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The New Regime of Subcontracting and/or Outsourcing in Accordance with the Labor Reform

May 10, 2014
The New Regime of Subcontracting and/or Outsourcing in Accordance with the Labor Reform

Operating Companies are considering taking the following actions: (i) they are forming Outsourcing On December 1, 2012, Mexico’s so called “Labor Reform” was approved, which included various amendments to the Mexican Federal Labor Law. Among the most relevant amendments are those regarding the treatment of companies that offer employee services, also known as outsourcing companies (“Outsourcing Companies”), in terms of what is now set forth in articles 15A, 15B, 15C, 15D and other applicable articles of the Federal Labor Law. The Labor Reform, as such relates to the aforementioned provisions (“Outsourcing Reform”), has caused confusion and concern. This has occurred because such has created a doubt as to whether an outsourcing relationship that does not comply with all of the provisions and requirements set forth in the Outsourcing Reform and is established by means of a services agreement that may be considered illegal in light of the Federal Labor Law, does or does not create an “economic unit” in the broadest sense. It is important to note that prior to the Labor Reform, Mexico’s federal courts had certain criteria establishing those cases where an economic unit exists, with such economic unit being liable for the labor relationship with the employee (without indicating whether joint and several or secondary liability would apply). Such judicial precedents do not state anything further than providing the nature of the “economic unit” to that relationship between the Outsourcing Company and the Operating Company, where between the both of them they accomplish the production or distribution of a good or service. This judicial opinion tries to pronounce, in a generic manner, that the unit is liable for the labor relationship with the employee, and that it must, in turn, respect and respond to the rights of the employees and fulfill its obligations as employer. The Labor Reform, in defining the nature and scope of contracts with Outsourcing Companies, considers the subcontracted services as those services for which an employer, named as a contractor, performs work and services with its employees under its dependence, in favor of a contracting party, whether an individual or business entity, which establishes the work to be performed by the contractor and supervises it in the performance of the services or the execution of the contracted work, and also establishes that the activities of outsourcing companies must comply with three mandatory requirements: (i) the outsourcing services may not conduct all of the activities of the company for which the services are rendered (the Operating Company) or the same or similar activities, as a whole, that are performed in the Operating Company; (ii) such shall be justified by their specialized nature; and (iii) they may not perform work that is the same as or similar to that of the rest of the employees who work for the Operating Company. If all of these conditions are not met, the contractor (the Operating Company) shall be considered the employer for all purposes under the Federal Labor Law, including obligations in matters of Mexican Social Security. On the other hand, in analyzing typical cases of Outsourcing Companies, one finds that, in a majority of cases, it is practically and technically impossible to determine the compliance or noncompliance with the aforementioned three conditions because there is no reference point of a group of employees who work in the Operating Company, given that, in an overwhelming majority of the cases, the Operating Company does not have any employees on its payroll. However, it is understood that if all three conditions are not fulfilled, then the Operating Company shall have employer liability. This means that a risk exists that labor lawsuits will establish the applicable legal criteria and resolve the issue.The labor reform also establishes the obligation for the beneficiary or contracting party (Operating Company) and the Outsourcing Company to enter into a written agreement, even though it does not establish a specific sanction for not doing so. Notwithstanding the foregoing, such omission can only serve to prejudice the Operating Company, given that, in the event that it cannot prove the existence of a contract, it will surely be considered the employer. At the time of executing the mentioned contract, and at all times thereafter, the Operating Company should ensure that the Outsourcing Company has all of the documentation that it should have as an employer, including all of the permits required from the corresponding authorities, and its own, sufficient resources in order to fulfill the obligations arising from the relationships with its employees (i.e. that it be economically solid). The Operating Company should constantly ensure that the Outsourcing Company complies with the applicable provisions in matters of workplace safety, health and environment. It is important to consider that this reform clearly establishes that the regime of subcontracting will not be permitted when employees are deliberately transferred from the Operating Company to the Outsourcing Company in order to diminish labor rights. In this specific case, Article 1004-C of the Federal Labor Law, and those that follow, will apply, which establish a fine that can be from 250 to 500 times the minimum salary in the Federal District, which as of today is $67.29 pesos. In reality, what the Labor Reform sought to accomplish was to guarantee that the labor rights of the Outsourcing Companies’ employees are respected when such companies do not fully comply with their obligations, at the cost of making such liability joint and several for the Operating Companies.In reality, what some companies are doing in order to comply with the three points above is discussed below. However, these are only actions that have not yet been supported by Mexico’s Supreme Court of Justice, by the Federal Collegiate Circuit Courts, by a Justice Court or by a Labor Conciliation and Arbitration Board, given that there have not yet been any applicable decisions issued with respect to subcontracting. 1.- Some companies have decided not to make any changes and to continue with the legal structure they currently have in place until such time as the labor courts begin to review the lawsuits and claims that are filed with respect to this matter and resolutions are issued that allow them to know which labor authority criteria should be followed. 2.- Other companies, in order to try not to cover all of the activities of the Operating Company and in order to avoid developing the same or similar activities so that it may avoid being considered an “Economic Unit,” are incorporating another or other Outsourcing Companies that provide different services instead of using only one Outsourcing Company. For these reasonsCompanies with different addresses from that of where the Operating Company is located; (ii) they are forming them with different shareholders; (iii) they are forming them with corporate purposes that are specific and different from the Operating Company or they are limiting the corporate purpose of the latter. The criteria for these Operating Companies lead one to think that the Operating Companies should not request all of the required services because it should be capable of providing some of them, such as those mentioned as their corporate purpose or activity, and therefore, all of the others should be requested from other companies that render such services. 3.- Other Operating Companies are specifically forming two Outsourcing Companies, one for the operators or unionized employees, and another for the administrative or nonunionized employees. 4.- Others are forming two Outsourcing Companies, one in which they hire only a General Director and another for all other personnel.In order to attempt to comply with the item relating to specialized services, some Operating Companies are considering: (i) justifying a specialized activity that is incorporated into the corporate purpose of the new Outsourcing Company; or (ii) adding to the Outsourcing Company that is already in existence those services and activities that the Operating Company is not capable of providing or rendering on its own, and in such manner justifying the need to utilize a third party to provide those specific services. Also, Operating Companies are looking for ways for Outsourcing Companies to pay the profit sharing to their employees, in order to prevent Mexican labor authorities from determining that the Operating Company is jointly and severally liable with respect to such, in the event that the Outsourcing Companies do not pay any profit sharing. Notwithstanding the foregoing, the risk that one of the employees of any of the Outsourcing Companies claims payment of profit sharing continues to exist, because there is an argument to be made that an “economic unit of production” exists. The foregoing is based on the provisions of the Labor Reform and also based on the aforementioned judicial precedents. Even so, some Operating Companies, without a basis to support such criteria, believe that by means of the aforementioned actions, they will have solid arguments to defend themselves in the event of a lawsuit.On the other hand, it is important to take into consideration that the need to change the structure of the Operating Companies or of incorporating new Outsourcing Companies to render services depends a great deal on the specific needs of each Company, group or organization, as well as the need, in each case, to regulate the payment of profit sharing among employees. If the profit sharing payment issue does not pose a big problem for certain Operating Companies, with such issue being basically a business decision, perhaps it would be better to wait and see how things transpire and the trends and standards of the Companies are judged in Mexico’s labor courts.In conclusion, the viability of Outsourcing Companies still exists. However, some precautions must be taken and contracts with Outsourcing Companies must be structured with certain requirements in order to reduce the risks discussed above.

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