Beyond COVID-19: Crisis response or road to recovery?
Crisis response or road to recovery?
A new set of amendments that will materially impact corporate structures in Mexico has finally been passed following many months of discussions and speculation. This major overhaul to the Mexican legal framework (the Outsourcing Reform) repeals and replaces the prior "subcontracted work" legal regime, by amending the Federal Labor Law (Ley Federal del Trabajo, LFT), the Social Security Law (Ley del Seguro Social, "LSS"), the National Workers Housing Fund Institute Law (Ley del Instituto del Fondo Nacional de la Vivienda para los Trabajadores), the Federal Tax Code (Código Fiscal de la Federación), the Income Tax Law (Ley del Impuesto Sobre la Renta), the Value Added Tax Law (Ley del Impuesto al Valor Agregado) and the Federal State Workers Law (Ley Federal de los Trabajadores al Servicio del Estado).
The Outsourcing Reform calls for companies directly or indirectly conducting business activities in Mexico (or those planning to do so) to carefully review—and potentially revise their corporate-employment structures as an immediate action. Failure to do so may result in (i) fines (up to roughly US$225,000), (ii) potentially being held to be joint obligor for labor and social security payments and obligations regarding subcontracted personnel, (iii) certain tax deductions being disregarded, and (iv) in some cases, being held to be part of tax-evasion schemes.
While this is not intended to provide (and it shall not be construed to be) legal advice, companies directly or indirectly doing businesses in Mexico and those planning to do so, should consider conducting a thorough review of their current corporate-employment structure to assess whether any changes are required to conform with the new Outsourcing Reform.
Ideally, this review process should also extend to the arrangements with main services providers, as even certain contractual relationships that typically would not be considered "outsourcing" will likely be affected by the Outsourcing Reform, in turn requiring substantial amendments to the relevant contracts, corporate purpose of the involved companies and/or even an employer substitution to be implemented within the short timeframe so provided by the Outsourcing Reform.
Consider, for example, a power-generator that has subcontracted engineering, procurement and construction activities to an EPC contractor and/or operation and management activities to an O&M contractor. Subject to review of the specifics in each case, the parties will likely need to amend their EPC/O&M contract to be in line with the Outsourcing Reform.
Employment subcontracting is now prohibited in Mexico. This prohibition extends to, and includes, personnel subcontracting through third parties (i.e., "outsourcing"), and personnel subcontracting implemented as a broader corporate-employment structure involving related parties serving as "employees service provider" that ultimately are part of the same corporate group than the operating entity they render these services to (i.e., insourcing).
Certain "specialized" services or works may still be subcontracted, provided inter alia, that:
Supplementary or shared works or services (servicios u obras complementarias o compartidas) rendered between companies of the same corporate group will be considered "specialized" and will be subject to the same rules and restrictions applicable to services rendered by third-party companies. For purposes of the foregoing, the criteria set forth in the Securities Market Law (Ley del Mercado de Valores) will be applied in order to determine whether there is common control and companies are part of the same corporate group.
Any personnel subcontracting relationship must be documented in writing. The relevant contract must comply with specific rules and requirements including, among others, an express reference to the estimated number of employees that are to be assigned to perform the subcontracted services or works. Note that these rules and requirements are not the same as those previously provided by articles 15-A, 15-B, 15-C and 15-D of the LFT (which essentially required not only the subcontracted services to be specialized, but the subcontracted personnel to render activities different from those rendered by personnel of the beneficiary of the services, and prohibited a subcontracting of all of the activities in the company benefiting from the services in the structure), and which have now been repealed as part of the Outsourcing Reform.
The new Services Provider Registry will be maintained by the STPS. The full rules of operation of the Services Provider Registry will be issued at a later date (more on this below), but the Outsourcing Reform currently provides, inter alia, that:
Note that the right to receive a share of employer's profits continues to be a right of employees in Mexico. Like other employee rights, this is not subject to waiver and is fully protected by the LFT and the Mexican Constitution; however, certain restrictions and exceptions on mandatory profit sharing continue to apply. Notably, the Outsourcing Reform caps profit sharing payments to the greater amount of (i) three months of employee's salary; or (ii) the average of the profit sharing received during the 3 prior years.
Services providers must regularly submit to the Mexican Social Security Institute (Instituto Mexicano del Seguro Social "IMSS") (i.e., no later than on the 17th day of January, May and September of each year), extensive information regarding the personnel services agreements entered into with their clients. Similar information will need to be submitted to the National Workers' Housing Fund Institute (Instituto del Fondo Nacional de la Vivienda para los Trabajadores, "INFONAVIT"), following a set of rules to be issued by the INFONAVIT for such purpose.
As part of the amendments to the Federal Tax Code, the Income Tax Law and the Value Added Tax Law, payments made in consideration or in the context of an employment subcontracting structure contrary to the Outsourcing Reform will have no tax effects and, accordingly, may not be deducted or credited. Moreover, no tax effects will be attributed to subcontracting structures where the personnel assigned by the services provider to render the services subject matter of the subcontracting:
Employer substitution for purposes of the LFT, will now require assets to be transferred from the substituted employer to the substitute employer. Prior to the Outsourcing Reform, employer substitution for LFT purposes required only notice to be given to the transferred employees. As further detailed below, this new employer substitution LFT rule will not be effective immediately, but it is worth noting that it is much more in line with the employer substitution requirements under the LSS (which require the transfer of assets relevant to the productive process as part of an employer substitution process).
The Outsourcing Reform was published in the late edition of the Federal Register (Diario Oficial de la Federación) on April 23, 2021, and has, as of today, become effective. Note, however, that:
As the global aviation industry looks towards post-pandemic recovery and less turbulent skies, it is the topic of decarbonisation that is increasingly top of everyone’s agenda. There have been a number of eye-catching announcements around the world in recent weeks, from United Airlines announcing its intention to purchase 100 electric aircraft, an increased focus on the use of sustainable aviation fuel (SAF) from several airlines, and Korean Air utilising the green bond markets.
© Norton Rose Fulbright LLP 2021