Mexico is a civil law country and, unlike countries with common law jurisdictions, Mexican courts are generally not bound by prior case law. There are no jury trials and, although oral hearings are part of Mexican proceedings, the legal system relies heavily on written pleadings and formalities, which carry great weight in Mexican courts. Mexico is a federal republic and, as a general principle under Mexican constitutional law, the authority not vested in the federal Congress is granted to the states. Even if it is likely that some matters may fall under state or even municipal jurisdiction, most corporate, regulatory, labour, social security and commercial matters fall under federal jurisdiction.
The statutory framework for employment in Mexico comprises, among other things: (1) constitutional rights; (2) international treaties approved by the senate; (3) the Mexican Federal Labor Law; (4) the Social Security Law, (5) general employment and social security regulations; (6) official Mexican standards (NOMs); and (7) precedents of the Supreme Court of Justice (jurisprudence).
The Mexican Federal Labor Law applies to all employment relationships in Mexico, regardless of the nationality of the employer, the employee, the place where the salary is paid, or the place where the employment agreement is executed. An employment relationship is described as a subordinated personal service provided by one individual to another, in exchange for salary or wage payment. The main element of any employment relationship is subordination, defined as the employer’s legal right to control and direct the employee and the employee’s corresponding duty to obey the employer. Once an employment relationship exists, all rights and obligations under the Mexican Federal Labor Law and the Social Security Law regarding mandatory contributions for employees will automatically apply, regardless of how the agreement is characterised by the parties. While it is common to see expatriates being relocated to Mexico, companies should have proper advice, as employment in Mexico will be regulated by the aforementioned laws regardless of any other agreement that may have been executed by the parties.
Mexican Federal Labor Law is historically characterised as overprotective of the workforce, both from an individual and a collective standpoint. However, recent amendments2 have established a more flexible framework for employers in connection with hiring employees, and some causes of justified termination of employment have also been included.
In Mexico, the Conciliation and Arbitration Boards are the authorities competent to resolve all individual or collective disputes arising from employment or labour relationships between employer and employee or between employer and union.3
Individual disputes generally arise when an employee files a claim against an employer with the competent Conciliation and Arbitration Board (CAB). Filing a claim initiates the ‘ordinary procedure’; after receiving the employee’s claim the authority sets a date and time for a hearing that has two stages (conciliation and claim; and defence to the claim). During the conciliation stage, the CAB pursues a settlement between the parties. If there is no settlement, the lawsuit will proceed to its second phase, claim and defence to the claim. Once this stage is finished, the authority sets an additional hearing for the parties to offer and render evidence to support their corresponding claims and objections. After introducing evidence, the parties are given time to file their final arguments. Finally, the authority will issue the final resolution and notify each of the parties accordingly. The parties have a 15-day window to file a constitutional proceeding (amparo) before the Collegiate Circuit Court on labour matters to challenge this resolution.4 The Collegiate Circuit Court will decide whether the resolution of the CAB is valid. During this ordinary procedure, incidents or indirect amparos5 may also be raised during the process.
In general terms, employment disputes regarding unjustified dismissals last approximately from two to three years. However, the CAB always urges the parties to enter into a settlement before the resolution is issued, with the result that the majority of claims filed with the CAB end with the execution of an agreement between the parties, which concludes the procedure.
The collective dispute procedure depends on the type of dispute filed by employees and unions. The most common collective action is the strike procedure, which consists in the temporary suspension of the activities in a workplace, and it affects the totality of the company’s activities. Strike procedures must observe special requirements regarding their lawfulness and circumstances.6
As regards doing business in Mexico, the Mexican Federal Labor Law recognises unions’ right to demand the execution of a collective bargaining agreement by means of a strike call. Unions in Mexico have historically abused of this right and, notwithstanding the fact that they may not represent the majority of the employees of a company, the mere possibility of shutting down a company for several weeks or months is sufficient to negotiate an amount in settlement and avoid the strike. Although there are companies that have succeeded in maintaining their labour relationships conflict-free without executing a collective bargaining agreement, others have been forced to negotiate ‘up against the wall’, faced with the threat of strike should they fail to put in place a collective bargaining agreement executed and registered with the CAB.
III TYPES OF EMPLOYMENT DISPUTE
There are several types of employment dispute in Mexico; among the most common are disputes over unjustified dismissals (i.e., termination of employment without legal cause). Employment relationships in Mexico are governed by the ‘job stability’ principle, which consists in the right of employees to keep their job as long as there are no legal grounds for termination justifying the dismissal. This is distinguishable from the labour system in other jurisdictions where employment-at-will is the general rule. The Mexican Federal Labor Law provides that an employer can only terminate an employment relationship ‘for cause’ in the event that the employee’s conduct results in one or more of the specific causes for termination provided in the Law, such as (1) lack of probity towards the employer or its clients; (2) disclosure of the employer’s confidential information or trade secrets; (3) sexual harassment of any co-worker; and (4) rendering services under the influence of alcohol or illegal drugs. Companies in Mexico have faced a constant struggle over the issue of low productivity of employees not being considered a valid cause for termination of employment, and invariably have to reach a settlement with employees through the payment of additional compensation.
In general terms, if the employer decides to terminate an employee for cause, the employer must give notice of the termination in writing7 within 30 days of the date that the employer becomes aware of the cause. The notification can be made directly to the employee or to the CAB. The mere fact of failing to give notice to the employee as required by law is sufficient in itself to render the dismissal unjustified. The employee is entitled to challenge the dismissal within two months of the termination and claim either (1) reinstatement in the former position; or (2) payment of the constitutional indemnification,8 seniority premium and outstanding fringe benefits, such as vacation pay, vacation premium and Christmas bonus. If the employer refuses to reinstate the former employee and the latter proves that the dismissal is unjustified, the CAB will determine a payment of 20 days’ aggregated salary per year of service in addition to payment of the constitutional indemnification, seniority premium and accrued benefits. In any case, during litigation the employer could be liable for back pay accrued from the date of the dismissal through the first 12 months of litigation. After this period, a monthly interest of 2 per cent of the amount of 15 months’ salary will be generated.
Another quite common employment-related dispute in Mexico consists in employees claiming before labour or social security authorities the correct and full payment of social security contributions. Also, audits or inspections may be carried out by the social security authorities to determine whether a company is in full compliance with its obligations under the Social Security Law, as well as with other applicable and secondary laws and regulations. As a result of a social security claim or audit, employers may be subject to the payment of omitted contributions, fines, surcharges and additional impositions. In Mexico, social security contributions are considered to be taxes for all legal purposes and in general social security obligations have a statute of limitations of five years.
Discrimination issues are increasingly more common in labour law, especially since the Mexican Supreme Court has formally addressed the importance of employees’ and individuals’ human rights, and has generally reminded companies of the need for ongoing compliance in these matters. There are relatively new secondary regulations and precedents requiring employers to have in place (1) confidential means to report any work-related violence, (2) measures to assist employees dealing with addiction, and (3) measures to prevent any violence and discrimination in the workplace. The above has turned the spotlight on companies, requiring them to act to avoid disputes that could ultimately pose reputational liabilities.
Employees affected by discriminatory practices may file a claim with the CAB or the National Council to Prevent Discrimination (CONAPRED). Employers can settle claims before litigation is initiated or even during litigation. CONAPRED may impose administrative or reparation measures to prevent future discriminatory practices in the workplace. The imposition of such measures will not preclude the affected employee from seeking remedies in other areas of the law (i.e., civil law and criminal law). In addition, labour authorities may also impose fines during labour audits in cases of non-compliance.9
IV YEAR IN REVIEW
Subcontracting or outsourcing structures are prevalent in Mexico, with a service company (either from the same corporate group or an external provider) directly hiring employees to render services to another company. These structures allow the profitable entities to focus on their core business activities while the service entities, with the personnel, focus on the recruitment, hiring and other processes necessary to comply with applicable employment and social security obligations. One of the most important reasons for establishing such structures is to achieve a more cost-efficient administration of the profit-sharing of the operating company. This is of particular relevance considering that the current percentage of profit-sharing to be distributed is 10 per cent of each employer’s business pre-tax profit.
Although subcontracting structures are not illegal per se, they have never been considered ‘bulletproof’ structures; that is, subcontracting structures entail liabilities for the operating company, such as (1) joint liability with the service company for compliance with labour and social security obligations in relation to the personnel, since the operating company is the real beneficiary of the services rendered by the personnel; (2) being considered the employer of the service company personnel if subcontracting requirements under the Mexican Federal Labor Law are not met and, therefore, being directly liable for compliance with all labour and social security obligations, including payment of the operating company profit-sharing, as well as payment of social security contributions; (3) constituting an economic unit10 with the service company, with both entities considered liable for labour and social security obligations; and (4) subject to the imposition of fines in the event of a labour audit.
All employees in Mexico have the right to share in the profits of the business in which they work, as provided by the Constitution. The current percentage for employees’ profit-sharing was last set in 2009 at 10 per cent of each employer’s business pre-tax profit.11 Employees are generally entitled to profit-sharing, except for managing directors, general managers, administrators or chief executive officers of the company. There is a relevant court precedent stating that the holder of the highest position in the company, regardless of the title given, is the only employee who is not entitled to profits as the compensation for this position warrants the exception.
Certain corporations are not obligated to share profits during specific periods, such as (1) new corporations during their first year of operation (i.e., first tax year, which in Mexico is the same as the calendar year); (2) new corporations, devoted to the production of a new product, during the first two years of operations; and (3) new corporations devoted to an extractive industry during the exploration period. Considering that the rest of the companies in Mexico are required to profit-share at quite a high percentage, subcontracting structures have commonly and successfully been used in Mexico for several years.
According to the Mexican Federal Labor Law’s definition of ‘subcontracting’: (1) an employer (contractor) performs activities or provides services through the employees under its direction in favour of a contracting party (whether an individual or a legal entity); and (2) the contracting party determines the duties to be performed by the contractor and supervises the development of the services or the execution of the activities hired.
Subcontracting structures have to meet the following conditions: (1) all the activities performed at the workplace cannot be subcontracted; (2) the services to be rendered must be justified because of their specialised features; and (3) subcontracted services may not involve like activities or activities similar to those performed by the employees of the contracting party. Pursuant to the Law, a contracting party that does not comply with all these subcontracting conditions could be considered the employer of the contractor’s employees for all legal purposes, including labour and social security obligations, and including profit-sharing. In addition, subcontracting must comply with certain obligations, such as the execution of a written contract; and verification that (1) the contractor has the proper documentation and its own and sufficient resources to comply with the labour obligations and (2) meets with safety, health and environment requirements at all times, regarding subcontracted employees. Non-compliance may result in fines following a labour audit. Also, in accordance with the Mexican Federal Labor Law and recent criteria, if an employer benefits from services rendered by employees of a third party and the latter lacked the proper and sufficient resources to comply with its labour obligations, both companies could be deemed jointly liable as beneficiaries of the services or as part of an economic unit by the labour and social security authorities for the payment of and compliance with obligations.
Subcontracting is not allowed when employees are deliberately transferred by the contracting party to the contractor to reduce their labour rights, in which case a fine equivalent to 250 up to 5,000 times the UMA may be imposed following a labour audit (currently representing approximately US$993 up to US$19,866).
As of January 2017, tax legislation has established new requirements for the income tax generated from services to be deductible under the Federal Income Tax Law and for the credit of value added tax transferred on expenditures made in relation to subcontracting operations as set out in the Federal Labor Law. Under this new requirement, the contracting party must obtain several documents in connection to the fulfilment of the contractor’s fiscal and social security obligations (e.g., a copy of digital payroll tax receipts for wages issued by the contractor to its employees and statements of payment of taxes and social security contributions). Likewise, each subcontracted employee’s salary receipts must include the contracting party’s unique Federal Taxpayers Registry number (or RFC), as well as the percentage of time the employee spent rendering services in favour of the contracting party.
In October 2016, the tax ministry, the Mexican Secretariat of Finance and Public Credit, published a statement determining that subcontracting regimes fall within the scope of a vulnerable activity;12 consequently, the contractor will be subject to compliance with the obligations provided in the Anti-Money Laundering Law and its regulations if the entity carries out administration and management of resources, securities or any other assets of the contracting party for the services rendered. In addition, the Department of Financial Intelligence has issued a criterion stating that subcontracting regimes will be considered vulnerable activities only when these are performed in an independent manner (i.e., through outsourcing companies) and they are not performed by part of the same corporate group. However, this criterion is not binding but rather serves for information purposes. There is a high possibility that the competent authorities will issue a further criterion clarifying whether ‘insourcing’ structures are in fact considered vulnerable activities or not.
In general terms, these amendments, as well as the regulations from a tax, labour and anti-money laundering perspective, seek to ensure that employees continue to receive their minimum statutory benefits, which include profit-sharing, and to eradicate the commonly known ‘bad outsourcing structures’ that do not comply with their employment obligations and leave employees defenceless. The authorities are not taking issue with subcontracting structures that are well implemented and provide their employees with benefits under the law, but are rather seeking to collect omitted contributions and punish those companies that save money either through non-compliance or at the expense of the employees’ minimum rights.
Given that subcontracting is an established practice for doing business in Mexico, and as reflected in the recent amendments to this structure, the authorities are constantly trying to identify potential wrongdoing; consequently it is important that companies conduct assessments of their respective subcontracting structures to verify their compliance with the aforementioned requirements and reduce contingencies of a fiscal or labour nature.
As noted above, it is quite common to find domestic and foreign companies with internal service entities looking to achieve the best, most cost-efficient options for their operations in Mexico while still meeting the specific requirements of the Mexican Federal Labor Law on subcontracting matters. It is becoming more commonly recognised that profit-sharing-exempted employees play a key role in these types of operating and service structures. Although there are certain preliminary regulations and proposals for legislative amendments regarding subcontracting and its requirements, at the time of writing, there are no specific resolutions or prospective binding precedents regarding subcontracting requirements and compliance.
V OUTLOOK AND CONCLUSIONS
In general terms, subcontracting structures are feasible and can even be quite useful when doing business in Mexico, as long as legal requirements are consistently met and advice is taken from qualified counsel. Ideally, this structure must be seen as an operational option to produce business cost-efficiencies, but it should never be treated as a way to derogate the employees’ labour rights. Non-compliance may trigger material liabilities from a labour, social security and tax perspective; it is therefore highly advisable to implement preventive and corrective controls, as well as internal policies and processes, when dealing with these structures in headcount analyses, including in relation to internal service companies, outsourcing companies, independent contractors and similar service providers where there is a possibility that an employment relationship could be presumed.
Mexico is an attractive jurisdiction for investment: the modernisation of its legal framework, its improving network of international agreements and its continuing efforts to adapt to international standards all ultimately provide a reliable and predictable landscape for foreign investment. However, the transition to becoming a major economy is challenging as the worldwide financial crisis has delayed the development that countries with similar characteristics have experienced. Thus, strengthening governmental institutions, building a strong and independent judiciary and providing a safe environment for businesses would certainly increase the international business community’s interest in investing in Mexico.
Mexico has improved its legal system in recent years to become a suitable venue to conduct business and has sought to protect foreign investment through deregulation, liberalisation of its market and execution of bilateral and multilateral agreements on trade and investment. Over the past several years, Mexico has modified its legal framework, including its employment-related laws. Despite these advances, Mexico will have to take additional steps to confront the challenges posed by new market trends and innovations. In 2012, Mexico underwent an employment-law transition with material amendments such as the changes to the subcontracting requirements, and while these changes have yet to be reflected in the current business environment, the 2017 constitutional amendment and the corresponding secondary laws yet to be enacted are expected to provide the modernisation necessary to adapt to current needs and international standards.
The constitutional amendment, whereby the CABs have authority corresponding to that of the judiciary, aims to provide more efficient, speedier, creative judgments on labour matters. This amendment provides a window for Congress and the government to modernise employee–employer relationships to achieve balanced scenarios, continue to promote foreign investment and strengthen the country’s economic growth. It will be interesting to see how the transition of labour and employment law enforcement from the executive to the judicial branch will evolve. This transition seems likely to have a positive effect considering that (1) judicial procedures have the highest national levels of efficiency regarding dispute resolution, (2) they have better control over their proceedings, and (3) the level of responsibility enjoyed by judicial government representatives, and the sanctions available to them, are greater than those that currently apply to the representatives of the CABs.
1 Hugo Hernández-Ojeda Alvírez is a partner, Isabel Pizarro Guevara is a senior associate and María Regina Torrero Ordaz is an associate at Hogan Lovells.
3 In accordance with a recent constitutional amendment the authority of the Conciliation and Arbitration Boards now corresponds to that of the judicial branch of government; however, at time of writing, the secondary laws have not yet been enacted that will implement the specific terms and procedures provided in the constitutional amendment.
4 This challenge is the Mexican equivalent of an appeal, but is distinct insofar as the appeal should argue that an element of the CAB’s treatment of the case was not founded in or was contrary to the Constitution or the Mexican Federal Labor Law.
5 Incidents are related to the procedure itself and are resolved by the same CAB, while indirect amparos are related to resolutions that will not resolve the dispute and these are dealt with by the competent district judge.
6 The most common causes for unions to call a strike are (1) to demand the execution of a collective bargaining agreement; (2) breach of any of the obligations or provisions contained in the collective bargaining agreement; and (3) claims for correct or full payment of profit-sharing.
7 Dismissal notices must detail thoroughly the reason for the termination. The content of this notice will provide the only factual basis for the employer’s defence in the event of litigation.
8 Constitutional indemnification consists in 90 days’ aggregated salary (i.e., base salary plus the proportional amount corresponding to any benefit paid in cash or in kind to the employee for the services rendered in the final year of service).
9 Fines are imposed using the measure and adjustment unit (UMA), which, as of January 2018, is equal in value to 75.49 Mexican pesos. Labour fines range from 50 to 5000 times the UMA value in effect. Fines or penalties are imposed taking into consideration: (1) whether the action or omission warranting the sanction was intentional or not; (2) the seriousness and the damage caused; (3) if a single action or omission affects several employees, the sanction could be imposed per each affected employee; and (4) if a single action or omission results in several infringements, the fines or penalties corresponding to each infringement shall be applied individually.
10 Defined as a structure in which one entity provides financing and resources and the other provides the manpower services that sustain an ongoing business, with both companies considered a single economic unit jointly liable as a single employer in relation to the corresponding employees.
11 Rules for payment and distribution of profit-sharing are set out in the Mexican Federal Labor Law, the Income Tax Law and their regulations.
12 The Anti-Money Laundering Law defines as vulnerable activity and therefore, object of identification as the provision of independent professional services without an employment relationship, carried out on behalf of the client, the administration and management of resources, securities or any other assets of its clients, among others.