Mexican labor law amendments impose restrictions on personnel subcontracting

Those doing business in Mexico are beginning to feel the impact of certain amendments to its labor laws.

The amendments, put in place in April 2021, affect the way businesses subcontract or outsource personnel in Mexico. In essence, the changes effectively prohibit employers in Mexico from subcontracting their personnel.

Set forth below are key points of the amendments and how these changes will affect stakeholders who subcontract or outsource personnel in Mexico.

Which laws were amended?

The changes affect a number of Mexican laws. Among them are these:

the Federal Labor Law (Ley Federal del Trabajo or LFT);

the Mexican Social Security Institute Law (Ley del Instituto Mexicano del Seguro Social);

the Law of the National Workers’ Housing Fund Institute (Ley del Instituto del Fondo Nacional de la Vivienda para los Trabajadores);

the Mexican Federal Tax Code (Código Fiscal de la Federación);

the Income Tax Law (Ley del Impuesto sobre la Renta);

the Value-Added Tax Law (Ley del Impuesto al Valor Agregado); and

the Federal State Workers Law (Ley Federal de los Trabajadores al Servicio del Estado) regulating Section B) of Article 123 of the Mexican Political Constitution and the Regulations to Item XIII Bis of Section B of the Article 123 of the Constitution related to subcontracting.

General personnel subcontracting prohibition

The Amendments generally prohibit employers from subcontracting personnel to fulfill their corporate purpose or main activities – referred to in the amendments as personnel subcontracting. The LFT says that personnel subcontracting takes place when a person (an individual or entity) provides or makes available that person’s employees for the benefit of another.

Specialized services – the exception

As an exception to the prohibition provided above, the amendments allow personnel subcontracting of “specialized” services or services “intended for specialized activities.” The specialized services must not be part of the entity’s core business – that is, the entity’s main corporate purpose and predominant economic activities. The contractor providing specialized services must register before the Ministry of Labor and Social Welfare (Secretaría del Trabajo y Previsión Social). The registration is valid for three years and must be renewed thereafter.

Joint and several liability

The amendments impose joint liability on the hiring person (individual or entity) for the contractor’s breach or violation of any mandatory requirement of all obligations related to the contractor’s employees.

Employer substitution

In Mexico, the substitution of an employer takes place when employers transfer their business and their rights and obligations concerning the employment relationship of the transferred employees to a third party, who will be the new or substitute employer. This new or substitute employer must recognize all existing employees’ labor rights and benefits.

In order to perfect the employer substitution, the amendments require assets to be transferred from the former employer to the new or substitute employer.

Employee profit sharing (participación en las utilidades)

By way of background, Mexican-based companies must share a portion of their profits with their employees. The amendments establish a cap on these profit-sharing obligations. In particular, each employee will receive the greater of (i) the employee’s three months’ salary; or (ii) the average profit sharing the employee received in the last three years.

Potential consequences of non-compliance

In the case of non-compliance, employers and subcontractors could be subject to fines ranging between 2,000 and 50,000 times the Mexican Unit of Measurement and Update (UMA, its acronym in Spanish). Further, non-complying employers and subcontractors would not be able to receive certain tax benefits, such as deductions and VAT credits. Other consequences of non-compliance may also involve criminal prosecution for fraud.

Going forward

In sum, the amendments’ general ban on personal subcontracting significantly impacts Mexican companies and any foreign company doing business in Mexico. Stakeholders should assess their compliance with the amendments and closely monitor any developments on the matter.

If you have any questions, please contact the authors of this article or email us at DLAPiperCommodities@dlapiper.com.

An earlier version of this article was published by DLA Piper on February 14, 2022.