Mexican Government Continues to Push Outsourcing Reform Despite Limited Effect on Formal Employment

Recently, the Mexican Labor Minister announced that her department will publish a specific guideline preventing subcontracting of day laborers in the avocado and berry industries, additional to the existing outsourcing reform enacted in April 2021 that prohibits the outsourcing of core-business workers. However, despite the efforts the government has made, the actual effect of the reform is still unclear given the stagnant formal employment rate.  

Background 

The Mexican government enacted a reform that prohibits the outsourcing of non-specialized workers. The 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 and benefit as subcontractors. Additionally, companies must share a portion of their profits (10%) with the employees in Mexico and the amendments established a cap on these profit-sharing obligations, either the employee’s three months’ salary or the average profit-sharing bonus the employee received in the last three years, whichever is greater.  

Uncertain results  

However, after one year into the reform, Banco de Mexico (Banxico) forecasts that the formal employment increase could end up below the job creation number in last year. Monica Flores, President of ManpowerGroup Latin America, shared that it’s a common practice where employers would register their employees with a minimum wage, but pay extra compensation in cash which will not be taxed nor contributed to the IMSS (the Mexican Institute of Social Security). “As far as this practice remains, the labor reform won’t change anything.” Flores pointed out.  

Government pushes for more inspections and regulations 

Juan Pablo Puebla Arévalo, the head of the Undersecretary of Labor and Social Welfare of Sedeco, said that from January to date, 47 inspections have been carried out in different parts of the state, of which 63 percent did not comply with the guidelines regarding the outsourcing reform. As non-compliance remains common, Mexican government vows to push for providing more guidelines and plan to conduct more inspections.  

Once a violation is identified, employers and subcontractors could be subject to fines ranging between 2,000 and 50,000 times the Mexican Unit of Measurement and Update (UMA, its acronym in Spanish). Further, non-complying employers and subcontractors would not be able to receive certain tax benefits, such as deductions and VAT credits. Other consequences of non-compliance may also involve criminal prosecution for fraud. 

Outlook: In sum, the amendments’ general ban on personnel subcontracting continues to impact employers in Mexico. Companies should assess their compliance with the amendments and closely monitor any developments on the matter.