Companies that enter into services contracts with service providers in Mexico that are individuals or companies should review their internal procedures and contracts to ensure compliance with applicable Mexican legal requirements. Such include verification that that the service provider is:
- Registered with the Mexican Federal Tax Administration.
- Has its own physical address.
- Provides services to numerous clients and has multiple sources of income.
- Is current in meeting all applicable tax reporting and payment obligations.
- Registered with the Mexican Social Security Institute (“IMSS”), and the employees it intends to assign to provide the services are also registered with the IMSS.
- Complies with all applicable reporting and payment obligations to the IMSS, National Housing Fund Institute and the Retirement Fund System (SAR), with accurate information regarding wages paid to its employees.
- Sufficiently capitalized to meet all its legal obligations.
- Compliant with procedures pertaining to furnishing badges and vests or uniforms to identify its employees, as well as work tools needed to provide the services
If the contractor is an individual, it is generally advisable to forego providing a work schedule and to allow the vendor to provide services to other clients and have multiple sources of income in order to remain truly independent. The service contract alone is not enough to create or support an independent contractor relationship between the parties. Further, if the services are provided by a company, it is advisable to not give direct orders to the employees assigned by the vendor to avoid creating a subordinate relationship with such employees.Failure to address potential issues may create an employment relationship between the company and its contractor, or the contractor’s employees, based on the fact that the company benefits from the contractor’s or contractor’s employees’ work. In such cases, the contractor or its employees could potentially file labor claims under Mexico’s Federal Labor Law for severance or other employment benefits. Moreover, if the Mexican labor authorities determine that an employment relationship exists, a risk exists that employees could demand retroactive enrollment in the Mexican Social Security Institute, which could lead to exposure for paying IMSS dues, penalties, inflationary adjustments and late fees from the date of hire.Finally, it is essential for all parties to Mexican services agreements to comply with applicable tax obligations arising from such agreements. In principle, a company hiring a service provider must verify that the contractor pays, on a timely basis, all wages, income tax withholding payments, IMSS social security contributions, as well as any applicable Value Added Tax (IVA). Proof of compliance with income tax and IVA obligations may be obtained by submitting a verification application to Mexico’s Federal Tax Administration.Based on the foregoing, it is essential to verify that contractors meet the requirements outlined above prior to entering into a services agreement and to continually verify compliance with all applicable employment, tax and social security obligations for the duration of the agreement.