Whilst doing business in Mexico, it takes time for foreign entities to learn how to navigate the complexities and workings of a coded legal system that does not operate on the basis of court precedents. In regards to labor and employment and the classification of labor relationships, Mexican Federal labor law (Ley Federal del Trabajo) is a heavily employee protective law. In regards to employee classification, the sternness of the law comes as a result of decades of employer manipulation in regards with misclassification of employees to avoid workplace compensation, social security payments and all legal labor established benefits which may be considered costly to employers. As a result of standardized misuse of legal institutions such as independent contractors, outsourcing companies, agencies and commissioned agents, Mexican Labor Law now operates under the basis of three simple but strict principles:
1) The economic dependence principle: which states that if any individual’s livelihood depends mostly of the income that one person or entity provides, there is legal presumption that said entity or person, is in fact an employer under the economic dependence principle which ties into the submission principle.
2) The submission principle states that if an individual does not have the liberty to work at will and must follow rules, regulations, schedules and is bound by submission or obedience to a person or entity, then said person or entity is deemed as an employer for all purposes that concern Mexican Federal Labor Law.
3) If in trial in a labor case the defendant claims that there is a relationship with the plaintiff that is diverse than employment, the burden of proof will fall on the defendant to prove the real nature of the relationship. If at any point the plaintiff proves the existence of a continued relationship with the elements of submission and economic dependence, the Labor Board will most likely rule in favor of plaintiff.
Misclassification and using legal institutions to conceal labor relationships has been a long lasting practice in Mexico. The factual and cultural reality of our nation has resulted in strict employee protective principles that can be hard to understand for foreign investors, but at heart keep to the same type of reasoning behind the Administrator’s Interpretation No. 2015N-1, issued by the U.S. Department of Labor, on the subject of misclassified Independent Contractors in the U.S.
As it is, it seems that the situation has been mirrored in the Unites States of America in accordance with what the department of labor has stated:
“Misclassification of employees as independent contractors is found in an increasing number of workplaces in the United States, in part reflecting larger restructuring of business organizations. When employers improperly classify employees as independent contractors, the employees may not receive important workplace protections such as the minimum wage, overtime compensation, unemployment insurance, and
workers’ compensation. Misclassification also results in lower tax revenues for government and an uneven playing field for employers who properly classify their workers. Although independent contracting relationships can be advantageous for workers and businesses, some employees may be intentionally misclassified as a means to cut costs and avoid compliance with labor laws.”
Due to a growing practice of misclassification in the US, the department of labor issued the previously cited interpretation arising from the Fair Labor Standards Act (FLSA) for determining whether there is in fact employment or not.
The economic realities factor
This factor is a measure to identify the distinction between workers who are economically dependent on employers and the narrower subset of workers who are truly independent businesspersons who must not be eclipsed by a mechanical application of the economic realities. The economic realities factor is parallel to the economic dependence and submission principles set forth by Mexican Law and to further the understanding of this factor, the interpretation refers to:
1) Is the Work being performed an Integral Part of the Employer’s Business?
Work can be integral to a business even if the work is just one component of the business and/or is
performed by hundreds or thousands of other workers. For example, a worker answering calls at a call center along with hundreds of others is performing work that is integral to the call center’s business even if that worker’s work is the same as and interchangeable with many others’ work. Moreover (and especially considering developments such as telework and flexible work schedules, for example), work can be integral to an employer’s business even if it is performed away from the employer’s premises, at the worker’s home, or on the premises of the employer’s customers.
2) Does the Worker’s Managerial Skill Affect the Worker’s Opportunity for Profit or Loss?
To inform the determination of whether the worker is in business for him or herself, this factor should not focus on the worker’s ability to work more hours, but rather on whether the worker exercises managerial skills and whether those skills affect the worker’s opportunity for both profit and loss.
3) How Does the Worker’s Relative Investment Compare to the Employer’s Investment?
Comparing the worker’s investment to the employer’s investment helps determine whether the worker is an independent business. If so, the worker’s investment should not be relatively minor compared with that of the employer. If the worker’s investment is relatively minor, that suggests that the worker and the employer are not on similar footings and that the worker may be economically dependent on the employer.
4) Does the Work Performed Require Special Skill and Initiative?
A worker’s business skills, judgment, and initiative, not his or her technical skills, will aid in determining whether the worker is economically independent. The fact that workers are skilled is not itself indicative of independent contractor status. Even specialized skills do not indicate that workers are in business for themselves, especially if those skills are technical and used to perform the work.
5) Is the Relationship between the Worker and the Employer Permanent or Indefinite?
Permanency or indefiniteness in the worker’s relationship with the employer suggests that the worker is an employee. After all, a worker who is truly in business for him or herself will eschew a permanent or indefinite relationship with an employer and the dependence that comes with such permanence or indefiniteness. However, a lack of permanence or indefiniteness does not automatically suggest an independent contractor relationship, and the reason for the lack of permanence or indefiniteness should be carefully reviewed to determine if the reason is indicative of the worker’s running an independent business
6) What is the Nature and Degree of the Employer’s Control?
This principle is intimately tied to the submission principle as stated my Mexican law. As with the other economic realities factors, the employer’s control should be analyzed in light of the ultimate determination whether the worker is economically dependent on the employer or truly an independent businessperson. The worker must control meaningful aspects of the work performed such that it is possible to view the worker as a person conducting his or her own business.
The correct classification of workers as employees or independent contractors has critical implications for the legal protections that workers receive, particularly when misclassification occurs in industries employing low wage workers. In Mexico (a developing country with low minimum wage) it is paramount to prevent and focus on a correct classification as to avoid penalties, claims and costly litigation before labor courts. Foreign entities must remember that the Federal Labor Law is employee protective and therefore at any point assumes the existence of a labor relationship. After decades of experience defending employers in Mexico our recommendation is to focus on legal prevention and a correct classification of employees.
As has been said, Mexico is fertile ground for business due to geografic setting, political stability, growth oportunities and skilled laborers at low costs. It has prooven to be far more inexpensive to comply with minimum labor requirements than to be subject to fines, penalties, claims and drawbacks by employees and authorities’ nation wide. Compliance and prevention begin with the correct clasification and management of the human resource that will im turn make the company grow.