Corporations engaging staffing companies in Mexico should be careful to avoid being deemed to be the employer of the staffing company'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. This article outlines several but not all of the issues that multinational employers should carefully consider when outsourcing in Mexico.
1. Make sure to be able to demonstrate the contractor's status.
Companies engaging a contractor to cover outsourced functions should verify that the contractor is the actual employer of the outsourced personnel (i.e., the personnel that will provide the services). Moreover, the contractor should meet the definition of "employer" under Article 10 of the FLL. Companies should also require the contractor to provide proof that it has complied with all of its employment-related obligations with respect to the outsourced personnel, in accordance with Article 13 of the FLL.
2. Identify the "best practices" to supervise the contractor's employees, to avoid being perceived as their actual employer.
Under the FLL, employees are entitled to a share in the company's profits (at 10 percent of pre-tax earnings). This is known as "profit sharing". One of the main risks of an outsourcing arrangement is that if the company that hired the contractor (i.e., the beneficiary of the services) is found to be the outsourced personnel's employer, such company may be subject to the liability of being required to pay for the outsourced personnel's profit sharing benefits.
Additionally, the company that contracted for the outsourcing services may be liable to the outsourced personnel under Mexico's Social Security Law (SSL). The July 9, 2009 amendments to the SSL, among other things, impose joint and several liability on companies receiving personnel services from contractors through a services provider agreement 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 after being ordered by the Social Security Institute (SSI) to meet its obligations, the contractor fails to do so, and the SSI notifies the Company about the contractor's dereliction of its obligations.
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 provided by the SSI, articles of incorporation data, and information about the services agreement executed by and between the concerned companies.
3. Confirm whether the work is legally considered outsourced work.
Article 15-A, which was enacted as part of the FLL reform, regulates outsourcing and defines outsourced work as: "the work carried out by an employer, named contractor, with workers that are under its control, for 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."
To be considered outsourced work according to Article 15-A, the work must meet the following conditions:
- The work cannot cover the totality of the activities, whether equal or similar in totality, that are carried out in the workplace; The work should be justified due to its specialized character; and The work cannot include tasks equal or similar to the ones 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 outsourced personnel. Companies should also avoid hiring outsourced personnel who will perform equal or similar tasks to those performed by its employees.
4. Be aware that the law is unclear.
Article 15-A is confusing because it is ambiguous, 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 when the bill was under consideration, establishes that in Article 15-A;
"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, who establishes the contractor's responsibilities and supervises the development of the services or the execution of the work."
Likewise, Article 15-A establishes three conditions for this kind of work (outsourcing), that in case of failure to comply with all of them, the contracting party will be considered employer for all the purposes of the law, in accordance with the provisions of Article 13 of this law, as well as for social security effects, such as the provisions contained in Article 15-A of the Social Security Law.
From the Ratio Legis above, and the interpretation of Article 15-A of the FLL, according to the Declaration of Purpose, said article could be construed in the sense that the three conditions must be not complied with to consider the company as employer; else, (i.e. at least one condition is met), the penalty should not be imposed, and in any case, the beneficiary of the services (company), would be jointly and severally responsible, but not employer, since no personal and subordinated services were rendered by the contractor's employees to the company though the payment of salary.
In the Federal Jurisdiction, the Federal Labor Board issued a criterion establishing that if one condition is not met, the beneficiary of the services (company), would be jointly and severally responsible, but not employer. This criterion is not enforceable for Local Jurisdiction (State Labor Boards).
5. Be careful when drafting or reviewing 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 clause 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. If possible, execute the agreement in Spanish and have both parties execute the Agreement in Mexico.
6. Register every contractor's employee with the Social Security Institute.
In each service agreement, address the obligation of the contractor to respond to any request of the SSI, to avoid any liability to the company that contracted for the services. Register every contractor's employee with the SSI, evidencing that the execution of any service agreement does not aim to avoid the payment of social security fees or to diminish the labor rights of the contractor's employees.
7. Documentation is key.
In each service agreement, the company contracting for the services should require the contractor to present all documentation, upon request or periodically, to verify that the contractor is meeting all of its labor and employment-related obligations, as per the duty imposed to the company under Article 15-C of the FLL. The specialized nature of the work to be performed by the contractor should also be carefully documented.
8. Consider relevant aspects of company branding for outsourced workers.
The outsourced personnel should not use the company's badges or business cards or other insignia with the company's name or logo. Instead, the contractor's name or logo should be included on the uniforms for outsourced personnel rendering services in the company's facilities.
9. Be mindful of any electronic tools that outsourced workers access or use or to perform the services contracted.
In the event that outsourced employees need to use the company's email accounts, companies should make a distinction between the accounts of its own personnel and the outsourced employees. Companies should also avoid including outsourced employees in emails, newsletters, internal communications or written orders, from which it could be assumed the existence of control, direction or subordination.
10. Follow the above principles throughout all aspects of the contractual relationship.
Once the appropriate service agreements and clear definitions of the status and relationship of each party involved have been established, it is important to note that these do not cover every potential risk related to outsourcing in Mexico. Throughout the course of the business relationship, the same principles should be followed. For example, invoices delivered by the contractor should not describe the services as "providing personnel services". Companies should also avoid any direct payments or expense reimbursement to outsourced personnel, or granting them awards or training course diplomas.
Conclusion
Considering that labor litigation cases in Mexico take, on average, 36 months to be resolved, there are no precedents to date showing the criteria the Labor Boards use when issuing their final awards and penalties, if any. For the time being, several case law resolutions are helpful in identifying best practices for the proper administration of contract workers and outsourcing agreements.
By Monica Schiaffino, Littler, Mexico and Philip Berkowitz, Littler, New York City
