In November 2020, the government delivered a bill to regulate outsourcing in Mexico. The initiative was applauded by many people, but the Business sector was unhappy.
The alarms sounded in the largest employers’ association in Mexico: the Employers’ Confederation of the Mexican Republic (COPARMEX in Spanish). The members of COPARMEX affirmed that the initiative bans this practice – which was not the case.
Meanwhile, Antonio del Valle Perochena, president of the Mexican Business Council, declared for Forbes that the new legislation would cause the loss of one million 390 thousand jobs, as well as the reduction of companies and investors.
Despite opposition from the business sector, the reform to the labor law was approved on April 21 2021 in the Mexican Senate by unanimity. But, what does this law modify? Why does it bother businesspeople? And above all, why does the Mexican government insist on regulating a hiring scheme that employs 4.7 million people in the country?
What’s wrong with outsourcing?
Eliminating outsourcing has been on the campaign promises of many politicians in North America. Bernie Sanders reminded Trump in the presidential pre-campaigns that he had promised to prevent the flight of jobs to Mexico, and urged the former president to fulfill his promise by banning outsourcing.
In Mexico, regularization became a commitment of the current government. Outsourcing grew 37% in the last five years. However, according to data from the Ministry of Labor and Social Welfare, of all those hired by outsourcing, some 2.9 million are under an illegal scheme.
Insourcing is the main problem for the Mexican government. In this practice, a company creates another company to subcontract its staff and prevent its workers from participating in the distribution of employee profit, a constitutional right for workers in Mexico. Also, insourcing serves as a way to evade taxes in the country.
The crusade against illegal outsourcing in Mexico is best exemplified in the case of Raúl Beyruti. The Attorney General’s Office (FGR in Spanish) requested an arrest warrant against him and a review of his bank accounts for the crimes of organized crime, resource operations of illicit origin, and tax fraud, as reported on April 7 by the newspaper La Jornada.
Beyruti is president of the country’s largest outsourcing company, GIN Group, and a shareholder in 90 other companies that are also being investigated for false billings. According to the investigations carried out by the Financial Intelligence Unit, the resources of illicit origin handled in the Beyruti companies exceed 30 billion Mexican pesos. These types of practices are the ones to be avoided in the new legislation.
Businesspeople delayed approval of the reform
Business associations in Mexico tried a partisan defense against the reform. They pressured the Executive Branch to negotiate modifications to the law and reduce the impact it would have on their businesses, according to El Universal reported in December 2020. Negotiating with the executive instead of with the legislature was a source of annoyance for some of these leaders, as expressed by Enoch Castellanos, president of the National Chamber of the Transformation Industry, (Canacintra) on his Twitter account.
Translation: In @CANACINTRAMex we do not agree nor is there a consensus of the entire private initiative to disappear subcontracting. I share a fragment of my interview on @MeganoticiasTV with @victorhugonoti.
Francisco Cervantes, president of the Confederation of Industrial Chambers, affirmed that there was consensus to eliminate insourcing, the practice that most affects salaried workers and that is most used for tax evasion.
The business front delayed the reform for more than three months in its approval. On December 8, the federal government asked the House to postpone the discussion of the reform until February 2021. The businesspeople managed to negotiate that the distribution of profits is limited to three months or the average of the last three years. After deliberations, the bill was approved in the Chamber of Deputies on April 14, so that on April 20 it was approved by the Senate. Senator Napoleón Gómez Urrutia suggested that the Beyruti arrest warrant, which invested in lobbying to stop the reform, helped speed its passage.
What are the key points in the new legislation on outsourcing?
- Subcontracting will only be allowed in specialized services and works that are not part of the company’s corporate purpose.
- Employment agencies may not be employers of the people they place in companies
- If the outsourcing company does not comply with its employer obligations, the company that subcontracts services must jointly and severally comply with these obligations.
- Outsourcing companies will be part of an STPS registry that will be renewed every three years.
- Every four months, the outsourcing company will deliver a report to the IMSS with data on the contracts entered into with other companies.
- Schemes that simulate subcontracting will be considered as tax fraud
- Only subcontracted activities that are not part of the company name will be deducted
When does the new legislation go into effect?
For the reforms of the law to come into force, the executive must approve the reform, and then, publishes it in the Official Gazette of the Federation (DOF). Thereafter, companies will have until August to adapt to the legislation, while the government will have until January 1, 2022.
This last point raised complaints in the legislative discussion. The PAN deputies considered that there should be no distinctions between private companies and government entities for the application of the law.
Once the reform is published, the STPS will have thirty days to publicize the rules for subcontracting.
The publication of the reform in the DOF is expected to take place on May 1, International Labor Day.
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