On April 23, 2021, an amendment to the Mexican Labor Law was published in the Official Gazette of the Federation. Below are the key points about the amendment and how they will affect employers that outsource or subcontract work.
According to the amendment, employers are no longer permitted to subcontract or outsource personnel. The law covers any individual or legal entity providing employees to be supervised and managed by a third-party client and that determines the services and work to be rendered. The law includes carve outs and exceptions under certain circumstances.
- Specialized Services
- The amendment permits the subcontracting of specialized services that are not part of the core business in terms of the company’s corporate purpose and activity registered before the Tax Administration Service (or Servicio de Administración Tributaria (SAT). Services will be considered specialized provided that they are not part of the core business of the company that receives them—the so-called “operating entity.”)
- Companies in the Same Corporate Group
- The amendment allows companies within the same corporate group, i.e., the “former service entity,” to render services or activities.
- Employment Agencies
- According to the amendment, employment agencies or intermediaries, which were previously referred to as “outsourcing companies”) may participate only in recruitment, selection, and training of candidates. The amendment states that the company receiving the services must be the one that conducts hiring.
- Profit-Sharing Cap
- Because some companies have attempted to avoid tax liabilities, they have adopted the practice of creating distinct companies that employ their workers. These companies are currently required to distribute 10 percent of the company’s taxable profits (PTU) to employees. The new amendment establishes a cap on these profit-sharing obligations. As a result, a maximum limit of three months’ salary or the average of the amount received in the last three years—whichever is more favorable to the employee—is now in place.
- Companies Providing Subcontracting Services
- Companies that provide subcontracting services are required under the amendment to take the following actions:
- Obtain the registration certificate before the Ministry of Labor and Social Welfare or Secretaría del Trabajo y Previsión Social, (STPS). Among other obligations, the company must evidence that its tax and social security obligations are up to date. Companies are required to renew the certificate of registration every three years.
- Execute a contract for the provision of the specialized services.
- Submit a quarterly report to Mexico’s Social Security agency (Instituto Mexicano del Seguro Social or IMSS ) and Mexico’s housing agency, Instituto del Fondo Nacional de la Vivienda para los Trabajadores or INFONAVIT on the specialized services contracts executed.
- Provide the contractor with a copy of the registration certificate before the STPS, tax receipts for payments of salaries, payment of withholding taxes and employer’s contributions and the value-added tax return, and a copy of the corresponding payment voucher.
- Companies Contracting Specialized Services
- Companies that provide specialized services are required under the amendment to take the following actions:
- Verify that specialized services are not part of company’s core business.
- Verify that the company providing the subcontracting services is registered before the STPS.
- Collect copies of:
- registration certificates before STPS;
- tax receipts for payments of salaries;
- receipts of payments of withholding taxes and payments of employer contributions; and
- value added tax returns and their corresponding payments.
CONSEQUENCES OF NONCOMPLIANCE
- In the case of noncompliance, companies may be subject to fines of up to USD$222,000 and even incarceration of a company’s representatives.
- Companies will not be able to credit or deduct taxes for subcontracting services, unless they fulfill the above requirements.
- Companies that do not comply with subcontracting obligations and attempt to deduct or credit taxes for the services of subcontracted personnel, or use simulation schemes for the provision of specialized services, will be subject to criminal liability for fraud.
- Both the company that subcontracts and the one that employs subcontractors may be held jointly and severally liable for all labor, social security, and tax obligations, which they would have otherwise been obligated to pay.