Coelum is our contribution to the development of the industry in which we participate. Through this monthly publication we strive to provide analysis, opinion and insight to the aviation community that we serve.
Coelum’s purpose is to become a reliable source of air industry law amendments and up-dates, and also a source in which major or relevant developments in aviation can be found. Whether on the legal field, commercial or industrial sectors, our Newsletter will bring the latest and major updates, developments and news, in the Air transport industry and Air Law fields, because a dynamic industry requires even a more dynamic approach.
- New Tax Realities for 2021.
- by Jessi Saba
- February NEWS on Mexican Aviation
- AFAC’s alleged digitalization.
- by Pablo Arandia
- January NEWS on Mexican Aviation
- 2020: THE UNPRECEDENTED YEAR.
- by Misael Arellano
- December NEWS on Mexican Aviation
Outsourcing in Mexico, (lights and shadows of the newly approved legal reform).
by Carlos Sierra.Only a few weeks ago, on April 20 of this year the Mexican congress approved the controversial reform to regulate outsourcing activities. The reform, which amends several provisions of the Federal Labor Law, the Social Security Law, the Law of the National Institute of the Workers Housing Fund, the Federal Fiscal Code, the Income Tax Law and the Value Added Tax law, among other regulatory laws associated with government employment, imposes substantial limits to the practice of subcontracting personnel through the use of companies, created specifically in some cases, to supply workers to other companies which, in turn, avoid hiring employees and hence avoid the costs associated with seniority, pension plans, social security payments, profit sharing and other responsibilities that the law imposes on employers for the benefit of employees."The practice of outsourcing mechanisms became so widespread that the limitations now imposed will have severe repercussions on the profitability of certain labor-intensive businesses that use to staff their operations with outsourced personnel.”The reform in question however has been largely debated. The practice of outsourcing mechanisms became so widespread that the limitations now imposed will have severe repercussions on the profitability of certain labor-intensive businesses that use to staff their operations with outsourced personnel.No one can deny that any person employed must be provided the benefits to which it is entitled in accordance with law. In that regard, while outsourcing could be practical for several reasons and, when conducted appropriately could be beneficial to companies that avoid having to deal with the large administrative burden of managing hundreds and in many cases thousands of employees outside of their core activity, it is also true that its widespread practice was also used to dodge the compliance of benefits to which the workforce is entitled by law.By outsourcing employees, certain companies prevented the workers, which were employed by a separate company, to receive the 10% of profit sharing, known as PTU or ‘Workers Participation in Profits’, that workers would be entitled to receive from the company for which they actually conduct the work. If the actual employer of these workers (company B) did not turn out a profit -which in many occasions they were designed to avoid-, while the company that retained the outsourcing service (company A) did turn out a profit, the employees of company B would not receive a share of the profits produced by company A since they did not actually work for the latter.In addition to this, certain outsourcing companies would charge a lumpsum to supply a determined number of workers, while paying these workers merely a portion of such amount and to avoid providing social security and other benefits by constantly changing the company that supplied the outsourced work to prevent the workers from accumulating seniority at any individual company.Employers in Mexico are also obliged by law to contribute one third of the amount payable for each employee for social security and workers housing benefits1, this contribution was dodged by several companies by outsourcing their labor force, or at least was diminished by causing the outsourcing company to register such workers at very low salary levels to reduce the amounts payable for social security in each case. This resulted in the negative impact on the accumulation of retirement benefits of the workers and substantially reduced the amount withheld for income tax that the workers would have paid with higher salaries.In summary, these abusive practices resulted in the tarnished reputation of the outsourcing practice at large, which without seeing its benefits was recently regarded as a form to prevent the compliance of obligations and benefits that all workers are entitled to receive."Employers in Mexico are also obliged by law to contribute one third of the amount payable for each employee for social security and workers housing benefits1, this contribution was dodged by several companies by outsourcing their labor force, or at least was diminished by causing the outsourcing company to register such workers at very low salary levels to reduce the amounts payable for social security in each case.”On the positive side, the outsourcing of workers, when compliant with the law, has been an efficient form to manage large numbers of employees allowing companies to concentrate on their core activities rather than on complex human resource management. Professional outsourcing companies provided flexible staff distribution and supply, training of workers on specific areas and the ability to retain a specific number of workers to develop a particular project for a limited period. Outsourcing is also the adequate form to retain a labor force with specialized skills or training to conduct a certain task, to launch a product, operate a call center, to conduct certain market or production activities, etc.While the recently implemented reform then attempts to more profoundly resolve a problem that was only partially addressed in the previous reform to the Federal Labor Law that was enacted in 2012. The extent of this reform could have a negative effect on companies that provide healthy and law compliant outsourcing services, as well as on companies that provide specialized services that other companies need. In this modern globalized world, no company alone can have all kinds of employees for every single activity it performs. Companies should be able to dedicate to their core business efficiently, while being able to outsource the conduction of ancillary tasks to outside suppliers that can perform a better and more specialized job at lower costs. For example, an airline, which core business is the provision of air transportation services for passengers and/or cargo, should be able to outsource non-core activities such as aircraft maintenance, ground handling or reservations, for instance, from specialized companies that can conduct a better job at lower costs and in full compliance of all legal obligations towards all workers involved.There is no debate that the abusive practices that have tarnished the reputation of outsourcing should be prevented and eliminated by restricting the same and imposing hefty penalties. No practice that attempts to prevent workers from receiving legal benefits should be allowed. The controversial aspect of this reform however has been its extent and its potential effect on healthy outsourcing practices. The perverse side of it as well results from the ill conception that the current administration has of private businesses and the extensive regulation that it intends to impose on private endeavors that under this left-wing administration are regarded as “neoliberal”, “capitalist” and “greedy”.It is no secret for instance that this reform was largely promoted by the leader of the mining workers who seeks to cause the thousands of employees that work in the mining industry to become affiliated to its labor union, which was not a requirement to the extent that these workers were largely outsourced from other companies by the large mining companies that operate in Mexico. The effect of this new reform in this case is likely to cause a severe impact on the mining industry and in the investment of foreign companies in this field.The outsourcing reform has been highly debated since the first initiative was sent to congress by president Lopez Obrador in December of 2020. Its final version resulted from an agreement reached on April 5, 2021 between the government and the private sector among other stakeholders. The government’s original intent was to ban outsourcing practices altogether. The result under the agreement reached with the private sector, while permitting the outsourcing of specialized services or activities and ad-hoc projects, is still far from ideal is confusing in its implementation and imposes severe penalties and requirements that can be gravely damaging for companies and workers alike."In summary, these abusive practices resulted in the tarnished reputation of the outsourcing practice at large, which without seeing its benefits was recently regarded as a form to prevent the compliance of obligations and benefits that all workers are entitled to receive.”Since its approval by the Mexican congress, the reform package, has been enacted by presidential decree published on April 23, 2021. The Ministry of Labor, still has a few days left of a 30 day period within which it is required to publish the guidelines under which companies that conduct outsourcing activities must become registered and obtain approval from the ministry to conduct their activities as such. Companies will have a vacatio legis period of slightly over three months (through August 1, 2021) from the date of publication of the presidential decree to formally hire any employees that are being outsourced and to make any other applicable adjustments; certain other aspects will become effective from January 1, 2022. To comply with this reform, every company that provides services to another must register to be authorized. To register, it must demonstrate that it is in full compliance with its tax, social security and other obligations. Companies that wish to outsource certain activities from others would only be permitted to do so when such activities would not be contemplated in their social purpose2, and when such activities would be specialized or would not be possible to be conducted by the companies themselves at a certain location or facility.The fines for breaching these new obligations can be imposed on both, the company seeking the outsourcing and the company that could provide such services and can reach up to MXP $4,400,000 (approximately USD $220,000) per occurrence.Any company that retains the services of any other company that fails to become registered in accordance with the law and the Labor Ministry guidelines (to be issued soon -hopefully-) will not be able to deduct the payments made to this company for tax purposes, in addition to the fines and other sanctions that could be imposed."Companies that wish to outsource certain activities from others would only be permitted to do so when such activities would not be contemplated in their social purpose , and when such activities would be specialized or would not be possible to be conducted by the companies themselves at a certain location or facility.”It remains to be seen whether the implementation of this reform can result in the benefit of thousands of workers that were deprived of benefits by the abuse of illegal outsourcing activities. It remains to be seen as well whether this reform might have a negative effect on legal and productive outsourcing practices that are essential for the cost-effective integration of services and productivity around the world.
1.- Under Mexico’s social security system, the contributions payable to the Mexican Social Security Institute, which are based on a percentage of a person’s salary are paid one third by the workers as a withholding of its salary that the employers must make; one third by the employer; and one third by the government.
2.- The social purpose (‘objeto social’) of any Mexican company is contemplated in the company’s bylaws and is generally written in broad sense to contemplate the conduction of several activities or services.