Update on the Mexican personnel outsourcing model: Decision postponed to February 2021

published on 17 December 2020 | reading time approx. 2 Minuten

The personnel outsourcing model in Mexico is currently in discussion. The Mexican government, the private sector and the trade unions agreed at a meeting on December 8, 2020 to postpone further debate to February 2021. Those involved should be given more time for objections and change requests. The general abolition of the two-company model ("insourcing") and the outsourcing of employees to external personnel service providers ("outsourcing") in favor of a new regulation is still highly likely. Affected companies should rethink their business model and adjust it if necessary.

The formal negotiations on the draft law, which began on November 23, 2020, began catastrophically for the employers: the government and trade unions made it unmistakably clear that the previously widespread avoidance of workers' rights by outsourcing staff to internal or external personnel companies should come to an end. Immediately and correspondingly Legislative changes should concluded in the parliament this year. The decision-makers do not only have external outsourcing in their sights, but also the two-company model that is very common in Mexico. The fact that there was a delay at the last moment was due to support from the private sector from an unexpected source: The Mexican finance ministry "Secretaría de Hacienda y Crédito Público" expressed concerns about the budget for 2021 due to the corona crisis caused declining corporate tax incomes, which would further continuing with the reform. The executive also had to realize at the last moment that the public sector itself is a major beneficiary and user of outsourcing models in Mexico in order to avoid nationwide civil servants and permanent public employment agreements. It is estimated in the media that around 40 percent of the staff in Mexico's tax offices are employed through private third-party companies.

The meeting on December 8th between the parties ended with an agreement on the following key points:

• Outsourcing is only permitted for specialized service providers, such as plant security, building cleaning, IT, catering, which are not related to the company's corporate purpose.
• The aforementioned special service providers must apply for authorization and will be included in a register created for this purpose.
• Invoices from external personnel service providers ("outsourcing") or their own affiliated sister companies ("insourcing") for personnel services in the broadest sense are no longer tax-deductible for the receiving company, unless it is an approved specialist service provider.
• The labor authority "Secretaria de Trabajo" can impose fines in the event of a violation.
• The employee profit-sharing scheme "PTU" is being redesigned and is to be limited to a maximum amount related to the monthly salary.
• The legislative process must be completed by the end of February 2021.
• The change in labor and social security law with the possibility of fines will come into force in April 2021 at the earliest.
• Changes in tax law are expected to come into force in July 2021 or January 2022 and will probably take effect for the first time in the 2022 tax year.

In addition, it is currently under discussion that if a legal outsourcing service provider is used, there should be an obligation to report in future to the STPS (Secretaría de Trabajo y de Prevención Social) and that the outsourcing company and the client should then be jointly liable for the correct payment of social security contributions and taxes. In this way, the outsourcing client should also be clearly made responsible.

Even if the changes have not yet been approved, companies operating in Mexico are advised to prepare for the changes as early as possible. Current contracts with external outsourcing service providers should not be extended for the time being; Notice periods are to be observed. The operating companies must be prepared to get ready to transfer the outsourced personnel to their own payroll as soon as possible, for example by registering both companies with social security. Various strategies are conceivable for insourcing:

a) Merger of the two companies and transfer of staff to the remaining legal successor,

b) Dissolution of the personal company and change of staff to the remaining company through the conclusion of new employment contracts recognizing the length of service by way of a bilateral agreement,

c) Maintaining both companies in different business units, possibly with partial transfer of staff, provided that both companies pursue a legitimate corporate purpose with independent services within the group of companies. However, it should be noted that the corresponding sister companies are no longer allowed to charge each other for staff or work.

The primary purpose of the two company model was to save employee profit sharing, the so-called "PTU", in the operating company. However, the model was already not free of risks and costs, because the structure of holding two companies caused additional work, the billing of services had to take place under the rules of the transfer pricing system and salary costs had to be paid plus a margin.

The legislature's intention to reform Article 15-A of the Federal Labor Act would lead a large number of employees back to their actual employers, with the result that employee profit-sharing would be applied in accordance with the law, but also with a stronger bond with the employer. Mexico will maintain its international competitiveness as an investment location only if the PTU will be limited to a reasonable level. Ultimately, the final decisions on reforming changes to the law must be awaited so that any realignments can take place efficiently, in accordance with the law and in a targeted manner.