The Outsourcing Reform Broke Paradigms

The new Labor and Tax Reform, regarding outsourcing and subcontracting, is changing companies’ operations across Mexico. While the new regulations brought considerable challenges to every player involved, they opened a new range of possibilities, agreed industry experts.

“The biggest challenge, administratively and economically, is to incorporate the formerly subcontracted personnel that work in essential processes of the companies. In the long term, it is an opportunity to increase production thanks to a higher motivated workforce. Human Resources departments can take advantage of a robust onboarding process to equilibrate talent, know-how and increase productivity in the long term,” said Melissa Pereda Nájera, Head of Human Resources of Volkswagen de México.

Published on April 23, 2021 and being enforced gradually from April 24 to Aug. 1, 2021, the Labor and Tax Reform prohibits outsourcing as it aims to end with “the perverse effect of preventing workers from benefiting or participating in profits,” according to President Andrés Manuel López Obrador, who introduced the reform in November 2020. In general terms, the outsourcing reform requires that companies hire directly all personnel needed to carry out core business activities.

Under the new legislation, it is considered outsourcing when an individual or legal entity provides or puts at the disposal its own employees for the benefit of another individual or legal entity. However, this does not mean that staffing and employment agencies are going to disappear. These companies can still intervene in the hiring process of personnel and participate in recruitment, selection and training but they will not be considered as employers, since that label is held only by the individual/entity that benefits from the services provided, according to International Tax Review.

“We can still offer the subcontracting of specialized services, as long as they are not part of the core business activities of companies. Outsourcing is recognized and used across the world, including international companies operating in Mexico,” said Francisco Martínez, CEO of The Adecco Group Mexico. There are many opportunities to take advantage of the new regulation, despite it being “more restrictive” than in other countries, he added. “It was necessary to end with bad practices. (The new Reform) will professionalize subcontracting and outsourcing, leaving only serious, formal operators that comply with law,” said Martínez.

Outsourcing of specialized services and activities that are not part of the core business activities of the beneficiary are still allowed, as long as the contractor has the Registry for Providers of Specialized Services and Specialized Works (REPSE) recognized by the Ministry of Labor. Until Oct. 12, 2021, there are 63,561 formally-registered contractors in Mexico, according to Héctor Marquez Pitol, Human Capital Commission President of COPARMEX and President of AMECH.

The first two years after the enforcement of the Reform were uncertain for most players involved, according to Alberto Alesi, ManpowerGroup General Director for Mexico, Caribbean and Central America. However, companies are now required to do “thorough analyses” to define their main economic activities and smartly outsource specialized services. While companies will be forced to have larger employee workforces, with their inherent budget challenges, “outsourcing and subcontracting evolve and it is a matter of time for things to stabilize. Recruitment, incorporation and training is not exactly the core business activity of many companies, which will continue to contract specialized staffing agencies,” said Alesi.

The new Labor and Tax Reform could be beneficial for Mexico but in the meantime, it is affecting thousands especially following the pandemic, agreed industry experts. The COVID-19 pandemic left 13 million unemployed, according to INEGI; but between May 2020 and June 2021, 12.3 million people returned to active economic activities, according to IMSS, leaving around 650,000 still unemployed. The outsourcing reform “increased the informal employment rates as around 900,000 lost their jobs,” while “the deficit caused by the pandemic is still not recovered,” said Alesi.

Months before the Reform was enforced, IMSS identified over 5 million people subcontracted in the country. During the transition period, 2.7 million employees were incorporated in their employers payroll, while the rest could remain working under the specialized services scheme where they were already working, according to the Incorporation and Collection division of IMSS.

The first months under new regulations are the toughest for everyone involved, said Martínez: “The most affected players have been our own clients. They had to directly hire the workforce they had already subcontracted and their budgets have suffered. We adapted rapidly to the new regulations, changing our structures and service portfolio to fully comply with law. The new regulation came here to stay and contractors are forced to obtain the REPSE.”

From companies’ perspective, the Reform opened opportunities toward a new work environment. The transition forced companies to be more conscious about their own needs and processes, while client-supplier relationships have been strengthened, highlighted Pereda.

Collaboration Rather than Conflict

While the Labor and Tax Reform was controversial due to the negative impact to both companies and employees, most of the private sector chose to actively work with authorities to draft the law rather than fighting it through other legal resources, such as legal protection (amparo), which was filed by at least 20 companies across the country, reported Expansión. For instance, cosmetics company Mary Kay won judicial concessions to delay the implementation of this norm and other companies are arguing that the law's applicability can lead to discrimination, reported MBN.

The Mexican Association of Human Capital (AMECH) initially considered the possibility of drawing on legal protection. However, AMECH members decided to collaborate with the authorities during the process of writing the law, due to the limited solutions that legal protection offered to staffing companies and everyone involved, agreed industry experts.

“This resource slows you down. A judge could protect you against the Reform but everyone involved will also need the protection to legally subcontract employees. Additionally, protected companies cannot make tax-deductible bills from Aug. 1, 2021. While there were constitutional foundations to follow this path, this made absolutely no sense to us so we would rather work with authorities to address the situation in the most plural way possible,” said Alesi. The Reform, while perfectible, came to eliminate bad practices and informality, and it made “no sense” to seek legal protection rather than collaborating with legislators throughout the process, agreed Martínez.

Considering what has happened in other countries across the world, law enforcement will play a key role during the transition to new regulations, agreed industry experts. “We hope that companies that try to play outside the regulation are prosecuted with the full force of law. Fortunately, the Ministry of Labor is opened to receive complaints in this regard,” said Alesi.

New Opportunities

The Labor Reform opens new opportunities toward a more automated future inside companies. “Innovation and development of competences will grow technology startups, that will offer innovative solutions to companies,” said Pereda. While it will take some time, the reform will break many paradigms in the Mexican industry.

New regulations have to be open to temporary employment, said Martínez. Temporary employment started attracting public policy attention across the world three decades ago, when it became popular, according to the International Labor Organization (ILO). Under this scheme, workers are engaged only for a specific period of time, including fixed-term, project or task-based contracts, as well as seasonal or casual work, including day labor.

“With our international experience, we noticed that in countries where temporary employment is regulated, informality is dramatically reduced. For instance, when bachelor students end their studies, they have the opportunity to work temporarily in diverse companies for about two years and then decide where to stay. According to our data, 33 percent of them end up staying in one of those,” said Martínez.

Temporary employment is an area for opportunity in Mexico, said Martínez, and highlighted the benefits it could bring to companies during peak seasons, while giving interesting internship opportunities to younger generations in a regulated ecosystem.