I. Background
On November 12, 2020, the President of the Republic, Andrés Manuel López Obrador, in use of his constitutional powers, presented before the Chamber of Deputies of the Congress, an initiative to amend the Federal Labor Law (hereinafter, “FLL”), the Social Security Law (hereinafter, “LSS”), Law of the National Employees’ Housing Fund Institute (hereinafter, “Infonavit Law”), Federal Tax Code (hereinafter, “CFF”), Income Tax Law (hereinafter, “LISR”) and Value Added Tax Law (hereinafter, “LIVA”), whose main purpose was to prohibit the subcontracting of labor.
As a result of the foregoing, a dialogue and negotiation table was established between the federal government, representatives of the most important business chambers in the country, as well as union leaders and representatives of the Legislative Branch, who on April 5, 2021, through a press release, announced that they had reached an agreement to prohibit the subcontracting of personnel, regulate the hiring of specialized services and cap the amounts that employers must deliver to their employees for employee profit sharing (hereinafter, “PTU”). Finally, it was established that such agreements would be submitted to the Chamber of Deputies for consideration in the corresponding legislative process.
II. Reform
On April 13, 2021, the Chamber of Deputies of the Mexican Congress, based on the agreements previously reached, approved a bill consisting of several legal reforms, which are listed below, highlighting the most important aspects that should be considered by companies with operations in Mexico:
a. Federal Labor Law
As a fundamental part of the reform, the prohibition of subcontracting of personnel is established, understood as when an individual or legal entity provides or makes available its own employees for the benefit of another.
It is established that employment agencies or intermediaries may only intervene in activities such as recruitment, selection, training and instruction of personnel, among other activities; however, they may never be considered as employers of these employees, which will be exclusively for those who benefit from their services.
Also, it allows and regulates the subcontracting of specialized services or the execution of specialized works that are not part of the corporate purpose or the main economic activity of the beneficiary of such services, provided that the contractor or service provider is registered in the public registry to be established for such purposes by the Ministry of Labor and Social Welfare (hereinafter, “the STPS”).
In this sense, it is worth mentioning that, on one hand, the corporate purpose is that which is established in the chart of incorporation of the company and/or in its amendments, and on the other hand, the predominant economic activity is, in terms of the provisions of Article 45 of the Regulations of the Federal Tax Code, that economic activity for which, in the fiscal year in question, the taxpayer obtains the highest income with respect to any other of its activities, and that such activity must be declared by the taxpayer at the time of its registration in the federal taxpayers’ registry.
It is established that complementary or shared services or works rendered between companies of the same business group, also known as ‘shared services’ -common administrative processes or activities of individual business units that manage to be consolidated within an organization-, will also be considered as specialized, they may operate under this same scheme, as long as they are not part of the corporate purpose or the predominant economic activity of the company that receives them. In this regard, it is worth mentioning that in order to be considered as a corporate group, the provisions of Article 2, Section X of the Securities Market Law, which states that it is the group of legal entities organized under schemes of direct or indirect participation of capital stock, in which the same company maintains control of such legal entities.
In addition, the reform provides that the subcontracting of specialized services or the execution of specialized works must be formalized by means of a written contract, which must state: i) the purpose of the services to be provided or the works to be executed; and ii) the approximate number of employees that will participate in the performance of such contract.
Regarding the registration to be processed by persons or companies that intend to provide specialized subcontracting services, it is established that they must prove before the STPS that they are up to date with their tax and social security obligations, in addition to the fact that such registration must be renewed every three years. In this sense, it is mentioned that the STPS must pronounce on the registration applications within a maximum period of 20 days, in case of not doing so during such period, the applicant may request the STPS to pronounce its resolution within the following three days, after such period, in case the authority does not do so, the registration will be considered to have been made in the form of affirmative ficta.
It is also provided that the STPS may deny or cancel the registration of those contractors that do not comply with the requirements of the law, which means that such authority may review compliance at any time during the term of the registration. In addition, it is established that the STPS itself will dictate the general provisions regarding the procedures to be followed to obtain such registration, exercising its regulatory power, without being able to exceed its powers.
With respect to PTU, the reform added a fraction to article 127 of the law, establishing that the amount will have a maximum limit of three months of the employee’s salary or the average of the participation received in the last three years, applying the more favorable amount for the employee of these two options.
In relation to employer substitution, a paragraph was added which establishes that in order for the substitution to be effective, the assets of the company or establishment must be transferred to the substitute employer. The foregoing is in accordance with the provisions of the LSS regarding that the substitution of the employer is considered when: i) there is a transfer of essential assets related to the operation between the substituted and the substituting employer, with the intention of continuing it; and ii) in cases in which the partners or shareholders of the substituted employer are, for the most part, the same as those of the substituting employer and it is the same line of business.
Regarding the sanctioning scheme, it is foreseen that whoever does not allow the inspection and surveillance, will be sanctioned with a fine ranging from 250 to 5,000 Units of Measurement and Updating (hereinafter, “UMAs”), in addition to being notified to exhibit information, with the consequence that in case of not doing so, the non-existence of such information will be presumed, with the resulting implications.
In addition, it is established that whoever subcontracts personnel prohibited under the terms of the reform, or whoever does so without being registered with the STPS, both for the contractor and the contracting party, may be imposed between 2,000 and 50,000 UMAs, in addition to informing the other competent authorities.
b. Social Security Law
With respect to the LSS, the reform establishes joint and several liabilities for those who benefit from specialized services provided by a person who has failed to comply with social security obligations with respect to its employees.
In addition, it is established that no later than the 17th day of each month of January, May and September, that is to say, on a four-monthly basis, the contractor must inform the Mexican Social Security Institute (hereinafter, “the IMSS”), establishing that failure to do so will be considered a violation of the LSS, the information of the contracts entered into during such period in accordance with the following:
- The parties to the contract: Name, corporate name, Federal Taxpayers’ Registry (hereinafter, “RFC”), address, mailing address and telephone number;
- For each contract: Purpose, term, list of employees, indicating name, Unique Population Registry Code, social security number, base salary, name of the contractor and the RFC of the same; and
- Copy of the registration issued by the STPS.
In addition, the IMSS and the STPS must enter into collaboration agreements to exchange information and carry out joint verification actions, mentioning that the IMSS will inform the STPS of any non-compliance detected by the companies.
c. Law of the National Employees' Housing Fund Institute (Instituto del Fondo Nacional de la Vivienda para los Trabajadores).
With respect to the Infonavit Law, the reform first touches on the issue of employer substitution, establishing that the substituted employer will be jointly and severally liable with the substitute employer for a term of three months with respect to its obligations under this law.
Likewise, as provided by the LSS, a four-monthly obligation is established for contractors to report to the National Employees’ Housing Fund Institute (hereinafter, “Infonavit”), no later than the 17th day of each January, May and September, the following information on contracts for specialized services or execution of specialized works:
- General data, service contracts, contribution and amortization amounts, employee information, determination of the base contribution salary and a copy of the registration certificate by the STPS.
On the other hand, as in previous laws, this law provides for joint and several liabilities for the obligations established there.
In addition, as in the LSS, it is also established that Infonavit must sign collaboration agreements with the STPS for the exchange of information and joint verification actions.
d. Federal Tax Code
Concerning the CFF, following the labor provisions, the amendment establishes that payments or considerations for subcontracting personnel to perform activities related to the corporate purpose, as well as to the main economic activity of the contracting company, will not have tax effects for deduction or credit.
In addition, it is established that payments or considerations for a service in which personnel is provided or made available to the contracting company in the following cases will not have tax effects:
- When the employees that the contractor makes available to the contracting party, originally have been employees of the contracting party and have been transferred to the contractor, through any legal figure.
- When the employees that the contractor places at the contractor’s disposal cover the main activities of the contractor
On the other hand, similar to labor matters, the reform of the CFF allows the subcontracting of specialized services or the execution of specialized works that are not part of the corporate purpose or the main economic activity of the beneficiary of such services, provided that the contractor or service provider is registered in the public registry to be created by the STPS for such purposes.
It also recognizes the tax effects of payments or considerations made for services or complementary works through shared services, as long as they are not part of the corporate purpose or the main economic activity of the company that receives them.
In addition, the reform stipulates that companies that subcontract specialized services or the execution of specialized works will be jointly and severally liable for the contributions caused by the employees that provide the service.
In this way, fines are included for taxpayers providing specialized services that do not provide the information required by the different tax laws. Likewise, the use of simulated schemes of specialized services, or carrying out the subcontracting of personnel is added as tax fraud and, therefore, it could be included in the assumption of organized crime by means of which a group of three or more persons participates in the simulation of specialized services or in the rendering of personnel subcontracting services.
e. Income Tax Law
The reform of the Income Tax Law incorporates the obligation of the contracting party to obtain the following documents from the contractor of the specialized services or the execution of specialized work:
- Verify that the contractor is registered in the STPS in terms of article 15 of the FLL.
- Tax receipts for the salaries of the employees who have provided the service or performed the work.
- Payment receipt issued by a financial institution for the declaration and payment of the corresponding tax withholdings.
- Payment of employer contributions (IMSS and INFONAVIT).
In addition, it adds as non-deductible the payments made for subcontracting personnel to perform activities related to the corporate purpose, as well as to the main economic activity of the contracting company, in terms of article 15-D of the CFF.
f. Value Added Tax Law (LIVA)
As in the Income Tax Law, the obligation of the contracting party to obtain from the contractor of the specialized services or of the execution of specialized work, the documents mentioned in the previous point, is incorporated.
In addition, the reform establishes that the obligation to withhold 6% of the value of the consideration effectively paid, related to the rendering of services through which they are made available to the contractor or a related party of the contractor, is repealed.
g. Federal Law of Employees in the Service of the State, Regulatory of Section B) of Article 123 of the Constitution and Regulatory Law of Section XIII Bis of Section B, of Article 123 of the Political Constitution of the United Mexican States.
Despite the fact that the initiative sent by the President of the Republic did not contemplate modifications to these laws, which regulate labor relations in the public service, the legislators in the Chamber of Deputies added an amendment to the same to establish that the subcontracting of personnel for the benefit of government agencies is prohibited, allowing, as for the private sector, only the subcontracting of specialized services or the execution of specialized works, in cases in which the contractor has the corresponding registration before the STPS (Ministry of Labor and Social Security).
III. Legislative process, transitory regime, and entry into effect
As regards the legislative process to be followed by the reform analyzed herein, since it has already been approved by the Plenary of the Chamber of Deputies, it has been turned to the Senate of the Republic, so that it may be discussed first in the Commissions of said parliamentary body and then in the Plenary of the same. We consider that this should be happening in the following days, since, as has been commented in different forums, it is intended that this reform may be published or enter into effect on May 1, 2021, on the occasion of the commemoration of Labor Day.
Likewise, it is worth mentioning that the transitory articles of the reform decree establish that it will become effective the day after its publication, except for the following considerations that must be taken into account:
- Regarding the reforms to the CFF, the LISR, and the LIVA, they will enter into effect on August 1, 2021;
- Regarding the laws that regulate labor relations in the public sector, they will become effective in the fiscal year 2022;
- The STPS will have a period of 30 calendar days from the effective date to issue the general rules regarding the procedure to obtain the registration referred to above;
- Contractors must obtain registration from the STPS within 90 calendar days from the date such authority issues the aforementioned general rules;
- It is provided that those companies that currently benefit from a subcontracting scheme may replace the current employers without the need to comply with the requirement of transferring the assets of the company, provided that the transfer of personnel is carried out during the 90-day period as of the effective date of the reform, and the labor rights of the employees, such as their seniority, must be recognized;
- It is established that those employers that have one or more employer registrations per class at a national level, will have a term of 90 calendar days as from the effective date to cancel such employer registrations and, if applicable, request the IMSS to grant them an employer registration in terms of the applicable regulations;
- Contractors must begin to provide quarterly information to the IMSS within 90 calendar days from the effective date of the reform.
- For those companies that migrate personnel recognizing labor rights, seniority, and terminated labor risks, for purposes of the LSS, it will be considered as employer substitution if it is carried out within the period of 90 calendar days as of the effective date of the reform.
In such case, the following must be applied concerning the determination of class, fraction, and premium of the Labor Risks Insurance:
- The company that absorbs the employees must classify itself following the criteria of the LSS and the Regulations of the Law on Affiliation, Classification of Companies, Collection and Taxation, and must keep the premium with which the company that had the employees was contributing if it was doing so correctly following the risks inherent to the activity; otherwise, it must contribute with the average premium of the corresponding class.
- In the cases in which a company absorbs the employees of another or others, with the same or different classes, and that under this they must adjust their classification to the new activities that they will carry out, the class and fraction will be determined attending to the inherent risks of the activity of the negotiation and the premium will be obtained by applying the following procedure:
- For each employer registration, both of the absorbing company and the substituted companies, the assigned premium shall be multiplied by the total of the base contribution salaries of the employees included in the same.
- The products obtained following the preceding paragraph shall be added and the result shall be divided by the sum of the contribution base salaries of all the employees included in all the employer registries.
- The premium thus obtained will be applied to the employer’s record of the company absorbing the employees and will be in effect until the last day of February following the substitution.
- To determine the risk premium for the following fiscal year, the terminated occupational risks that occurred to the employees in the corresponding fiscal year must be considered.
The foregoing provided that the companies to be replaced have been correctly classified according to the risks inherent to the activity, otherwise, they must contribute at the average premium of the corresponding class.
- For companies that carry out an employer substitution under the terms mentioned above and have a Medical Services Subrogation Agreement with Reversion of Fees in force, the conditions agreed therein will not be subject to modification.
IV. Recommendations
In view of the foregoing in this memorandum, we recommend that the Company establish an Action Plan that should include the following:
- Audit in Labor Subcontracting Matters. – It is proposed to carry out an audit with respect to the services that the Company currently subcontracts, or if applicable, provides any to another individual or legal entity that could be included within it. Additionally, review the corporate purpose, as well as the predominant economic activity, in order to be able to determine, if applicable, which specialized services may be subcontracted for the development of the activities.
- Analysis on Tax Matters. It is proposed to review the specialized services that the Company intends to contract, in order to avoid falling into a scheme of simulation of rendering services.
- Migration of Personnel – Derived from the above, in the event that it is established that the Company is currently subcontracting personnel that cannot be considered as specialized services in terms of the reform, to carry out the migration of personnel through the mechanisms established for this purpose within the terms mentioned above.
- Compliance: Subsequently, to follow up on an ordinary basis the compliance with the provisions that are being reformed, in order to avoid falling into any non-compliance with the regulations that may result in a sanction for the Company.
Therefore, in case of requiring support to carry out these and other actions necessary for the compliance of the labor subcontracting regulations, VGA’s specialized lawyers are trained to support the Company at the appropriate time. In case you have any questions regarding what has been raised here, the VGA team remains attentive to any related comments.
