“Outsourcing” Regulation in Mexico

Context, Consequences, and Remedies.

“Outsourcing” Regulation in Mexico

Context, Consequences, and Remedies.

Outsourcing” or Professional Employer Organization (PEO) services in Mexico have drawn the ire of President Andrés Manuel López Obrador (AMLO) and his compatriots. The industry may heavily regulated in the near future via a comprehensive that is in review in the Mexican legislature, and would doubtless be signed by AMLO. This is in response to decades of abusive practices against workers, contravening Mexican Labor Law. On the surface, banning the practice outright seems logical, though the issue is more complicated than it initially appears. International PEOs such as SERVIAP may be caught in these new regulations, even though our customer base and purpose as a company is entirely different from the bad actors in our industry.

Within Mexico, the PEO industry has been used by companies, large and small, to avoid their legal responsibilities to their employees. For example, companies will bounce their staff from one PEO provider to another, forcing them to "resign" each time. This causes the accumulated vacation benefits to be reset to zero and reduces the burden of severance in case the staff are let go at some point. Another common tactic is intentionally underreporting salaries, leading to lower taxes. The difference is made up by cash payments.

SERVIAP almost exclusively works with international clients, who are beholden to the US Foreign Corrupt Practices Act, and other standards of their home country. Our value proposition is not the avoidance of proper administration, but the precise opposite: Complete HR/tax compliance sold in a package deal.

Unfortunately, our PEO services could be considered "subcontracting" as loosely defined by the law, especially in a case of international PEO in which the employees will be performing the core duties of The Client Company.

This article can give you some background:
https://www.natlawreview.com/article/end-outsourcing-mexico

Why it may be regulated:

✔ The Client Company's PEO employees (via SERVIAP) will be performing the core duties of the client.

Why it may not:

✔ The law is generally understood to prohibit subcontracting within Mexico, for the purposes of avoiding taxes and denying people their rights. International clients are not based within Mexico.

✔ Defining the "social reason", or core function of a business in Mexico requires that the business be registered in Mexico. The Client Company What SERVIAP is going to do: 

✔ If we are caught under the new law, we will form various "specialized entities" where the people hired by SERVIAP are in fact our employees, and the services are delivered whole cloth by SERVIAP under a consultancy model. This would apply for roles such as sales, engineering, etc

✔ If The Client Company would not qualify for this model, we can help you incorporate, and then manage all payroll, taxes, etc. as a package deal. Yes, you all would have a subsidiary, but it would still be "turnkey" from an administrative standpoint. SERVIAP is still working out the details on this bundled service option.

SERVIAP will continue to promote our PEO services in Colombia, Argentina, Chile, Peru, and Brazil. All of these countries have no such regulation for our industry.

Why it may be regulated:

✔ The Client Company'sPEO employees (via SERVIAP) will be performing the core duties of the client.

Why it may not:

✔ The law is generally understood to prohibit subcontracting within Mexico, for the purposes of avoiding taxes and denying people their rights. International clients are not based within Mexico.

✔ Defining the "social reason", or core function of a business in Mexico requires that the business be registered in Mexico. The Client Company What SERVIAP is going to do: 

✔ If we are caught under the new law, we will form various "specialized entities" where the people hired by SERVIAP are in fact our employees, and the services are delivered whole cloth by SERVIAP under a consultancy model. This would apply for roles such as sales, engineering, etc

✔ If The Client Company would not qualify for this model, we can help you incorporate, and then manage all payroll, taxes, etc. as a package deal. Yes, you all would have a subsidiary, but it would still be "turnkey" from an administrative standpoint. SERVIAP is still working out the details on this bundled service option.

✔ SERVIAP will continue to promote our PEO services in Colombia, Argentina, Chile, Peru, and Brazil. All of these countries have no such regulation for our industry.

What we should do now:

✔ Any client that wishes to work with us should proceed with an MSA with SERVIAP, which would provide services either as a specialized subsidiary, managed entity, or a traditional PEO in any country outside of Mexico.

For existing clients:

In such case as current PEO employees are switched to a "specialized" SERVIAP branch, or ultimately hired under a The Client Company’s subsidiary in Mexico, their seniority re: vacation days and severance compensation will be respected. SERVIAP will include this in the labor agreements from day one; if a transition occurs, the employees will not suffer.

Bottom line:

1. International PEO continues to exist in a legal grey area. It is the domestic Mexico-to-Mexico PEO market that is in imminent danger.

2. SERVIAP always advises our clients to choose the least risky path, therefore a transition to one of the above-mentioned service models is advised, as we have designed them from the ground up to be compliant. We advise doing proactively before new or existing PEO services are caught under the new law.

SERVIAP believes that our industry does need new regulation. That said, the ambiguity of the law has left us, and our clients, in a position of temporary uncertainty. Rest assured, we are proactively addressing these concerns and doing everything we can to maintain continuity for our clients and just as importantly the employees. "PEO" is simply a tool to achieve your objective: Profitable and compliant activity within Mexico. No matter what solutions we offer, you know that it will be done correctly and in the best interest of our clients, in full compliance with the law.

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