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.