With Bill to Ban Subcontracting Likely Imminent, Considerations for Global Employers in Mexico

December 18, 2020

Even with Mexico’s decision to delay a vote on the controversial proposal to ban outsourcing last week, to allow time for negotiations, companies must be prepared. In 2021, it is highly likely that legislation impacting outsourcing and insourcing in Mexico will be approved.  Given the likelihood of success, HR Policy Global has prepared a list of thoughts and considerations for global employers with a presence in Mexico.
 
Background:  As we discussed previously, Mexico’s employers must pay “Social Security” and “Housing Fund Contributions” and share 10% of the employer’s pre-tax profits with their employees. The profit-sharing requirement is particularly inflexible because it does not consider important factors such as profit gain or loss from the previous year or the size of the company or the number of employees in Mexico.  As a result, many multinational companies either outsource jobs to agencies (outsourcing) or create a second entity in Mexico which serves as the payroll service and employer of the Mexican workforce (insourcing).  
 
The new bill is designed to fundamentally change those practices. 
 
Profit-Sharing Tax Changes Appear to Be Linchpin Issue.  Negotiators appear to view changes to the Mexican profit-sharing tax as the biggest gap which must be bridged.  Unions have been pushing for employers’ commitment on this topic, but businesses criticize its lack of flexibility and impracticality as having adverse effects to foreign investments.  This will certainly be the point to watch.  
 
Insourcing Likely to be Prohibited Coupled with Profit Share Tax Changes.  With insourcing viewed as a loophole for employers to avoid the 10% profit-sharing taxation, changes either banning the practice or imposing some type of profit-sharing tax anyways are likely.  
 
In response, employers generally have two options: 
  1. Transfer all employees from the insourcing entity to the operating one; or 
  2. Consider a merger of the two entities. 
Each method comes with differing tax implications and labor cost adjustments. Companies need to start evaluating their workforce structure and make a strategic plan. Employers might be reluctant to comply if the cost of structural change is higher than the potential monetary penalty incurred from violating the law. However, employers need to be aware that the government may be able to file criminal charge against companies for non-compliance. 
 
Outsourcing Likely to be Permitted Under Specific Circumstances.  Based on earlier versions of the Mexican proposal, HR Policy Global believes subtractors not performing “core business functions” will remain permitted.  For example, a car manufacturer which outsources janitorial and catering services for its manufacturing plants would be permitted to maintain the arrangements.  However, the car manufacturer would presumably not be permitted to outsource assembly line worker jobs.  
 
Employers will need to consider converting subcontractors, long-term or seasonal workers into employees or consider hiring the roles from other sources.  Costs can vary drastically depending on the arrangement with the staffing company, worker supply of the industry, and labor demand of the company. 
 
Additionally, shared services could be placed under the “specialized services” as outsourcing activities. However, the scope and application of this exemption has not been clear under the new amendments.
 
Notably, mass end-of-year dismissals could be deemed “detrimental to workers” under the tripartite agreement signed by the president, businesses and unions. The Mexican Social Security Institute (IMSS), the National Workers Housing Fund (Infonavit) and the Federal Tax Administration will be responsible for compliance. The effectiveness is uncertain, but companies need to be cautious about your year-end employment plan.
 
Outlook: Once the bill is passed, employers will have one year to prepare and implement changes to ensure compliance.  HR Policy Global will continue to engage on the issue and work with its international coalition to monitor these important developments in Mexico.