On April 20, 2021, the Senate approved the draft bill with draft Decree that modifies various Laws regarding Labor Subcontracting.

On April 15, 2021, the Second Draft Opinion of the United Labor and Social Welfare and Legislative Studies Commissions was published on the website of the Chamber of Senators1, in a positive sense on the Minute with Draft Decree that modifies various Laws on Labor Subcontracting. This minute had been voted in favor of the Senate Labor and Social Welfare Commission.

With the foregoing, the Chambers of Deputies and Senators have approved various amendments, additions and repeals to various provisions regarding outsourcing of the Federal Labor Law ("LFT"), Social Security Law ("LSS"), Law of the National Workers' Housing Fund Institute ("LINFONAVIT"), Fiscal Code of the Federation ("CFF"), Income Tax Law ("LISR"), Value Added Tax Law ("LIVA"), Federal Law of Workers in the Service of the State ("LFTSE") and the Law Regulating Section XIII Bis of Section B of Article 123 of the Political Constitution of the United Mexican States.

The approved reform project will be sent to President Andrés Manuel López Obrador for enactment.

The main aspects of this reform are:

  1. Federal Labor Law.

    1. Repeal of "15s". Repeals Articles 15- A; 15-B; 15-C, and 15-D that were added to the LFT in November 2012, related to subcontracting.
    2. Prohibits subcontracting. As a general rule, the subcontracting of personnel is prohibited, that is, if a natural or legal person provides or makes available their own workers for the benefit of another.
    3. Employment agencies or intermediaries may continue to operate in the recruitment, selection and training of workers; employers are the ones who benefit from their services.
    4. Permitted subcontracting. The LFT expressly permits the subcontracting of specialized services or the execution of specialized works, provided that it complies with the following requirements:
      • The contracted service or work is not part of the corporate purpose or the predominant economic activity of the beneficiary or contractor.
      • The contractor must be registered in the public registry of the Secretaría del Trabajo y Previsión Social ("STPS") (Ministry of Labor and Social Security, in english).
         
      • The conditions for subcontracting allowed by exception create the need for companies to review their corporate purpose in order to update it and delimit it according to their predominant activity; in such a way as to allow the contracting of more specialized services; we consider that each company should review the production process declared for the registration of the company in the Work Risk insurance, before the Instituto Mexicano del Seguro Social (Mexican Institute of Social Security).
         
      • It will allow that complementary or shared services or works rendered between companies of the same business group2 to be considered specialized as long as they are not part of the corporate purpose or the predominant economic activity of the company that receives them.
         
      • We consider that the conditions for permitted subcontracting (which implies that one company makes workers available to another), implies that professional services other than the corporate purpose and predominant economic activity of the contracting company, which are performed under the absolute responsibility of a professional, with its own resources and elements and without workers made available to the contracting company, should be excluded from registration with the STPS.
         
    5. Requirements of the contract. The subcontracting contract must be formalized in writing and indicate: (i) the purpose of the services to be provided or the works to be executed and (ii) the approximate number of workers who will participate in the fulfillment of said contract.
    6. Joint and several liability. Whoever contracts services or works of a specialized nature, will be jointly and severally liable for the contractor who fails to comply with the obligations arising from the relationship with the workers who performed the service and work. The foregoing, regardless of whether the contractor previously demonstrated to the contracting party that it had sufficient elements of its own to comply with its employer's obligations.
       
      • This generates risks and uncertainty for any contractor of specialized services and works, since it cannot have absolute control over the situation of a third party.
         
    7. Registration before the STPS. Individuals or legal entities that provide subcontracting services (which implies that one company places workers at the disposal of another) must register with the STPS. We consider that only companies that provide services and specialized works, in such a way that they place their workers at the disposal of the contracting company, should register.
       
      • In order to obtain the registration, they must prove that they are up to date with their tax and social security obligations and renew it every three years. However, the STPS will deny or cancel at any time the registration of those individuals or legal entities that do not comply with the requirements set forth in the Labor Law.
         
      • The STPS must resolve the application for registration within 20 (twenty) business days after its receipt and if it does not do so, the applicant may request the resolution within three days after the request and if the STPS refrains from resolving, the registration will be deemed to have been effected.
         
      • The registered individuals or legal entities will be registered in a public registry available on the Internet.
         
      • The STPS will issue the general provisions that determine the procedures related to the registration referred to in this article.
         
    8. Employer substitution. This will be effective as long as the assets of the company or establishment are transferred to the substitute employer. It is relevant to consider that there is an opportunity to make the substitution without proving the transfer of assets during 90 (ninety) days following the decree by transitory provision.
    9. Employees' Profit Sharing ("PTU"). The amount that, on an individual basis, the company will distribute to the workers for PTU will be a maximum of three months of the worker's salary or the average of the participation received in the last three years; whichever is more favorable to the worker.
    10. Sanctions. Both the provider of illegal subcontracting services and the contractor thereof, as well as the provider of services or specialized works that are not registered with the STPS, may be subject to a fine of 2,000 to 50,000 UMAS (according to values as of this date, MXN$179,240 to MXN $4,481,000.00)3; and the corresponding tax and criminal authorities will be notified.

  2. Social Security Law.

    1. Repeal "15-A" of the LSS. Therefore, for social security purposes, the concept of labor subcontracting and its assumptions set forth in the LFT apply.
    2. Joint and several obligation. The natural or legal person that contracts the rendering of services or the execution of works with another natural or legal person that fails to comply with the social security obligations, will be jointly and severally liable in relation to the workers used to execute such contracts.
       
      • Although there is no clarity in the draft amendment, we interpret that the non-compliance of the contractor must be proven by the Mexican Social Security Institute ("IMSS") before generating any act of direct collection from the beneficiary.
         
    3. Quarterly report. Only subcontracting companies that perform services or specialized works must provide information on the contracts executed in the applicable four-month period, including the current registration issued by the STPS, every four months, no later than the 17th day of January, May and September.
    4. Multiple registration before the IMSS. Article 75 of the LSS, which allowed subcontracting companies to process several employer registrations by type of occupational risk is repealed.

  3. Law of the National Workers' Housing Fund Institute.

    1. Employer substitution. In this case, the replaced employer will be jointly and severally liable with the substitute employer for the obligations derived from the LSS, born before the date of the replacement, up to a period of three months, after which all responsibilities will be attributable to the new employer. This amendment reduces the term from six to three months to the benefit of the substituted employer.
    2. Quarterly report. Subcontractors of services or specialized works must provide, on a four-monthly basis and no later than the 17th day of January, May and September, the information related to the contracts entered into during the four-month period in question. The procedure will be disclosed by the INFONAVIT, but it is expected that by sending the report to the IMSS it will be considered as complied with before INFONAVIT itself in order to avoid duplicity in the sending of information.
    3. Joint and several liability. Whoever subcontracts services or works with a company that fails to comply with its obligations before the INFONAVIT, will be jointly and severally liable in relation to the workers used to execute such contracts.
    4. Inter-institutional agreements. The INFONAVIT will enter into collaboration agreements with the STPS for the exchange of information and the performance of joint verification actions. In addition, the INFONAVIT will inform the STPS of the non-compliance of companies with subcontracting requirements.

  4. Fiscal Code of the Federation.

    1. No deduction. Payments or considerations made for subcontracting personnel that perform activities related to the corporate purpose or predominant economic activity of the contracting party will not have tax effects of deduction or crediting.
       
      • Neither will be deductible or creditable the services in which personnel is provided or made available to the contractor when (i) the workers that the contractor provides or makes available to the contracting party, were originally workers of the latter; (ii) they have been transferred to the contractor, by means of any legal figure, and (iii) when the workers made available by the contractor cover the main activities of the contracting party.
         
    2. Authorized deduction. Tax deduction or credit effects will only be given to payments for subcontracting services or specialized works, which are not part of the corporate purpose or the predominant economic activity of the beneficiary thereof as long as they are provided by a contractor registered with the STPS and comply with the requirements of the LISR and LIVA.
    3. Business groups. The complementary or shared services or works rendered between companies of the same business group will be considered as specialized and will consequently have deduction and crediting effects, as long as they do not form part of the corporate purpose or of the preponderant economic activity of the company that receives them.
    4. Joint and several liability. Applies to those who receive services or contract specialized works, for the contributions that have been caused in charge of the workers with whom the service is rendered and that have not been paid by the contractor.
    5. Fines, aggravating factor. Fines in tax matters, recidivism in the attempted deduction or accreditation of personnel subcontracting activities and similar figures indicated will be aggravating. It is also proposed to fine the contractor who does not provide the contracting party with the necessary information for the expense to be deductible or the transferred tax to be creditable.
    6. Equalization offense. The amendment equates to the crime of qualified tax fraud, whoever uses simulated schemes for rendering services or specialized works, or subcontracts personnel prohibited by the Federal Labor Law. In this case, the corresponding penalty will be increased by one half, with a minimum penalty of three months and a maximum penalty of nine years.

  5. Income Tax Law.

    1. Deduction of payments for specialized services. They are deductible as long as the contracting party verifies that the contractor has: (i) the registration in force before the STPS, (ii) CFDI for the payment of wages to the workers performing the services, (iii) receipt of payment of the payment of the whole of the tax withholdings made to such workers for the wages paid, (iv) payment of the IMSS and INFONAVIT contributions. It is compulsory that the contractor delivers the above mentioned receipts and information to the contractor.
    2. Non-deductible. Payments made for any personnel subcontracting services prohibited by the LFT and the CFF are not deductible.

  6. Value Added Tax Law.

    1. Withholding Repeal. Consistent with the sense of the amendment, the obligation to withhold the 6% Value Added Tax ("VAT") payable by persons receiving personnel subcontracting services is repealed.
    2. Non-accreditation. VAT transferred for the rendering of illegal labor subcontracting services, i.e., those that do not comply with the requirements set forth in the LFT and the CFF, is not creditable.
    3. Creditable VAT. In order for the VAT for specialized services and works to be creditable, the contracting party must obtain from the contractor and the contractor is obliged to provide a copy of: (i) registration with the STPS and (ii) a copy of the VAT return and the acknowledgment of receipt of the payment and of the VAT that was transferred. This information must be delivered no later than the last day of the month following the month in which the contractor has made the payment of the consideration for the service received and the value added tax that has been transferred.
       
      • The contracting party that does not collect the aforementioned documentation must file a supplementary tax return in which the VAT credited for such concept is reduced.
         

  7. Federal Law of Workers in the Service of the State.

    1. Prohibited subcontracting. The subcontracting of personnel for the benefit of the public agencies regulated by the LFTSE is prohibited.
    2. Permitted subcontracting. Only the subcontracting of services or specialized works will be allowed, provided that the contractor is registered with the STPS.
       
      • It should be noted that this law does not clearly establish what type of subcontracting is prohibited for public agencies. Nor does it establish that the services or specialized works that may be subcontracted must be determined based on the predominant activity of the agencies.
         
      • We believe it would be convenient for the authority to clarify this part for greater clarity of the scope of this reform, since we know that the government, especially the executive branch, has abused the use of the supply of personnel to freeze or terminate positions that would otherwise be base positions.

  8. Law Regulating Section XIII Bis of Section B of Article 123 of the Political Constitution of the United Mexican States.

    • Prohibited subcontracting. The subcontracting of personnel for the benefit of institutions that provide public banking and credit services, Banco de México, Banco del Bienestar, Banobras, among others, is prohibited. Only the subcontracting of specialized services or the execution of specialized works will be allowed, as long as the contractor is registered with the STPS.

  9. DEADLINES.

    1. The amendments to the LFT, LSS and LINFONAVIT will become effective the day after they are published in the Official Gazette of the Federation, which is estimated to be May 1, 2021.
    2. The amendments to the CFF, LISR and LIVA will become effective on August 1, 2021.
    3. The amendments to the LFTSE and the Regulatory Law of Section XIII Bis of Section B of Article 123 of the Mexican Constitution will become effective in fiscal year 2022.
    4. Within 30 calendar days following the entry into force of the Decree, the STPS must issue the general provisions for the registration and registry of subcontractors that perform specialized services or works.
    5. Upon the entry into force of the Decree, contractors that provide subcontracting services must obtain registration before the STPS within 90 (ninety) calendar days, counted as of the date said Ministry publishes the general provisions for such purpose.
    6. During the 90 calendar days following the entry into force of the Decree, the transfer of the assets of the company or establishment will not be required for an "Employer Substitution" to be executed for labor and social security purposes, provided that the outsourcing company transfers the workers to the beneficiary within such term (without the transfer of goods or assets being necessary). In such case, the labor rights, including the seniority of the workers, must be recognized.
       
      • For purposes of determining the Occupational Risks Insurance before the IMSS, the company that absorbs the workers must classify itself according to the criteria in force in the LSS and may keep the premium with which the outsourcing company that administered the workers was contributing, provided that such company has been correctly classified according to the productive process of the beneficiary, otherwise, it must contribute with the average premium of the corresponding class. The above, without a doubt, may be attractive for several companies.
         
    7. Those employers that had requested the IMSS to assign one or more employer registrations by class, will have 90 (ninety) calendar days as from the entry into force of the Decree to cancel such employer registrations and keep only one of them.
    8. Contractors rendering specialized services or works must begin to file with the IMSS the four-monthly reports with the information of their contracts within 90 calendar days following the entry into force of the Decree.
    9. Within 60 (sixty) calendar days following the entry into force of the Decree, INFONAVIT will issue the rules for contractors that provide services or specialized works to provide quarterly reports.

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