On November 12, 2020, Mexico’s President Andrés Manuel López Obrador announced in a press conference that he is officially introducing an initiative to Congress to reform subcontracting. If approved, the proposal would modify various laws, including the Federal Labor Law (LFT), the Social Security Law, the Law of the Institute of the National Housing Fund for Workers, the Federal Fiscal Code (CFF), the Income Tax Law and the Value Added Tax Law.

This bill will have to pass the legislative process before it is published in the Federation’s Official Gazette. With Morena, the President's political party, having a majority in both chambers of Congress, however, it is likely that the initiative will pass through without much opposition or amendments.

The proposed bill expressly prohibits subcontracting, defined as the practice of providing or making available workers for the benefit of another person or legal entity. To adopt this new definition, articles 15-A to 15-D of the LFT—which have been regulating subcontracting since the reform of December 2012—would be repealed.

Further, a contractor would be allowed to provide services or perform specialized works that are not part of the corporate purpose (or core business) or the economic activities of the beneficiary (customer) only if it is duly authorized as a provider of specialized services by the Ministry of Labor and Social Welfare (STPS).

Moreover, the beneficiary would be held jointly and severally liable for any of the contractor’s violations under the labor, social security, or tax laws.

The proposed bill also seeks to restrict employer substitutions. In Mexico, an “employer substitution” is the practice of transferring employees from one company to another, without the need for employees’ consent. If approved, these substitutions would be illegal unless there is a transfer of assets between the companies. It would no longer suffice that the different companies share most of the shareholders.

Contractors would have new obligations, including to periodically report to the Mexican Institute of Social Security (IMSS) and to the Institute of the National Housing Fund for Workers (Infonavit) contracts for the provision of specialized services. Failure to timely submit these contracts would subject the contractor to fines ranging from 500 to 2,000 times the UMA value. (UMA, which stands for “Unidad de Medida y Actualización”, serves as the basis to calculate obligations and payments and is updated annually in February.) With the current UMA value of $86.88 pesos, the fines could range between $43,440 and $173,760 pesos (or from US$1,900 to US$7,555).

On another front, the income tax laws and the value added tax laws prohibit the deduction or crediting (as appropriate) of taxes related to subcontracting or contractors that do not have authorization from the STPS.

To monitor compliance with these provisions, the STPS, IMSS and Infonavit would coordinate efforts to conduct inspections and share the information among the three government agencies, as well as report the findings to the tax authorities in case they found irregularities.

A company that refuses to be inspected would be summoned to present the required information directly to the requesting authority, on top of the possibility of being fined for such refusal. If it is found that a company is subcontracting personnel, both the contractor and the beneficiary (customer) would be subject to fines ranging from 2,000 to 50,000 times the UMA value—i.e., from $173,760 to $4,344,000 pesos (or US$7,555 to US$189,000).

Importantly, using deceptive practices to conceal the provision of specialized services or the performance of specialized works, or subcontracting personnel, would constitute tax fraud. The penalty likely would be imprisonment from three months to nine years, depending on the amount of fraud.

The law would enter into force and effect on the day after its publication, with the exception of the tax laws, which would take effect on January 1, 2021.

Within four months of the law taking effect, the STPS must issue the general regulations, setting forth the requirements and procedures to apply for authorization as a provider of specialized services.

The reform to the subcontracting framework would require most affected companies to undertake an expedient restructuring of their corporate structure and internal practices, including how service providers are utilized within the company.

We will continue to update as additional information becomes available.