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News Article

Impact of the 2012 Labor Reform on the Mining Industry

Mon, 10/21/2013 - 13:33

The mining industry is both one of Mexico’s biggest income generators and one of the largest generators of direct and indirect employment in the country. As such, Mexico’s labor law and the way in which it is administered and regulated are critical in deciding the ways in which the sector can function and develop. The recent reform to the labor law is for the most part viewed by legal experts to have been a vital modernization that will lead to economic growth for the whole country, and given the direct impact it has on activity in the mining industry, the sector must adapt to this new legal environment.

The 2012 Labor Reform represented the long overdue modernization of an outdated law that had been mostly unchanged since 1970, and the new law better reflects the reality of Mexico’s current social and labor environment. According to the National Institute of Statistics and Geography (INEGI), in the four decades since 1970 life expectancy has increased from 61 to 76 years, and the active working population as a proportion of the overall population has increased dramatically from just half to around two thirds. “The 2012 Labor Reform is a good opportunity for Mexico because it allows the country to reorganize and improve employment relationships. In general terms it was necessary, given that the last important amendment to the labor law took place in the 1970s. It may seem like a very aggressive reform, but it was a long-needed one,” says Rafael Cereceres, Partner at C&V Abogados.

The reform proposal was exhaustive, addressing 80% of the law’s 1,010 articles and integrating all aspects of the labor market, from contracting and discrimination to salary payment and dismissal. The legislative power ultimately approved modifications to a third of the Law’s original content. The mining sector is arguably one of the industries that will be more significantly affected by the recent Labor Law Reform, principally because the law contains a new chapter dedicated solely to mining (articles 343-A to 343- E). The focus of the legislation laid out in this chapter is to improve health and safety regulations for mining operations in Mexico based on requirements that range from having a proper management system for health and safety issues and informing workers of the risks inherent in this type of work, to making both concession holders and mining operators responsible for ensuring that mines are managed in compliance with all safety regulations.

The mining chapter of the new Labor Law also gives workers a more active role in the upkeep of health and safety standards. Article 343-D gives workers the right to refuse to work if their employer is not fulfilling certain security obligations, such as providing them with the proper training, protective clothing, and equipment. Another positive development in this area is that those found to have breached safety regulations, to the extent of potentially resulting in the loss of life, can now be fined up to 5,000 times the daily minimum salary (over US$25,000). These are changes that have the aim of, and hopefully will succeed in, improving the industry’s security record.

The general areas of reform, outside of the mining chapter, also have an important impact on the way in which mining companies operate. Not the least of these is the tightening of regulations around outsourcing, which is common within the Mexican mining industry, for example at the construction stage or in the provision of catering or cleaning services. Besides the obvious practical advantages of outsourcing, it often has the additional benefit of bringing costs down, because Mexican companies are obliged to share their net profit with their employees, whereas such payments are not made to those working for the outsourced company. Changes made under the 2012 Labor Reform, however, aim to eliminate this practice. For example, companies may now only outsource ‘specialist’ labor that is different to that provided by the company’s regular, contracted employees. The law also states that the outsourced labor may not account for the entirety of the company’s operations. Placing such limits on the conditions under which an organization may outsource will directly affect the ways in which mining companies conduct their business. “Most companies in the industry contract services through external providers,” says Alfonso Rodríguez Arana, Director General of LegalMex. “In many cases the staff provided through these channels plays a direct and immediate role in the core business of the company, even though they are subcontracted.” According to Rodríguez Arana, those companies that hold a mining concession without having a single employee are greatly affected by these changes and will need to restructure as a result, if they have not already. If they do not do so, mining companies that are found to have created false institutions with the aim of reducing their labor expenses will now be sanctionable by law.

Outsourcing represents one way in which the 2012 Labor Reform has served to improve the balance of the employer- employee relationship. While it has tightened the law in this area, the reform has simultaneously opened up in the area of contracting. Employers can now hire workers through a number of different contracting schemes – including trial contracts, temporary contracts, and seasonal contracts –and it is now also possible to hire employees at an hourly rather than a daily rate. It should be noted that, whatever the length of the contract or number of hours worked, all employees share the same right to the national minimum salary and to receive social security benefits as specified by law. Employees may also work overtime at double the rate of their usual hourly wage. However, overtime hours should not exceed three hours per day and cannot surpass three consecutive days. These changes afford employers much greater flexibility in meeting their companies’ staffing needs, reducing the risk of overcommitting to long contracts that may not be required in the long-term. It is also now easier for either party to terminate the contract before it expires.

Despite some reservations about potentially increased costs for mining companies operating in Mexico - resulting from new outsourcing regulations and having to spend more on increasing security provisions - the 2012 Labor Reform is generally viewed by legal experts as being beneficial for the industry. Indeed, many experts think that it will even increase productivity across all industries. The Mexican Institute for Competitiveness (IMCO) predicts that, as a result of the reform, Mexico’s GDP will increase by between 1 and 1.5% annually.

“The 2012 Labor Reform is a good opportunity for Mexico because it allows the country to reorganize and improve employment relationships”

Cereceres views the Labor Reform as a positive step forward that provides a good opportunity for Mexico’s mining industry to improve its employment relationships. The biggest improvement for Cereceres is that the government has now increased its surveillance, making sure that the new rules and regulations are being properly implemented across industries. “The new government is working very closely with the Ministry of Labor to ensure that mining companies are complying with their labor and safety obligations, as employers. This is a positive change, and one that was needed,” he says. In fact, mining companies that apply international best practices can benefit greatly from the reforms made to Mexico’s Federal Labor Law. Among them is the opportunity to hire employees under new recruitment schemes, including trial periods and temporary training programs.

The law also protects employers against potential abuses from former employees. In the words of Rodríguez Arana, “one of the most transcendent issues addressed by the reform is the imposition of a limit to wage payment during labor trials. This is especially important considering that, in Mexico, such trials last – at best – three years, during which the employer had to pay the full amount of the plaintiff’s wage as if he or she were still working for the company.” Mexico’s labor litigations are carried out by a Workers’ Compensation Appeals Board (JFCA), which currently has a severe lag in case resolution and takes an average of 51 months to resolve a trial. An amendment to the law means that if an ex-employee brings a case of unfair dismissal against its former employer and wins, the employer will be obligated to settle unpaid wages equivalent to the worker’s full salary for 15 months, as well as a 2% interest for every month that passes until the trial is resolved. In addition, lawyers and public officials that deliberately delay trials will be held liable and sanctioned. This is welcome news in particular for small- and medium- sized mining companies that previously could have had to pay many years’ worth of back payments whenever faced with an unfavorable sentence in labor trials. The reform will undoubtedly prevent many companies from facing financial difficulties or even closure due to costly legal disputes.

Another key development is the country’s ratification of the International Labor Organization’s Convention 176 on Safety and Health in Mines, which was written in 1995. However, in 1998 Mexico’s Ministry of Labor and Social Welfare recommended that it not be ratified by Mexico because the country did not yet have the legal means to comply with its terms. Nevertheless, in August 2012, the Ministry suggested that the necessary process be begun to reconsider its ratification. Although this convention is yet to be ratified, the Ministry of Labor and Social Welfare has recommended that the government now do so. By committing to such conventions, Mexico stands itself in good stead for attracting further foreign investment into its industrial sectors.

While recent reforms and their consequences represent a challenge for mining companies operating in Mexico, in the long term they will prove to be a positive step forward for the industry. LegalMex has successfully advised its mining clients on the reform’s risks and benefits, and along with his partners and expert associates at LegalMex, Rodríguez Arana helps further his clients’ business by promoting a preventative approach to labor conflicts. “This implies the modification of contracts, verification of legal relationships with suppliers, and many other due diligence changes. We have deeply helped our clients in the mining industry and this is why we fortunately have a lot of work,” he adds. Despite the speculation around the exact potential that the 2012 Labor Reform has to improve the development of Mexico’s mining industry, its full impact will only be revealed in the coming months and years.