On November 12, President Andrés Manuel López Obrador announced a bill initiative that, if enacted, will have a significant impact on outsourcing and the use of service entities currently in use to minimize Mexican employee profit-sharing obligations. The initiative includes amendments to the Federal Labor Law, the Social Security Law, the Mexican Tax Code, including changes to income and value added tax regulations, and several others. The President submitted this initiative to Congress and it is expected to pass more or less as proposed. Labor Secretary Luisa María Alcalde said outsourcing hurts workers by allowing companies to avoid granting benefits to subcontracted employees, a local paper reported. She also cited other abusive practices the law aims to curtail, such as companies firing workers before Christmas and rehiring them early in the year to avoid paying year-end bonuses.

Here are the most relevant details of this initiative to the Federal Labor Law:

• It aims to eliminate the subcontracting of personnel, which is defined in the reform proposal as one where an individual or entity provides or makes its own workers available for the benefit of another. Subcontracting specialized services will still be permitted, but these need to be different from those services generally provided by the hiring company. For example, an auto parts manufacturer could subcontract a company to provide canteen and meal services, but not similar manufacturing services.

• Individuals or entities that provide specialized services must have authorization from the Secretary of Labor (STPS). The STPS will make a list of specialized service providers publicly available on the internet. The STPS has four months to issue the general provisions that determine the procedures related to this authorization.

This initiative also includes significant changes to the Social Security (Ley del Seguro Social) and Employee Housing Law (Ley del INFONAVIT), including limiting a company’s employee registration to its principal line of business. This would limit outsourcing companies’ current ability to register employees under the activity of their clients. Under these reforms, companies hiring subcontractors will now be jointly and severally liable for all the labor obligations of the specialized subcontractors they hire. If passed, reforms to the Federal Income Tax Law include limiting a company’s ability to claim a tax deduction for fees to unauthorized service companies.

These reforms could have a significant impact on the maquiladora industry, as well as manufacturing and high-employee services industries. We are monitoring this initiative closely and will update this blog with any developments.