Global employers may soon be faced with significant changes to their Mexican workforce structure as a result of proposed legislation banning outsourcing of personnel.
Outsourced Labor Impact on Profit Sharing Targeted
One of the key drivers of the proposed legislation relates to Mexico’s law on profit sharing. In Mexico, ten percent (10%) of a company’s taxable profits are legally required to be shared amongst its employees.
For years, it has been common practice for employers to minimize the financial impact of this legal obligation by utilizing services entities and contract workers. In the most common structure, there is an operating company, which generates the business profit, and a separate services entity that employs the workers who perform services for the benefit of the operating company.
The operating company, which may have very few or even only one employee, sources workers from the services company, and other third party contractor entities, to perform the work of the core business. But because these workers are not employed by the operating entity, there is no legal requirement that they receive a profit share from that entity. Instead, their profit share is generated from the services entity or third party, which typically has far less profit than the operating company to distribute.
Presidential Push To Effectively Eliminate Outsourcing
In an effort to reform existing labor practices, including the realities of profit sharing described above, in November 2020, Mexican President Andrés Manuel López Obrador proposed legislation that would effectively eliminate outsourcing of personnel.
Under the proposed bill, operating companies will no longer be able to source the labor used to carry out the business functions from related services entities or third party providers. Companies would still be able to engage contractors to provide “specialized services” unrelated to the core business. In effect, this means that employers will no longer be able to utilize the operating and services entity model, nor would they be able to source labor for the business from a third party.
Employer Action Required As New Law Likely
While the bill continues to be the topic of governmental and industry representative debate, the current view is that it is likely to pass in close to present form and could be passed imminently. Employers should therefore be examining their Mexican workforce now to understand what changes will be required, and develop strategies to adjust to the new legal obligations once the legislation has passed.
In particular, employers should review their current labor structure to understand whether they are utilizing outsourced labor from either a related services entity or a third party entity. Employers should also be evaluating the type of outsourced labor as compared to its corporate purpose to determine strategies for compliance with the new law once effective.
It is key for employers in Mexico to prepare for the new legal scenario and seek advice to evaluate their existing workforce structure, and strategize for compliance with the new legislation from a corporate, tax, and employment perspective.
