In our prior publication, we discussed an omnibus bill presented by Mexico’s President to Congress in November 2020. The bill proposed abolishing outsourcing of personnel in Mexico. Since then, the bill has now been discussed, was approved by Congress with certain modifications and, on April 23, 2021, the Executive Branch published the amended omnibus bill modifying a total of eight laws in Mexico.

Background

Within its Federal Labor Law, Mexico enacted a set of statutes regulating outsourcing of personnel in 2012, which allowed one party to hire another to provide personnel. The statutes generally permitted the hiring party to have the personnel under its direction, control and supervision, provided: (1) personnel did not render all of the hiring party’s activities; (2) vendor was able to justify the specialized nature of the services; and (3) services were not the same as those conducted by the employees of the hiring party.

One of the arguments advancing the November 12, 2020 bill banning outsourcing of personnel was based on the proposition that many companies had abused the outsourcing system to transfer core business activities to outsourced personnel (independent contractors) to avoid or diminish payment of labor benefits (mostly for mandatory sharing of 10% of the profits) and tax obligations by implementing corporate structures reducing inter-company margins and applying both outsourcing and insourcing mechanisms when hiring employees. The bill, as ultimately approved by Congress, has far-reaching consequences not only within the labor realm, but also for its social security and tax implications.

Outsourcing of Personnel
On April 23, 2021, following approval from Congress, Mexican President Andrés Manuel López Obrador (AMLO), published certain reforms to the following federal legislation applicable to the private sector: Labor Law; Social Security; Housing Fund; Fiscal Code; Income Tax; and Value Added Tax.

In summary, the reforms:

1. Generally prohibit outsourcing of personnel, which is understood to mean when one person provides, or puts under the direction and control, employees for the benefit of another.
2. Allow: (a) hiring third parties rendering specialized services or performing specialized work; and (b) inter-company supplemental or shared services, provided that the services rendered are not within the hiring party’s corporate purpose or core business.

Within its pre-contract due diligence process, those seeking to hire a third-party vendor will need to ensure the vendor has produced evidence of registration with the Ministry of Labor to render a specialized service. In addition to mandatory registration, the reforms call for including the purpose of the specialized service or work within a written agreement as well as the approximate number of employees rendering the specialized services.

Profit Sharing

Mexican labor law generally requires a business to share 10 percent of taxable pre-tax income with its employees. The reforms, published on April 23, 2021, capped the profit sharing at the highest between: (i) employee’s three-month salary; or (ii) employee’s average profit sharing received during the last three years.

Joint and Several Liability

The reforms at issue generally impose joint liability on the hiring company for any breach or violation of the labor law as amended, by its vendors for omitted benefits or unpaid social security contributions.

Migration of Personnel

Companies that have adopted corporate structures or included within their operations outsourcing of personnel might consider a careful evaluation of corporate structure, evaluating whether any adjustments need to be made to the corporate purpose of the companies and realigning said purpose to the core business, to reduce potential overlap with required third-party vendors rendering specialized services to a company.

The Registry: REPSE

The Ministry of Labor published an agreement on May 24, 2021, setting forth the general rules for vendors rendering specialized or shared services to register no later than August 23, 2021. The registry is administered by the Ministry of Labor and is known by its acronym in Spanish “REPSE.” The REPSE is a public registry that will be accessible via a portal (http://repse.stps.gob.mx/) and allows vendors providing specialized services to register. It generally requires making affirmative representations of the specialized nature of the services they will render and sets forth the list of documents and requirements for each vendor during the registration process. Unless the registration is cancelled for some reason, the registry provides for a term of three years from the date of registration.

The Contract: Specialized Services

The scope of the contract with third-party vendors differs with the reforms and provides that the scope of an agreement will be the rendering of specialized services. A contract for special services will now need to include specific information on the vendor’s registration, purpose and specific services to be rendered, number of employees, and obligation to cooperate in producing names of employees as well as their information and base salary (as mandated by law).

Imposition of Fines and Non-Compliance Tax Implications

The reforms include the potential imposition of harsh monetary fines, currently up to approximately USD $220,000, against both the company and a vendor in the event of a violation of the prohibition of outsourcing personnel. Failure to prove compliance may inhibit the hiring company to deduct, for income tax purposes, any payments made to an unauthorized contractor as well as crediting any value-added tax paid to an unauthorized contractor. Criminal consequences may also ensue in the event an individual or company violate the ban on outsourcing personnel.

General Considerations

As published on April 23, 2021, the reforms to the Federal Labor Law are effective one day after its publication. The reforms to the tax code, income taxes and value-added taxes will be in effect on August 1, 2021.

By August 23, 2021, vendors providing specialized services should be registered in the REPSE.

While the core changes of the reforms stemmed from labor issues, there is a whole subset of issues that follow to which consideration should be given, such as:

1. Assessment of:
   1. Corporate Structure
   2. Corporate Purpose
   3. Existing Contracts
   4. Employee allocation
   5. Potential employee migration
   6. Asset transfers
   7. Labor compliance
2. Implementation of:
   1. Enhanced due diligence for contracting with third parties rendering specialized services
   2. Revised protocols for assessing forthcoming contracts
   3. Updated contract administration guidelines for supervising vendors and new reporting obligations to the government
   4. Controls for supervision of vendors providing specialized services

During AMLO’s presidential administration, we have seen several structural changes in Mexico and these reforms are not an exception. While the central part of the reform is based on labor law issues and taxes, the reforms carry changes on many fronts and call for a careful assessment of a company’s corporate structure, corporate purpose, data protection and contracts with third parties. The endgame of any assessment should be to identify mechanisms to implement changes within an organization to comply and satisfy the new requirements, which may entail a corporate restructure, amending internal policies and procedures and modifying contract templates, among others. Therefore, the foregoing general considerations may be tenuous of the whole set of issues that businesses should consider implementing and design those changes within a business to comply with these reforms.