Mexico: The outsourcing reform and its implementation

published on 18 August 2021 | reading time approx. 3 minutes

Shortly before the deadline of 1 August 2021 the government also recognizes that, due to unclear regulations and regulatory gaps, companies have great difficulties in implementing the outsourcing reform. Therefore the deadline for the implementation was extended to 1 September 2021 in some aspects.

In particular as follows:

All specialized service providers, that means all providers of activities that do not fall into the core company purpose of the client shall be registered in the system established by the Ministry of Labor and Social Welfare (Registro de Prestadores de Servicios; REPSE) in accordance with Article 15 of the Federal Labor Law, no later than 1 September 2021;
In the case of companies of the same group that operate under an insourcing regime, that means that they have hired all the employees through their own personnel company, the deadline for transferring employees to the operating company has been extended until 1 September 2021, without being no longer mandatory to transfer the assets of the personnel Company, in accordance with article 41 of the Federal Labor Law;
According to the Regulations of the Social Security Law in matters of Affiliation, Classification in risk classes for occupational accidents and Inspections, companies that have already requested their employer registration in different risk classes before the Mexican Institute of Social Security, shall cancel them before 1 September 2021 and request to only get a single employer registration;
All the reports referred to in sections I and II of article 15 A of the Social Security Law of individuals or legal entities that provide specialized services or carry out specialized works shall be provided until 1 September 2021;
Tax provisions prohibiting deduction and accreditation for both Tax purposes on Income Tax (Impuestos sobre la Renta; ISR) and for Value Added Tax (VAT), for payments associated with outsourcing contracts shall not apply until 1 September 2021 instead of 1 August 2021 and;
The migration of the employees to the new companies recognizing their labor rights, including their seniority and the risks of completed work, will still be considered as employer substitution until 1 September 2021.

The extension of the deadline is due to doubts if some services can be qualified as specialized services. There is considerable legal uncertainty about this matter as well as a lack of a clear differentiation criteria.

As the corporate purposes of the companies are usually very broad and open, in many industries it is extremely difficult or sometimes impossible to distinguish – based on the statutory purpose of the company – if services have to be classified as specialized services and therefore aren’t services of the core business of the company. Therefore it has to be analyzed whether the provision of the rendered services is actually outsourcing.

The Federal Labor Law considers that an outsourcing service is provided when a person or a legal entity puts their workers to the disposition and benefit of others. According to an interpretation based on the purpose of the law, employees are put to the disposition of a third party, if the work of the outsourced personnel is done for the direct benefit activities of the client, if the latter had direct control over them and if the employees uses the working tools from the third party.

A delimitation must be made as to whether the contract is a service provision agreement under civil law or an labor contract. According to the legal definition of Art. 8 of the Federal Labor Code, an "employee is a natural person, who performs subordinate personal work for another natural or legal person".

It therefore depends on whether the service provider is in a relationship of subordination to the service recipient (= employment relationship) or whether two equal contractual partners are opposed to each other (= service or labor contract). The following criteria established by the law courts for the existence of a contract under labor law may be used for the purpose of delimitation:

The employee receives instructions in how and when to carry out his/her activities;
The employer provides the tools necessary for the employee to carry out his/her tasks;
The employer issues ID’s that identify the employee as part of the company or its worker;
There is a constant periodical economical compensation, regardless if it is denominated professional fees instead of salary.

If most of these elements are present (mainly their obligation to follow instructions), said contractual relationship shall be considered of labor nature, and therefore the company must be registered at the REPSE as permitted Outsourcing provider.

In case after a careful individual revision a company comes to the conclusion that the company's activities are outsourcing, this is generally prohibited. Only if it is a specialized service or a specialized construction service, the service can be further offered after the mandatory REPSE registration. The registration process is bureaucratic, very complex and the company must fulfill all social security and tax obligations.

Once the registration has been completed, there are ongoing compliance obligations. As the provider and contractor have a jointly liability for the correct submission of income tax and social security contributions since the reform, the provider of the specialized services must above all submit monthly documents to the client as proof of the contributions paid. Because of the joint liability, it is therefore of high importance that contractors of specialized services request these documents and information from its provides on a monthly basis and check them if they are correct. Additionally it should be considered that the registration must be renewed every three years.

Take the opportunity of the deadline extension until 1 September 2021 and check if your company is subject to registration or, conversely if you are making use of specialized services in order to avoid possible fines and criminal penalties such as tax evasion and social security fraud. Rödl & Partner will gladly support you in finding a tailor-made solution for your particular case.