On November 13, 2012, for the first time in 40 years, after extensive consideration by both Mexico’s House of Representatives and its Senate, the Senate approved a significant labor reform bill, with far-reaching and substantive implications for foreign companies doing business in Mexico and local Mexican employers alike. Mexico’s government stated that the purpose of this bill is to increase productivity and better paying jobs, while also allowing greater employment access for women and younger workers. Most of these changes will be familiar to U.S. employers, as in many ways they bring Mexican labor standards more in line with those that we are accustomed to here in the United States. However, employers that have been doing business in Mexico will find other changes more significant, such as the revisions designed to ensure more extensive coverage of Mexico’s Federal Labor Law (FLL) employee benefits, as well as clarifications to the procedural requirements for employment terminations in Mexico.
Some of the key changes in the law are outlined below.
Outsourcing/Subcontracting: Historically, many companies doing business in Mexico have managed labor obligations through outsourcing or subcontracting to a service company, which provides the workforce for a fee. Although the employees render services that benefit a particular commercial company, they are employed by and on the payroll of the service company, which is contractually responsible for labor obligations. This is important in all aspects of the FLL, but particularly so in regard to the law’s 10 percent employee profit-sharing requirement. Under a typical subcontracting relationship 10 percent of the profits of the service company—as opposed to the commercial entity that benefits from the services—are shared with the employees, thus limiting the commercial entity’s obligations to the service company employees. Recently, a Mexican federal court foreshadowed the end of this practice by 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 amendments create new restrictions for service companies as employers, as well as for the beneficiary companies, by essentially codifying the federal labor court’s holding that these two entities will be deemed a single economic unit for purposes of the FLL’s benefits and protections to employees. Further, to the extent that such outsourcing relationships are used to avoid labor obligations, under the amendments, the actual beneficiaries of the services are jointly liable under the FLL. Likewise, if a contracting commercial company is found to be invoking such outsourcing for the purpose of avoiding labor obligations under the FLL, including payment of profit sharing, it may be subject to significant fines from the Mexican labor authorities.
This is one of the more significant changes in the law, given the long-standing use of these arrangements. According to Alfonso Villalva P., a partner in the Mexico City-based law firm Bufete Villalva, S.C., “In order to reinforce this type of relationship in favor of all the parties involved—the operating company, the service company, and the employees—this reform imposes an obligation on the part of the operating company, prior to using a service company, 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.” Sr. Villalva also notes: “This reform penalizes attempts by actual employers to use outsourcing arrangements to avoid obligations to their employees under the FLL.”
Anti-Discrimination/Harassment: The amendments align Mexico with international anti-discrimination and harassment standards by expressly prohibiting discrimination on the basis of ethnic origin, nationality, disability, health conditions, religion, immigration conditions, opinions, sexual preference, or civil status. What is more, workplace and sexual harassment (along with mobbing, 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 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 amendments include protections for working mothers by providing flexibility in choosing when to take maternity leave and shorter shifts to accommodate nursing mothers.
Disability: Employers with 50 or more employees must adapt the workplace to accommodate employees with disabilities.
New Hires: The law now requires new hiring forms, incorporates protections for seasonal workers, includes trial and training periods up to six months for new employees, and provides telecommuting benefits. There are also specific rules for employers that hire Mexican employees to work abroad. Improved working conditions for household, agricultural, and mine workers are also included.
Underage Labor: Hiring children under the age of 14 is now a crime.
Payroll Deductions: Employers must now inform the family court if the employment of an employee owing alimony payments is terminated.
Terminations and Termination-Related Proceedings: Before the reform, employees could claim that they never received for-cause notice of termination from their employer, and the burden of proof was on the employer to prove that such notice was in fact served. The amendments redefine the burden of proof in this notice process and allow employers to serve notice directly on the employee or through the labor board, which prevents employees from claiming they never received such notice. Exactly how this change will play out procedurally will be the subject of future labor court proceedings.
In addition, back pay awards in unjustified termination proceedings are now capped at one year of accrued salary, which creates a disincentive for claimants to delay such proceedings. (Under the old regime, awards could include accrued salary from the date of termination to the date of award, which encouraged terminated employees to drag out the process.) If the proceedings are not completed within the year term, the terminated employee must be paid an interest of two percent on a monthly basis over the equivalent of 15 months of salary, instead of having back pay awards increasing month by month until the proceedings finish.
Use of “Electronic Means”: This term is now defined, using terms such as digital certifications, private codes, passwords, digital documents, access codes, and electronic and advanced electronic signatures. As a result, employers are allowed to issue employment-related documents electronically.
Fines for Noncompliance: The reform increases fines for noncompliance with the FLL.
Labor Unions: An earlier version of the bill contained labor union-related changes, including limits on strikes, provisions concerning the transmission of financial information to union members, and the classification of collective-bargaining related information as public. It is not clear whether these amendments will be included as they are the subject of continued discussions in the House of Representatives.
For U.S. employers, many of these changes will not appear terribly shocking or controversial because they are relatively consistent with U.S. employment law standards. In fact, although this reform increases protection for employees, it also actually provides greater certainty concerning labor relations and requirements, which should help companies as they embark on business ventures in Mexico. At the same time, employers doing business in Mexico should not only review their employment policies and procedures to ensure compliance with the reform but also look for new opportunities to make such policies and procedures truly global. Furthermore, in light of the joint labor liability aspect of this reform, consideration should be given to the actual benefit of continued use of services and outsourcing companies to hire personnel, particularly since the use of these services carries with it a substantial cost already. Now, the ability of such beneficiary companies to avoid labor liability has been practically eliminated, which is generally considered to be a major business justification behind paying a high markup to a service provider. As such, these corporate structures and outsourcing models arguably no longer provide the same protection they once did and may no longer be a cost-effective solution.