by Diana J. Nehro, Esq., Ogletree Deakins
For the first time in 40 years, Mexico has instituted significant labor reforms, a move that has far-reaching implications for its employers as well as U.S. companies doing business there.
According to Mexican officials, the reform legislation was designed to increase productivity, create better-paying jobs and improve employment access for women and younger workers.
Outsourcing, subcontracting
Historically, U.S. companies with Mexican operations have managed labor obligations by outsourcing or subcontracting to service companies that provide workers for a fee. In this arrangement, workers are employees of the service company, which is contractually responsible for labor obligations.
This is important in all aspects of Mexico’s Federal Labor Law (FLL), but particularly in regard to the law’s 10% employee profit-sharing requirement. Under a typical subcontracting relationship, 10% of the profits of the service company—not the company that buys the labor—are shared with employees. That limits the U.S. company’s obligations to its workers. (The law applies to all foreign companies doing business in Mexico.)
A Mexican federal court recently foreshadowed the end of this practice, holding that when an employer enters into a “professional services agreement” or “any other legal arrangement” in order to avoid its labor-related obligations, the service company and the operating company will be deemed to be a “single economic unit” under the FLL.
The new labor reforms created new restrictions for service companies and their U.S. clients by essentially codifying the federal labor court’s holding that the two entities will be deemed a single economic unit for purposes of the FLL. In addition, the legislation made service companies and the actual beneficiaries of the services jointly liable under Mexican law.
The law established heavy fines for foreign companies found to be using outsourcing arrangements for the purpose of avoiding labor obligations, including payment of profit sharing.
According to Alfonso Villalva, a Mexico City attorney, the new law makes it essential for U.S. firms using service companies to “engage in a comprehensive review of the service company’s financial condition and certify its financial and economic solvency. This will ensure that the labor obligations to the employees working for the operating company are met, and that the service company is in compliance with applicable regulations in matters of industrial safety and health and environment.”
Discrimination and harassment
The reforms align Mexico with international anti-discrimination and harassment standards. The law expressly prohibits discrimination on the basis of ethnic origin, nationality, disability, health conditions, religion, immigration conditions, opinions, sexual orientation or civil status.
What’s more, workplace and sexual harassment (along with lack of honesty and acts of violence, among others) are now defined and are grounds for a just-cause termination. This is important because it will allow employers in Mexico to consistently enforce global policies and procedures concerning harassment and related matters.
Further, employers are now prohibited from requesting pregnancy tests as a hiring condition, and they cannot require a woman to resign due to pregnancy or change of civil status.
Family leave
The right to paternity leave for five days and maternity leave for six weeks for the birth or adoption of a child is now mandatory.
In addition, the labor reforms include protections for working mothers by providing shorter shifts to accommodate nursing mothers and flexibility in choosing when to take maternity leave.
Disability
Employers with 50 or more employees must adapt the workplace to accommodate employees with disabilities.
Practical considerations
For U.S. employers, many of these changes will not seem difficult to deal with because they are consistent with U.S. employment law. In fact, although the reforms increase employee protections, they also give employers greater certainty about labor relations and requirements. That should help U.S. companies starting new ventures in Mexico.
Employers doing business in Mexico should review their employment policies and procedures to ensure compliance with the reform law. They should also look for new opportunities to make such policies and procedures truly global.
In light of the joint labor-liability aspect of the law, employers should weigh the actual benefit of continuing to outsource labor through service companies. It is already a fairly expensive proposition. Now, there is practically no way for a foreign employer to avoid labor liability, which has generally been considered the major business justification for paying a high markup to a service company.
That means such operating systems and outsourcing models arguably no longer provide the same protection they once did—and they may no longer be cost effective.
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Diana J. Nehro is of counsel in Ogletree Deakins’ Boston office, and she is a member of the firm’s International Practice Group. Reach her at (617) 994-5734 or diana.nehro@ogletreedeakins.com.
