibility that other violations to the treaty can be brought to the labor mechanism if there is a case of recidivism.
Luis Monsalvo is a lawyer and a university professor specialized in labor law. He is also one of the recently appointed panelists of the USMCA’s facility-specific rapid response labor mechanism between the US and Mexico. Additionally, he is Managing Partner of Monsalvo Abogados, a Mexican law firm with more than 40 years of experience in labor affairs.