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News Article

Who Would Be the Big Losers in the Elimination of Outsourcing?

By Alessa Flores | Tue, 10/27/2020 - 17:12

President Andres Manuel López Obrador announced today that he will present an initiative to Congress to eliminate outsourcing in Mexico. He highlighted that outsourcing, in which businesses hire external companies to take over part of their activity or production only benefits companies and overlooks the rights of workers. "I am going to send a bill to make that mechanism disappear. It is going to be another controversial issue. I am bringing it forward, like the fideicomisos (trusts funds), but we have to clean it up. We cannot be accomplices to corruption," said López Obrador.

In its beginnings, outsourcing was created to help companies accomplish operative and support tasks so they could focus their strengths on increasing productivity, efficiency and growth, explains the College of Public Accountants of Mexico. However, this practice has also been abused. President López Obrador explained that "the reforms made by former governments (to allow outsourcing) were based on helping the company so that it would not be involved in administrative procedures,” pointing to payments to workers, social security and INFONAVIT. “What happened? That they abused," he added. Alejandro Bolaños Peréz, Member of the Fiscal Development Commission of Mexico’s College of Public Accountants, explains that outsourcing has been misapplied in Mexico, leading to withholding of salaries and reduction or even elimination of income tax (ISR) payments and social security contributions.

President López Obrador referred to a reform enacted in Nov. 29, 2012, by former President Felipe Calderon's administration with the objective to promote business competitiveness. It should be noted that the reform allows companies to "subcontract only specific or secondary tasks of a specialized nature. Subcontracted services may not be the same or similar to the services mainly performed by the company's workers." For example, a communications company may subcontract cleaning, private security or valet parking services, but should not be allowed to subcontract personnel who provide marketing or communications services.

According to figures from INEGI on the 2014 Economic Census, there were approximately 3.5 million outsourced employees. By 2019, this figure exceeded 4.6 million people. Although the figures show that the economically active population is increasing, this does not always translate to good job opportunities and good salaries for workers. The Mexican Human Capital Association estimates that 900 companies are currently avoiding legal obligations through outsourcing, with the most widespread practice being failing to register an employee’s real salary with authorities. Doing this, companies pay smaller IMSS and INFONAVIT fees.

Consequently, this practice affects public finances through smaller contributions but also affects the employee's future, since their pension and housing credit will be calculated at a lower rate of income than what they have always received. After the passing of the reform in 2012, millennials and new generations would be the most affected generation. Of these, 51 percent earn up to MX$7,952(US$377.73) per month and just 4 percent earn over MX$13,254(US$629.58) per month. In addition, this generation represents 25.7 percent of the population, according to data from the INEGI Intercensal Survey. 

Forbes Mexico explains that millennials are well aware of the economic crises, as they have grown between the fall in oil prices, the rise in foreign debt and the devaluation of the dollar. This generation has not been favored by socioeconomic conditions. In addition, it is estimated that 63 percent of millennials do not have a savings fund and 68 percent are in debt. "It is a generation that lives in a precarious way, in debt and without the ability to build a legacy. They cannot improve in social terms, because the conditions to do so do not exist," said Carlos Jimenez Bandala, a specialist in Organizational Studies at UAM, to Forbes Mexico.

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Alessa Flores Alessa Flores Senior Journalist and Industry Analyst