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 the 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 comprises, among other things:
- constitutional rights;
- international treaties approved by the Senate;
- the Mexican Federal Labour Law;
- the Social Security Law;
- general employment and social security regulations;
- official Mexican standards (known as NOMs);2 and
- precedents of the Supreme Court of Justice (jurisprudence).
The Federal Labour 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 a salary or wage. 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 Federal Labour 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.
The Federal Labour Law is historically characterised as being overprotective of the workforce, both from an individual and a collective standpoint. However, amendments in 2012 established a more flexible framework for employers for hiring employees, and some causes of justified termination of employment have been included.
The conciliation and arbitration boards (CABs) are 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 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 will be held in two stages (first, conciliation, then 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 the second stage. Once the claim and defence to the claim 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 competent collegiate circuit court on labour matters to challenge this resolution.4 The court will decide whether the resolution of the CAB is valid. Incidents or indirect amparos5 may also be raised during this ordinary procedure.
In general terms, employment disputes regarding unjustified dismissals last between two and three years, approximately. However, the CAB will always urge the parties to enter into a settlement before the resolution is issued, with the result that the majority of claims filed with CABs 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 the unions. The most common collective action is the strike procedure, which consists of a temporary suspension of the activities in a workplace, and it affects the whole of the company's activities. Strike procedures must observe special requirements regarding their lawfulness and circumstances.6
As regards doing business in Mexico, the Federal Labour 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 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 a 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 DISPUTES
There are several types of employment disputes in Mexico, of which the most common relate to unjustified dismissals (i.e., termination of employment contracts without legal cause). Employment relationships in Mexico are governed by the 'job stability' principle, which consists of the right of employees to keep their job as long as there are no legal grounds for termination justifying a dismissal.7 This is distinguishable from the labour system in other jurisdictions where employment-at-will is the general rule. The Federal Labour 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 permanent 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 an employer decides to dismiss an employee for cause, the employer must give notice of the termination in writing8 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 to render the dismissal unjustified. The employee is entitled to challenge the dismissal within two months of the termination and to claim either reinstatement in the former position, or payment of the constitutional indemnification,9 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 dismissal and through the first 12 months of litigation. After this period, interest will be generated on the amount of 15 months' salary at a rate of 2 per cent per month.
Another employment-related dispute that is quite common in Mexico consists of 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. Social security contributions are considered to be taxes for all legal purposes and, in general terms, social security obligations have a statute of limitations of five years.
Discrimination issues have become increasingly common in labour law, especially since the Mexican Supreme Court formally addressed the importance of employees' and individuals' human rights, and has generally reminded companies of the need for continuing compliance in these matters. There are relatively new secondary regulations and precedents requiring employers to have in place (1) confidential means of reporting any work-related violence, (2) measures to assist employees dealing with addiction, and (3) measures to prevent any violence and discrimination in the workplace. This 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 competent 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 for non-compliance during labour audits.10
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 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'; indeed, they entail certain liabilities for the operating company:
- 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;
- being considered the employer of the service company personnel if subcontracting requirements under the Federal Labour 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;
- constituting an economic unit11 with the service company, with both entities considered liable for labour and social security obligations; and
- 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 set in 2009 at 10 per cent of each employer's business pre-tax profit.12 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 obliged 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 been used commonly and successfully for several years.
According to the Federal Labour Law's definition of 'subcontracting': (1) an employer (contractor) performs activities or provides services through its 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 for which the contracting part was hired.
Subcontracting structures have to meet the following conditions: (1) none of the activities performed at the workplace can 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 Federal Labour 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 Federal Labour Law and other 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 of between 250 and 5,000 times the UMA may be imposed following a labour audit.
As of 2017, tax legislation has established new requirements for the income tax generated from services to be deductible under the 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 Labour Law. Under these requirements, the contracting party must obtain several documents in connection with 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 2016, the tax ministry, the Secretariat of Finance and Public Credit, published a statement determining that subcontracting regimes fall within the scope of a vulnerable activity;13 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 they are performed independently (i.e., through outsourcing companies) and are not performed by part of the same corporate group. However, this criterion serves for information purposes and is not binding. There is a possibility that the competent authorities will issue a further criterion clarifying whether 'insourcing' structures are 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 employees' minimum rights.
Given that subcontracting is an established practice for doing business in Mexico, and as reflected in the 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 to reduce fiscal or labour contingencies.
It is quite common for domestic and foreign companies with internal service entities to seek to achieve the best, most cost-efficient options for their operations in Mexico while still meeting the specific requirements of the Federal Labour Law on subcontracting matters. It is becoming more commonly recognised that employees exempted from profit-sharing 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, there are currently no specific resolutions or prospective binding precedents regarding subcontracting requirements and compliance.
The administration of president-elect Andrés Manuel López Obrador (AMLO) is committed to the implementation of unannounced on-the-spot labour audits; therefore, we expect that the powers of labour auditors will be increased in the coming year with the purpose of verifying different kinds of employer obligations, including outsourcing structures, and companies' general obligations. Also, the Ministry of Labour, in this new administration, will focus on conducting more transparent dialogues between unions and workers to avoid 'sweetheart' unions and their arrangements with companies in Mexico, with the aim of defending labour rights in all types of industries. Considering the foregoing, employers in Mexico should deal with collective negotiations carefully to achieve a balance for both parties, complying at all times with labour, tax and social security obligations.
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, such a structure must be seen as an operational option to produce business cost-efficiencies and should never be used as a way to derogate employees' labour and social security 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 head-count 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 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 government 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 make it 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. For several years, Mexico has been modifying its legal framework, including its employment-related laws. Despite these advances, additional will need to be taken 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 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.
This 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; however, positive effects can be expected, 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.
Labour law in Mexico is undergoing constant change to meet international standards, such as the International Labour Organization, and to comply with the commitments made in the Free Trade Agreement, which has joined Canada, Mexico and United States as long-standing commercial partners and has generated $1,046 billion dollars to date in trilateral commerce. The AMLO government has already proposed a new labour law amendment, which seeks to comply with the previous constitutional reform, which is still awaiting a vote and confirmation by Congress. While this evolves, we expect that certain practices in the day-to-day business of a company will need to be adjusted to the policies and visions of this new government, including the Ministry of Labour.
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.
2 Norma oficial mexicana.
3 In accordance with a constitutional amendment, the authority of the conciliation and arbitration boards [CABs] now corresponds to that of a judicial branch of government; however, the secondary laws that will implement the specific terms and procedures provided in the constitutional amendment have not yet been enacted.
4 This challenge is the Mexican equivalent of an appeal but is distinct insofar as the appeal should argue that an element of the competent CAB's treatment of the case was not founded in or was contrary to the Constitution or the Federal Labour 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) a 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 The standard of proof in Mexican employment litigation is considered 'absolute proof'; therefore, the employer must present evidence that clearly, and without any possible doubt, supports the termination for cause of the employee. The CAB is reluctant to uphold a termination for cause based on circumstantial evidence. Also, considering the fact that the Federal Labour Law provides that, in the event of doubt, the authorities shall use the most favourable interpretation for employees, it is critical to have undisputed evidence to support the grounds or cause of termination in order to prevail in a litigation dealing with a termination for cause.
8 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.
9 Constitutional indemnification for permanent employees consists of 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).
10 Fines are imposed using the measure and adjustment unit (UMA), which, as of 2018, is equal in value to 80.6 Mexican pesos. Labour fines range between 50 and 5,000 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, and that (3) if a single action or omission affects several employees, the sanction could be imposed on 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.
11 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.
12 Rules for payment and distribution of profit-sharing are set out in the Federal Labour Law, the Income Tax Law and their regulations.
13 The Anti-Money Laundering Law defines '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 other things.