Mexico Reforms Outsourcing and Subcontracting Laws

​The Mexican government enacted labor and tax laws in April 2021 that prohibit the outsourcing of workers. Several experts said Mexico's amended outsourcing rules will have a significant impact on companies that hire subcontractors.

Mexico's outsourcing regulation is designed to bring more workers into Mexico's formal economy and to reclaim the rights of workers who have not received adequate protection as subcontractors, explained Mónica Vera, managing director of global professional services firm TMF Group in Mexico City.

"The aim is to force companies to hire their employees directly," said Luis Reséndiz, an attorney with Fredrikson & Byron in Minneapolis.

Subcontractors will now register and document their services with Mexico's Ministry of Labor, Reséndiz added. Subcontractors will also provide information periodically to Mexico's Social Security Institute and the National Workers' Housing Fund.

These restrictions stem from the need to address abusive practices in outsourcing, said Raul Rangel, co-chair of law firm Butzel Long's Mexico team in Washington, D.C. Some companies have used "dubious outsourcing practices purposefully to avoid paying any profit sharing to their employees," he said.

Outsourcing results in workers being denied job benefits, said Mexican President Andrés Manuel López Obrador when he sent a proposal to Congress to ban outsourcing by companies without prior government authorization, according to Mexico News Daily. López Obrador said outsourcing causes mass dismissals at the end of the year because companies want to avoid paying bonuses and other benefits to employees and prevent them from accumulating seniority.

Employers in Mexico can only hire outsourced workers for specialized services when the activities they perform are not part of the company's corporate purpose and its principal economic activities, Rangel said.

Companies with specialized service providers—such as administrative support, catering staff, cleaning crews, maintenance, security services and specialized engineering workers—are not subject to these restrictions for now, Vera noted.

These companies must register their specialized service providers with Mexico labor authorities and have a written agreement between the outsourced service provider and the employer, Rangel stated.

Effective Dates for Legislation

Mexico's federal labor law, social security law and the National Workers' Housing Fund law all went into effect in April 2021, but employers had a three-month transition period, Rangel noted. The amendments to Mexico's tax code, income tax law and value-added tax law took effect on Aug. 1.

"Many employers have already begun implementing transition plans to comply with the new requirements," Rangel said. "It's critical for employers to also start assessing and evaluating their current hiring practices and service agreements with labor service providers."

The Mexican government passed labor law reform in 2012 to limit outsourcing, but Reséndiz said enforcement then was lax, while many businesses ignored those rules.

Impact on Employers and Employees

To date, many employers in Mexico relied on work performed by outsourced employees to meet their contractual obligations to their customers, Rangel stated. According to the Asociación Mexicana de Empresas de Capital Humano, or the Mexican Association of Human Capital Companies, around 4.5 million Mexican employees are working under outsourcing service agreements.

Rangel said that regulations on outsourcing may initially impact hiring practices and HR management in the following ways:  

• Employers who relied on outsourcing could be forced to terminate service agreements and directly employ their own workforce.
• Employers who shared employees' services with entities in the same corporate group may need to reallocate employees to another group's affiliates, depending on their job function.
• Employees who worked for companies that outsourced their work could end up either transferred to a different employer or lose their jobs.
• Companies that provide outsourcing services might need to find a new business model or form new entities to provide specialized services. Alternatively, they may limit their scope to employee recruitment, selection and training.  

"Employers will also have to increase their direct workforce for any capacity they used to outsource to fulfill their needs," Vera said. For example, companies will have to hire more people for warehouse and retail jobs during high-volume seasonal shopping.

Reséndiz said the regulations could have some unintended negative consequences for employers in Mexico.

"These regulations could discourage foreign investment," he noted. "Many international companies who rely on outsourcing to start operations in Mexico may eventually leave. Companies will have to assess the financial impact of implementing these changes and explore alternatives."

How HR Can Help

HR departments must understand, adapt and comply with the changes to outsourcing in Mexico, Rangel noted.

"HR is critical," Reséndiz said. "HR must analyze whether any present or future employment or services arrangements may constitute outsourcing, including contracts with services providers. If the business's current structure relies on outsourcing, HR will likely lead the way to restructure the business to become compliant."

Companies with operations in Mexico might find themselves navigating complex Mexican labor laws that require an in-depth understanding of the country's legal process, as well as the region's culture, Rangel explained. If a company does not comply with the rules, it could face fines, joint liability, the inability to credit or deduct taxes for outsourcing, and in some cases, criminal liability.

"HR will be vital in ensuring that the restructure does not cause significant disruptions to either the employees or the business," Reséndiz said.

Catherine Skrzypinski is a freelance writer based in Vancouver, British Columbia, Canada.

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