A Reform prohibiting outsourcing in Mexico went into effect on April 23, 2021. Legislators in Mexico had been trying to reform the labor law beginning in 2012, when they introduced restrictions to outsourcing, but those restrictions were unsuccessful. Corporations found loopholes in the law to be able to continue exploiting workers, which led to the actions taken this year.  Outsourcing represents a significant portion of the workforce in Mexico, having annual growth of approximately 200,000 subcontracted workers, where half of the personnel work for large companies (those with more than 250 workers), concentrated in manufacturing, tourism, and other service-related industries.

A special lawsuit, Indirect “Amparo” 736/2021 – II, was filed in Mexico to contest the constitutionality of the Reform legislation on subcontracting. This was done in an effort, “so that things remain in the state they were in before the filing of this medium of defense.” The company that brought the Indirect Amparo was awarded a provisional suspension and the hearing to decide on the trial was scheduled for June 18, 2021, allowing them to continue utilizing subcontracted workers while the lawsuit is pending judicial review.

This reform includes more severe sanctions for companies that fail to comply, prosecution for the crime of tax fraud, applying preventive detention. Corporations were previously permitted a tax deduction and or tax accreditation related to their outsourced workers, but this will no longer be allowed.. Fines of more than 4 million pesos per affected worker may be imposed on those who fail to comply with the stipulations of the reform.

There are three different categories or methods of outsourcing that are subject of the new reform legislation:

The FIRST is the provision for ordinary, unregulated services, which consist of the services provided by lawyers, marketing professionals, and accountants, among others. The SECOND is illegal subcontracting, where corporations treat subcontractors as employees, without proper compensation and benefits. In this case, there is no direct employer relationship, reduced social security benefits, minimum wage pay, and additional salary payments outside what would be official employment.. The THIRD category is specialized services or works, which will be allowed, consisting of the following:

• External: consists of specialized services or works, which are not a part of the general business of the corporation or the predominant economic activity the corporation is engaged in. Professionals being outsourced in these circumstances require registration in the public registry of the Ministry of Labor and Social Welfare (STPS). An example can be cleaning, surveillance, maintenance companies, etc. For their professional activities or work exercises to be carried out, they must be performed in the facilities of the company that hires the contract worker, whose corporate objectives are not the same as that of the contractor. Limitations begin when the company that outsources functions performs services related to the business purpose of the subcontracted workers. For example, a cell phone production company that entrusts a third party with the production of the screens, which are essential for the assembly of the device, would not be permitted to outsource this work. Within the framework of the law, existing contracts must be adjusted to explicitly state the different lines of business, and the contract workers must be required to provide their STPS registration in the public registry, to comply with tax regulations.

• Internal: complementary or shared services or works provided between companies of the same business group will also be considered as specialized, provided they are not part of the same corporate function or the predominant business activity of the company that hires them. For example, “home” companies created by the company, to provide complementary or shared services, forming part of the same business group, would be allowed. Complementary or shared services are not defined anywhere in the legislation, and corporations outsourcing services will have to be demonstrate that the contracted service qualifies as specialized.

The subcontracting of personnel consisting of a natural or legal person providing or making their own workers available for the benefit of another is prohibited. It is not subcontracting if people are provided to fulfill a certain service, being the provision of workers in favor of another company, where this is the only benefit, the key point to determine if we are talking about subcontracting.

The Reform applies to three types of outsourcing services: (1) Personnel subcontracting (2) Specialized services and specialized works (3) Employment agencies.

It is highly recommended that companies make a broad review of the contracts they have with all suppliers, to classify them in the 3 previously mentioned cases, as well as review the corporate objects of both companies and suppliers, and on the occasion of this reform, in the new companies, draft social objects that are highly focused on what the predominant activity to be carried out is going to be, and those that have a very broad corporate object, reduce it in the coming days or weeks to avoid falling into that formal assumption “that if the activity of the object is similar to the one of the supplier, authorities will say that it is not specialized, bringing the aforementioned consequences.”

The Reform was published on April 23, 2021 in the Diario Oficial de la Federación (DOF), published daily by the government of Mexico, which is the main official government publication in Mexico, and as of April 24, 2021, any outsourcing is illegal. From April 23, 2021 and earlier, there is a kind of amnesty so that companies can get in order, having 119 days to transition to a new specialized service provider scheme, or to “hire” all employees directly in the wealth-generating company. After August 1, 2021, which is the key date that the legislation comes into full force, there can be no outsourcing.

On May 24, 2021, the registration rules were issued, following which, all companies have 90 days to obtain their registration.

On August 1, 2021, specialized invoices from suppliers will be required to address aspects related to social security and taxes, complying with the requirement of having the proper registration.

Registration rules:

The registration will be for each activity offered by a subcontracting company, and each specialization will be assigned a specific folio number.

To request registration, companies must submit the following information on the platform:

1. Current electronic signature

2. Name, denomination, or company name

3. Trade name

4. Federal entity

5. Federal Taxpayers Registry

6. Address: street or avenue, exterior number, interior number, neighborhood or subdivision, postal code, town, and municipality or mayor’s office

7. Geolocation

8. Landlines, cell phones and emails

9. Number of the Constitutive Act of the company, identification data of the notary or public broker that issued it, date of its notarization and corporate purpose (in case of being a legal person)

10. Employer registration before the Mexican Institute of Social Security

11. Data of the legal representative of the specialized services company or the execution of specialized works, first surname, second surname and first name (s), landline and cell phone, valid Official Identification (Voting Credential, Passport or Professional ID), CURP and email (for individuals and legal entities)

12. Affiliation with the Institute of the National Fund for the Consumption of Workers

13. Total number of workers at the time of application for registration

14. Specialized Economic Activity following the “Catalog of activities for the classification of companies in the insurance of work risks” of the Mexican Institute of Social Security contained in the Regulation of the Social Security Law in Matters of Affiliation, Classification of Companies, Collection and Inspection

15. Activity or activities that wish to register in the register

16. Prevailing economic activity.

In addition, for each activity that the company wants to register, the level of specialization must be proven.