Mexico: Outsourcing is banned and companies must comply with new regulations fast to avoid hefty fines
In April 2021, a modification to the Federal Labor Law became in force which forbade most outsourcing contracts between Employers and Employees in Mexico. Only in special cases the government allow outsourcing of Employees.
Many companies, both local and multinational, adopted outsourcing schemes in recent years, mainly to reduce labor costs.
The three-month implementation period ends in July 2021, with hefty fines to those companies that do not transfer employees in time and cease using outsourcing services. Thus, almost all companies with outsourcing schemes are running against the clock.
The financial impact must also be calculated and properly reported in line with Mexican generally accepted accounting practice (gaap) in this year’s accounts.
For a number of years, many Mexican and multinational Employers adopted strategies to either reduce taxes and social security contributions or to avoid paying the mandatory profit sharing.
One commonly adopted approach was for Companies to transfer most or all of their Employees to a third-party entity, whose sole activity was to do the outsourcing of Employee services.
Despite its advantages as a manner to hire employees and give flexibility to working relations in some industries, outsourcing was used as an effective way to avoid profit sharing and under report salaries.
The Mexican tax authority has been fighting tax evasion and subtle mechanisms for understatement of salaries, which are common practice in certain industries.
Unfortunately, some outsourcing contracts were carried out by dubious third-party providers that became actual employers of the employees but did not fully comply with tax, social security and other obligations. Lower salaries reported to Social Security, periods of no contributions without Employees being aware, and other dirty tricks were common practice by these contractors. Whilst some companies that used such outsourcing services were aware of improper practices, others were not, but in any case, government entities were financially hurt, as they received lower income.
Proper outsourcing was done using a service entity that had the Employees of the operating Company, and “rented” the Employees in exchange of fees. These service entities did not hurt government income, as real salaries were reported and taxes and contributions were properly paid, but it curtailed the employees’ right to receive the mandatory profit sharing prescribed by the law.
In short, profit sharing is equivalent to 10% of annual taxable income made by the Employer in the fiscal year (all fiscal years in Mexico are January 1st – December 31st). It must be paid before May 30 of the next fiscal year, Employees must have been active in the company at least two months in the year and senior management should not be considered for payment. Half of the profit-sharing payment is made on a per-head basis, and the other half is calculated considering the salary of each employee.
As a consequence of this recent law amendment, scores of companies in Mexico are in the process of transferring employees to the actual operating entities.
Exceptions to this prohibition of outsourcing contracts are employees whose profile does not belong to the core business of the entity. For example, office cleaning staff or security personnel can still be outsourced.
Companies transferring employees and those receiving them must comply with local gaap pertaining to Employee benefits. Mexican gaap on this issue is known as “NIF-D3” and is similar to IAS19 (IFRS) and ASC-715 (US-gaap), although not identical and some important differences exist.
Both ceding and receiving Entities must calculate and disclose the figures obtained by the actuarial calculation of labor liabilities after the migration process is completed. Its impact in the 2021 result and other items are needed to be assessed and disclosed properly.
How GLOBACS can help?
The actuarial consulting services of QUANTS, the Mexican member of GLOBACS, are fully conversant with NIF-D3 and can guide any company through the process of calculating and disclosing Employee Benefits related figures.