November 20, 2020
In the latest example of a global attack against subcontracting, Mexican President Andrés Manuel López Obrador unveiled a draft bill generally banning the practice in Mexico. Under the law, companies would only be allowed to subcontract government-approved roles that provide “specialized services or carry out specialized projects that are not part of a company’s line of business.”
In Mexico, the outsourcing of certain roles or seasonal hiring through temporary agencies is a relatively common practice. In these situations, the worker remains the employee of the agency, which helps reduce the labor cost for employers. This would change if the draft bill is passed. For example, a medical device maker could subcontract with a caterer, but not workers who perform manufacturing work alongside full-time employees. In addition, a list of “specialized service” providers will be made public by the Secretary of Labor (STPS).
In comments supporting the draft bill, Mexican Labor Secretary Maria Alcalde cited 2018 estimates that put the number of subcontracted workers in Mexico at 4.6 million and growing, up from around 1 million in 2003. The Mexican Government stated the bill will prevent abuse of the outsourcing practice it alleges functions as a loophole to allow employers to avoid paying benefits mandated by Mexican law. Secretary Alcalde cited the case of a Cancun resort which had 802 workers with two registered as employees. However, the draft bill could significantly limit the nation’s labor market flexibility, which will eventually compromise its intention of providing more benefits to the workers if companies decide to hold back their hiring.
Companies that illegally subcontract employees would face steep fines up to $212,000. Further, companies benefiting from subcontracted services would be jointly and severally liable for required labor and social security obligations. Failure to comply with this provision would mean additional tax penalties.
Outlook: The Mexican legislation is similar to developments elsewhere in North America and Europe, such as the California ABC legislation, seeking to reduce the practice of contracting out work that would otherwise be performed by company employees. Companies doing business in Mexico should be prepared for a significant change in operations. HR Policy Global will continue to work with our Latin American network of experts to monitor these important developments. If you are interested in learning more about the impacts of this legislation, please contact Wen Dong at firstname.lastname@example.org or Henry Eickelberg at email@example.com.