Note published in Factor Capital Humano, Leyes y Gobierno [Laws and Government] section by Gerardo Hernández.
Read the note in its original source
A scenario with a total restriction of subcontracting in Mexico is practically impossible. This modality, used in accordance with the law, can be beneficial; therefore, eliminating the modality would cause more harm than good for the labor market, specialists agree.
According to TallentiaMX, there are 7 million subcontracted people in Mexico. This modality, also known as outsourcing, is present in work centers of all sizes, but this contracting modality has largely benefited small and medium-sized companies; 36.7% of the subcontracted labor force is found in SMEs.
Is some form of subcontracting necessary or is all outsourcing bad? Reflects Alfonso Bouzas, coordinator of the Citizen Observatory of the Labor Reform. “It is a new condition in the labor relationship that arose as a result of technological changes and changes in the organization of work. Subcontracting that responds to these needs cannot be eliminated; what is more, eliminating it would seriously affect the country’s economy”, he states.
On the other hand, the labor lawyer believes that a reform to regulate this modality is necessary, because the existing “padlocks” were never enforced. “The door was opened to full subcontracting, despite evidence of jeopardy”.
Along these lines, Isaac Maximino Ibarra Barajas, founding partner of the Ibarra Barajas Firm, believes that “it would be a serious mistake” to eliminate subcontracting, given the large number of companies that depend on outsourcing to operate properly.
Nevertheless, the specialist does not rule out that this model of hiring requires greater regulation to avoid simulation and, in consequence, any harm to the workers.
“It must be acknowledged that these modalities were abused. At the beginning, they were even greatly detrimental to the interests of the workers. There were companies that called themselves ‘outsourcing’ companies and they were not that in reality; they pretended to outsource the staff, but they did not register it in the Social Security system. The animosity from the government and the public treasury toward this modality is understandable, but the right thing to do is to legislate it and enforce the “padlocks” in regard to it”, said Barajas Ibarra.
In the opinion of Alfonso Bouzas, outsourcing must be regulated under clearer rules. “A first basic definition is that subcontracting cannot be used for the essential activities of the company and, thus, the margin of subcontracting is defined by the nature of the company.”
Óscar de la Vega, partner at the De la Vega y Martínez Rojas Abogados Firm, also believes that outsourcing should be placed under a better regulation, to prevent companies from subcontracting their entire staff.
“Actually, there are countries in Latin America in which there is a more advanced regulation, and we have lagged behind.” However, in the opinion of the specialist, there are sufficient legal criteria to regulate the modality, although it would help to have a certification scheme, coordinated by the labor authorities.
Factors of competitiveness
In the world of subcontracting, states Óscar de la Vega, there are companies whose business is providing workers to different organizations and other companies that are created solely for the purpose of managing the payroll of a single company.
“These companies are not used to avoid salary integrations with Social Security, the Infonavit [National Worker’s Housing Fund Institute] or tax compliance. For the most part, the objective of these insourcing operations is to make companies more competitive in terms of employee profit sharing”, he explains.
Along the same lines, Óscar de la Vega explains that while the United States has reduced corporate taxes, Mexico keeps them at 35% and this, together with profit sharing (PTU) of 10%, which has a negative impact on companies’ competitiveness.
“The PTU is not bad, its percentage, the same as 35 years ago, is what is wrong. If this percentage were lower, companies would not use these service-providing companies, which, although questionable from the standpoint of morality, are legally valid: there is a contract for the provision of services between the corporations, they are not designed to evade the payment of Social Security contributions or to eliminate seniority”, says the labor lawyer.
Ibarra Barajas agrees on this topic, the social cost and the tax burden have a very high impact on companies, payroll is one of the highest expenses and there is little tax deductibility.
A stigmatized modality
“Outsourcing has been highly stigmatized”, states Isaac Maximino Ibarra Barajas. The underreporting of wages, the damage to seniority on the job, the omission of registration with the Mexican Social Security Institute (IMSS) and the lack of compliance in employee profit sharing are some of the serious offenses that have been attributed to subcontracting. However, warns the specialist, while there are outsourcing companies that engage in these bad practices, these practices are not exclusive to this modality, they extend to all types of companies.
For his part, Alfonso Bouzas believes that “the main sinner is the government”, since public institutions, regardless of their color, have resorted to outsourcing, but also to models such as the hiring of personnel on a fee basis to fulfill the tasks of permanent workers.
One of the priorities of Andrés Manuel López Obrador’s administration for this year is to combat simulated subcontracting. Luisa María Alcalde Luján, head of the Department of Labor and Social Welfare (STPS), has warned that aggressive outsourcing is damaging to workers, to public finances and to those outsourcing entrepreneurs who do comply with the Law.
The authorities have emphasized that, despite the legal framework in existence since 2012 for subcontracting, it has never been fully enforced nor has compliance with it been verified. The STPS, the IMSS, the Infonavit and various agencies of the Ministry of Finance have created and interdisciplinary group to combat illegal subcontracting.
Despite this coordinated effort, stated Alcalde Luján, more mechanisms in the Federal Labor Law (LFT) are required to regulate this modality and provide the sector’s authorities with better supervision tools.
President López Obrador announced that the government is working on a reform to place more “padlocks” on outsourcing and avoiding simulation through this modality. He informed that the dependencies of the inter-departmental group will present a report on subcontracting next Friday, focusing on the negative effects it has on the workers and on the Public Treasury, which exceed 21,000 million pesos in damages to the Treasury.