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Outsourcing in Mexico: Best Practices

Latin American Briefings

Corporations engaging staffing companies in Mexico must be careful that they are not considered to be the employer of the staffing company's (hereinafter "Contractor's") employees. Recent changes to the Mexico Federal Labor Law (FLL), and in particular to Article 15-A of the FLL, regarding the practice of outsourcing, increase this risk. One of the main risks of Article 15-A is, if the beneficiary of the services (i.e., the company retaining the Contractor) is considered an employer, labor authorities may then determine that the company needs to pay profit sharing (at 10 percent of pre-tax earnings) to the Contractor's employees.

Reforms to Mexico Social Security Law

On July 9, 2009, reform bills to Mexico's Social Security Law (SSL) were enacted into law. The purpose of the SSL, as amended, is to regulate outsourcing and establish legal mechanisms that strengthen the Social Security Institute's (SSI) revision authority. These reform bills mainly establish joint and several liability for those companies receiving personnel services from Contractors through the execution of a services agreement. According to the SSL, as amended, the beneficiary of the services (hereinafter "Company") shall assume the obligations set forth in the reform bills if the following requirements are met:

  • The Company gives instructions to the Contractor's employees;
  • The Contractor's employees work at the facilities determined by the Company;
  • The Contractor fails to fulfill the obligations established in the SSL; and
  • If the SSI has previously ordered the Contractor to fulfill omitted obligations, it fails to meet these requirements; and the SSI issues a notice to the Company regarding such order and omission.

The SSI imposes some formal obligations on the Company as beneficiary of services, including the filing of a quarterly report to the SSI that provides information such as the name, corporate name, corporate and tax domicile, tax ID and employer registry number with the SSI, articles of incorporation data, and information about the services agreement executed by and between the concerned companies.

FLL Article 15-A

Article 15-A was enacted during the reform of the FLL to regulate outsourcing. The article provides that outsourced work (régimen de subcontratación) is defined as:

work carried out by an employer-named con- tractor, with workers that are under its control, on behalf of a contracting party, either individual or company, which establishes the contractor's responsibilities and supervises the development of the services or the execution of the work.

According to Article 15-A, to be considered outsourced work, the work must meet the following conditions:

  • The work cannot cover the totality of the activities "same or overall similar" to those carried out in the workplace;
  • The work should be justified for its specialized character; and
  • The work cannot be similar to tasks as those carried out by the rest of the employees of the contracting party.

Article 15-A further provides that if all of the above conditions are not met, the contracting party (Company) will be considered as an employer for the purposes of the FLL and shall also assume social security obligations for the employees.

Article 15-A is confusing because it is drafted in a negative form, and the meaning of the legislation may, on its face, seem to be open to debate. It is unclear from the language whether Article 15-A intends to state that even if any of the above-identified requirements is met, the contracting party will not be considered an employer for purposes of the FLL. On the contrary, the plain meaning of the Article also suggests that if these requirements are not completely met, the contracting party will be considered an employer of the Contractor's employees.

The considerations expressed at the Congressional Declaration of Purpose or Ratio Legis issued by the Senate with the bill to reform, establishes the following regarding Article 15-A:

In that sense, the minute sent by the co- legislator [House of Representatives] seeks to regulate this issue [outsourcing], in order to prevent the evasion of the fulfillment of obligations, either by the contractor or the contracting party.

For this purpose, "outsourcing" is defined as the work that is performed by an employer called contractor, with workers that are under its control, in favor of a contracting party, individual or company, which establishes the contractor's responsibilities and supervises the development of the services or the execution of the work.

Article 15-A establishes three conditions for this type of work. In the event of a breach of all of them, the beneficiary shall be deemed as employer for all purposes of this Law, in accordance with the provisions of Article 13 of the same Law, and for purposes of the obligations of social security, as may be prescribed by Article 15-A of the Social Security Law, among other provisions of the same nature.

Consequently, according to the Ratio Legis, and in accordance with the Congressional Declaration of Purpose, the sanction (being considered an employer) will be triggered if the client breaches all of the three conditions provided in Article 15-A. If the companies engaged in the services agreement meet any of the three conditions, then the sanction will not materialize.

Service agreements

Taking into consideration the relevant aspects of the related SSL reforms, the following should be considered when drafting a service agreement between the Company and Contractor:

  • Include the Contractor's Social Security employer ID number in the services agreement.
  • Avoid claims that the Contractor is just a vehicle to pay compensation and benefits to employees, and that employees are under the Company's control.
  • Rather than a "personnel services agreement," the document should be described as a services agreement (for advice and management, among others).
  • Consider including a provision that the Contractor will solely and autonomously: determine the way such services are to be performed; supervise the activities of the employees; discipline employees; and determine benefits and salaries, etc.
  • Address the obligation of the Contractor to respond to any request of the SSI, to avoid any liability to Company.
  • Register every Contractor's employee with the SSI, evidencing that the execution of the agreement does not aim to avoid the payment of social security fees or to diminish the labor rights of the employees rendering services to the Contractor.
  • Establish in the agreement the Contractor's obligation to disclose such documents per Company's request.
  • If possible, execute the agreement in Spanish and include an execution place in Mexico.
  • Establish that the Contractor has sufficient material and economic resources to comply with its employee-employer obligations.
  • Require the Contractor to present all documentation to the Company upon its request or periodically, so the Company can comply with Article 15-C of the FLL, which requires the beneficiary of the services to periodically verify its Contractors' labor and employment obligations.
  • Document the specialization of the work to be performed by the Contractor.
  • Invoices delivered by the Contractor should not include description such as "services for personnel provision."

In addition, to the extent possible, consider having the Contractor manage the autonomy as a contractual term and practice in regard to its personnel, particularly in terms of work tools, including:

  • The Company should avoid the delivery of badges or business cards to the assigned personnel.
  • The Contractor's name or logo should be included on the uniforms for outsourced personnel rendering services in the Company's facilities.
  • In the event outsourced employees require email accounts, it should make a distinction between the accounts of the Company's personnel and the outsourced employees.
  • The Company should also review assignment of cars, phones and other tools.
  • The Company should avoid including outsourced employees in emails, newsletters, internal communications and written orders, from which it could be assumed the existence of control, direction or subordination.
  • The Company should avoid any payments or direct expense reimbursement to outsourced personnel.
  • The Company should avoid granting awards or training course diplomas to the Contractor's outsourced personnel.
  • The Company should avoid hiring outsourced personnel who will perform equal or similar tasks to those performed by its employees.

Even though Article 15-A is applicable to the services provided by the Contractor, taking the above mentioned measures can help to decrease the risk for the Company.

Conclusion

In view of the above, the Company should take steps to demonstrate that the Contractor is not only a contractor providing personnel, but also:

  • an employer according to the definition in Article 10 of the FLL; and
  • an employer with enough resources to assume labor obligations for its employees in accordance with Article 13 of the FLL.

Therefore, the Company should identify the "best practices" to supervise the Contractor's employees, as they could claim that the Company is their actual employer.

About the Authors

Monica Schiaffino is a shareholder in the Mexico City and Monterrey offices of Littler, the largest global employment and labor practice representing management. She advises clients on labor and employment matters in Mexico and the Latin America region. She was named the 2014 Lawyer of the Year in Best Lawyers in Mexico.

Philip Berkowitz is a shareholder and US practice co-chair of Littler's International Employment Law Practice Group. Based in New York City, he advises multinational companies regarding US and overseas employment and executive compensation practices, and in individual and class action lawsuits and arbitrations.



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