With or Without(sourcing)?

On April 24, the Labor Law Reform was published in the Official Journal of the Federation, making it a reality that the federal Labor Law will go through some drastic changes when it comes to outsourcing of personnel. The publication gives companies 90 days (until July 21) to rectify their hiring schemes to align with the new rules and regulations around outsourcing.

Mexico has a young population; the average age is 26. The country’s total workforce is around 55 million, of which 28 million work in the informal sector and 27 million in the formal sector. The official unemployment rate of 3.65 percent. Currently, 4.7 million workers are employed through outsourcing schemes, making Mexico the country with the fourth-largest outsourced workforce in the world after the US, China and Japan, according to the World Employment Confederation (WEC). Mexico has around 11,000 companies that outsource workers to others, with different schemes and strategies.

These are the outsourcing models used in Mexico:

• Through an external agent under outsourcing scheme (registered outsourcing services)
• Through an external agent under “specialized services,” (agent sends service invoice)
• Insourcing: companies using various entities (i.e., one for commercial activities and another for hiring personnel)
• Unions: small portion of salary is paid and declared to tax and social security authorities, remainder is paid through the union

The main reasons companies use outsourcing:

• No infrastructure for handling hiring and payroll
• To avoid direct relationship with employees, shield against lawsuits and employer responsibilities
• Avoid PTU/Profit Sharing: 10 percent of fiscal profit has to be shared out to employees
• Lowering tax/social security payments

Unfortunately, outsourcing has become a dirty word in Mexico, where it is mainly known as a means to lower personnel costs and PTU, cheating employees of their full, entitled benefits and the government of tax revenue. It has been a hot topic for over a decade and legal changes have been in the pipeline since then. There are also “good” outsourcing companies that pay 100 percent of the benefits to workers; however, the government has decided not to consider these in the reform.

Approved Labor Law Reform

Under the new reform, outsourcing schemes will be outlawed except when applying to areas that are not the business purpose as stated in the Articles of Incorporation of the entity or related to the main business activity of the entity (by invoicing volume). Failure to comply will result in:

• All invoices related to outsourcing will not be tax deductible
• VAT (16 percent) on invoices related to outsourcing will not be refunded
• Fines of MX$179,240-MX$4,4481,000 (US$9,000-US$225,000)

Exceptions:

• Specialized services (Articles 15A – 15D from the Federal labor Law will be repealed); outsourcing of specialized services is allowed, as well as contracting out projects as long as these do not cover areas stated as the business purpose in the Articles of Incorporation or represent the main business activity of the entity or the performance of specialized works that are not included in the corporate purpose or are not the main economic activity of the company. You cannot have the same position as employee and in outsourcing

• Construction, where there are temporary contracts available; in this case, there needs to be a copy of the construction contract between the client and services provider with every employment contract and the period of the contract needs to be respected
• You can still have various entities within the company for different services that you provide, as long as they are not intertwined when it comes to income.

Registration with Department of Work and Social Welfare (STPS)

Outsourcing agencies/contractors need to be registered with the Department of Work and Social Welfare and meet a number of compliance requirements. Full details about this registration will be published on May 24, and agencies will have 90 days after that to register and regularize outsourcing services.

Changes in PTU (Profit Sharing)

PTU payment is limited to:

• Maximum payment of the equivalent of three months’ worth of salary*

     OR

• Average amount of PTU received during the last three years*

     * Whichever is higher will apply.

How to Move Forward?

Within the legal framework, there are various solutions on how to move from having outsourced personnel or becoming an employer. Here is a short description of three possible scenarios; a personalized solution needs to be found for each and every company, depending on the cost-benefit ratio.

1. Becoming an employer in Mexico

In this case you need to be prepared to take on the entire HR administration or hire a service company to manage your HR department. There are a few steps you need to take before becoming an employer and in managing your personnel:

• First, you need to legally establish your entity in Mexico (before a notary, registration with the tax authorities, open a bank account)
• Second, you would need to register as an employer (with the tax authorities, social security), register your risk category, register with INFONAVIT (housing fund), FONACOT (loans fund) and the National Migration Institute (if you have foreigners on your payroll; take into account that for each foreigner on the payroll you need to also have nine national employees)
• Set up personnel administration, which includes but is not limited to:
  • Labor contracts (set-up, sign and file)
  • Keep personnel file on all employees (must be available to employee)
  • Payroll calculation and payment every two weeks (payment sequence can change per industry)
  • Digital payslips (CFDI)
  • Social security: registration/changes, sick leave, work illness/accident follow-up, maternity
  • Administration of benefits and overtime (through linked software system)
  • PTU/profit-sharing calculation and payment
  • Termination of contracts (either justified or unjustified termination with all paperwork)
  • General HR attention: questions, recruitment, information
• Department of Work and Social Welfare (STPS)
  • NOM-35 (administration and adjustment for emotional healthcare of employees)
  • Mixed commissions (>30 people within the organization), five commissions to be set up by employees that safeguard that all benefits and rules are observed. The commissions and procedures have to be approved by STPS and will need constant administration and updates that can be audited at all times:
    • Security and hygiene
    • Productivity, training and qualifications
    • PTU/Profit sharing
    • Personnel seniority rights
    • Internal rules and regulations
• Additional benefits
  • Benefits that are not compulsory by law, such as private medical insurance, food vouchers, savings fund, car lease, housing and other benefits. Although not compulsory, some of these benefits are usual in most companies and need to be managed carefully.
• Personnel logistics
  • Travel arrangements, accommodation, expense management, training, medical exams

2. Specialized services

Personnel who are not directly linked to the official business purpose (as stated in the Articles of Incorporation) or main business activity (as per invoicing volume) of the client company can be hired through an outsourcing agency.

Outsourcing companies have to register before the Department of Work and Social Welfare (STPS) and obtain a permit to perform these specialized services. From that moment, they are allowed to invoice for outsourcing services but need to comply with a high level of administration within the legal framework. The registration list is called the “Padron,” and will be published by STPS by May 24, after which more information will be available.

These might include administrative, commercial prospection, QHSE and drilling services

3. “Construction” contracts

There is the possibility to hire temporary personnel through a third party if the temporary project is not related to the business purpose as stated in the Articles of Incorporation of the entity or related to the main business activity of the entity (by invoicing volume).

This could concern, for example, the installation and implementation of a new IT system, offshore construction or pipe laying, among others.

Other options

The three options mentioned above are the options that are most common within the legal framework. There are other options, such as:

• Outsourcing services like administration, commercial prospecting, regulatory consulting
• Contractors, where the candidate rendering service sends an invoice instead of being contracted (if a contractor only invoices to one company, (s)he is automatically considered an employee)

Each company, project and employee is unique, and a personalized solution is out there for everyone, depending on the current situation and structure of the company, its future plans and outlook.

At iPS – Powerful People, we have identified various alternatives that are 100 percent compliant under the Mexican law and ensure that all human capital receives the benefits they are entitled to. In the end, the reform is implemented for the benefit of employees and we believe that its personnel are the most valuable assets of any company.

Do not hesitate to reach out to us to get a personalized solution for your specific situation.