Mexico’s Outsourcing Law: Incomplete, but Opportune

Mexico’s outsourcing law has met its prime objective: to increase formal employment. But its rigid language has left out new modalities of work that became commonplace in the post-pandemic reality. As such, the outsourcing law should be expanded to include temporary staffing opportunities to reflect this new reality. It should provide the flexibility that companies need, creating a timely opportunity that could help speed up the country’s economic reality, according to industry experts.

“Over 85 percent of the firms that inadequately offered outsourcing disappeared and 3 million people have shifted from outsourcing to formal employment,” said Leonardo Lara, Wealth Leader, Mercer Mexico.

Mexico’s outsourcing law was drafted to circumvent the audacious abuse of subcontracting that left millions of workers financially vulnerable and without legal recourse to confront their employers. Its announcement and subsequent implementation were met with initial panic and a race to comply and avoid fines. For many, this transformative process involved the reinvention or reconfiguration of entire human resource departments, which often expressed the need for internal support. On the other hand, employment agencies saw themselves obligated to transform their entire business models to accommodate the needs that arose from this shift.

This inadvertently triggered a temporary hiring freeze that ultimately hindered the generation of formal employment as intended. However, quantifying the exact impact is hard to discern completely as its enforcement came about during the pandemic, said Maya Dadoo, Co-Founder and CEO, Worky. Prior to this regulatory change, it is estimated that more than 5.2 million people worked under the name of an outsourcing company, of which 4.3 million were rehired by the client company, according to data from ManpowerGroup Mexico. This left a discrepancy of 900,000 people that were not registered with the Mexican Institute of Social Security (IMSS), indicating that they either lost their job or were pushed into the informal labor market. Altogether, this led to the demise of Mexico’s once reigning subcontracting industry, shrinking by an estimated 80 percent, said Francisco Martínez, CEO, Adecco Group.

Companies coped by internalizing many of the positions that should theoretically continue to be outsourced to a third party. “This is the first indication that the reform is based on an incomplete law,” said Martinez. One such task concerns payroll processing, which in many cases is being handed off to directors of human resource departments that have never had to curate one, but if done incorrectly could bring about hefty legal consequences coming from IMSS. “This has generated an overnight demand for talent that does not yet exist, which needs to be developed and nurtured with urgency,” said Dadoo.

While this is only one aspect of the ongoing confusion regarding the outsourcing law, it highlights the desperation of companies and the need for consulting on this unfolding process. Demand for consultancy services is likely to increase further in the following months now that the Ministry of Labor and Social Security (STPS) and IMSS have proven to be willing to come after companies that do not comply. “Their recommendation is follow the law and use the regulation to innovate internal processes,” added Martinez.

Collectively, this transformation has incurred significant costs for companies. Even though these players they may be inclined to reduce costs, they should certainly not try to bypass compliance standards, warned the experts. For now, companies should focus on “meeting compliance measures and seek professional advice,” so that they are not found outside of the law, agreed Regina Cabal Urquiza, Co-founder, Momlancers. Nevertheless, it is clear that Mexico’s outsourcing law needs to be amended to include the function of temporary staffing companies to provide the flexibility that companies and some working people need. For this, legislators can look to similar outsourcing laws abroad and retrofit them to accommodate the sociopolitical reality of Mexico. This effort will encourage the creation of more formal employment, which will be the central challenge of 2022.