It’s been more than a year since the Federal Labor Law reform in Mexico was enacted. This reform, authorized during April 2021 by the Mexican Congress of the Union, prohibits the outsourcing of workers. Many organizations doing business in Mexico were affected by this drastic move.
The reform intended to combat bad practices linked to irregular subcontracting, such as tax evasion and breach of obligations to workers. These represented a massive loss of tax collection throughout Mexico.
Many Mexican and foreign organizations doing business in Mexico still have difficulties implementing this outsourcing reform. Yet, its noncompliance potentially imposes consequences that can lead to severe financial sanctions or criminal prosecution for fraud.
Here’s a summary of the most important aspects of the Federal Labor Law. This includes practice tips on the current process for subcontracting specialized services in Mexico.
What Types of Services Can Still Be Subcontracted in Mexico?
Organizations are permitted to subcontract any specialized services when their activities don’t fall into the primary or same economic activities of the organization. In other words, organizations can subcontract specialized services they require. For example, administrative, logistics, promotion and sales, IT services, call center, operations and others. But only as long as the service contracted isn’t part of the organization’s corporate purpose.
Classifying the type of specialized services currently permitted can be challenging, as many organizations have extensive corporate purposes. However, it’s important to know the outsourcing of legal, IT and professional services generally fall into the exception of permitted “specialized services,” according to the reform.
Therefore, the determination of what’s allowed to be outsourced in Mexico must be analyzed from the standpoint of “intended for specialized services” performed.
Required Registrations of Specialized Service Providers in Mexico
A specialized service provider can be a legal entity or an individual. And it must be registered before the Mexican Ministry of Labor and Social Welfare (Secretaria del Trabajo y Prevision Social “STPS”) through a system called “Registro de Prestadores de Servicios” or REPSE. The registration is valid for three years and must be renewed.
Also, the service provider must regularly inform the Mexican Social Security Institute and National Workers Housing Fund Institute about all its executed service agreements. And identify employees who will perform the specialized work.
Contract Formalities for Specialized Services
The REPSE registration must be indicated in the contract signed between the contracting party and contractor.
Joint and Several Liability for Employment Obligations
If the specialized service provider fails to comply with its employment obligations to its workers—as derived from the workers—who perform specialized services, the contracting party will be jointly and severally liable. It will also be responsible for any unpaid taxes and social security payments due.
Fines and Tax Consequences for Noncompliance with Subcontracting Regulations
The Federal Labor Law reform provides either subcontractors or service providers may pay severe fines for violating subcontracting laws. Often between 2,000 and 50,000 times the Mexican Unit of Measurement and Updating (UMA).
Any tax deductions for payments made to subcontractors can’t be deducted, if they relate to prohibited outsourcing.
Role of Employment Agencies During Recruitment
Employment agencies may intervene in the process of recruiting and selecting personnel. However, in no case will the intermediary be considered an employer or contract in substitution.
With the Federal Labor Law reform enacted last year, System Soft Technologies and its legal team recommend Mexican and foreign organizations doing business in Mexico follow the above recommendations. In addition, they must oversee specialized service providers are in full compliance with registrations and obligations as an employer per Mexican laws.
System Soft is a global leader providing outsourcing services and delivering large-scale recruiting and workforce-intensive solutions. Reach out to us if you have any questions.
About the Author: Liliana Torres Valencia, Esq.
Liliana is an In-house Immigration Attorney at System Soft Technologies. She has extensive experience in employment and investment-based nonimmigrant and immigrant matters. Liliana’s handles cases for individuals and companies throughout their nonimmigrant and immigrant journey, including resolution of complex legal issues, development and implementation of strategic solutions, and risk management. Her experience, professionalism, strong work ethic and effective advocacy skills on complex cases have translated into successful results for our employees.