Note published on April 6 in La Lista, Economía [Economy] Section by Beatriz Gaspar.
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AMLO and the unions closed the agreement on the regulation of subcontracting and profit sharing. What will be the impact on SMEs?
The situation lived by small and medium-sized enterprises (pymes) in 2020 was devastating. Of the 4.9 million micro, small and medium-sized establishments reported in the 2019 Economic Census by the National Institute of Statistics and Geography (Inegi), the Study on Business Demography, 2020 estimates that 3.9 million survived (79.2%), that is, one million 10,857 establishments (20.8%), closed their doors definitively.
However, the scenario looks unpromising given the impact that will be caused by the regulation of the outsourcing modality agreed upon yesterday by President Andrés Manuel López Obrador, the unions and businessmen. The agreement arrives after AMLO sent the proposal to prohibit this hiring scheme last November.
Among some of the aspects that it includes we find: the prohibition of personnel subcontracting; it regulates the subcontracting of specialized services different from the corporate purpose and the main economic activity of the contracting company; registration before the STPS [Department of Labor and Social Welfare] and the subscription into the public registry of subcontracting companies of specialized services and works, among others.
The reform proposes limiting the outsourcing mode to specialized services and preventing it from being used to evade responsibilities regarding labor rights and the payment of taxes, or to be used to simulate labor relations.
However, “the labor flexibility (of subcontracting) allows companies to operate more efficiently and lighten administrative or tax processes’ burdens. Nevertheless, the disconnection of the classic worker-employer relationship that arises from outsourcing can favor the evasion of obligations”, as is pointed out in ‘Subcontracting in Mexico: effects on labor welfare and tax evasion’ a research paper by the Center for Economic and Budgetary Research (CIEP).
Something that set off red flags by experts on this topic and its implication on Employee Participation in Company Profits (PTU), that is profits corresponding to 10% of taxable income which are above 300,000 pesos per year, in regard to its cap at 90 days of salary.
La-Lista consulted with Armando Leñero, president of the Center of Studies on Formal Employment (CEEF), and Ricardo Martínez Rojas, founding partner of the De la Vega & Martínez Rojas Law Firm, to discuss the impact that both topics will have on SMEs.
The bill for the regulation of subcontracting will mainly affect SMEs, because it will represent a greater expense “to which no other expense should be added, because they already pay 35 cents out of each peso in benefits; with the reform to pensions that will enter into force in 2023 there will be a 9 point increase in the employers’ contribution, a total of 44%”, explains Martínez and adds “this government wants to end with the formalization of economy. It is eliminating the middle class and creating more poor people.”
This would put many jobs at risk, causing micro, small and middle-sized companies to absorb jobs that they used to subcontract, in addition to attacking all of those who were working within the law, because Article 5 establishes that any person can work in any activity as long as it is lawful. Both experts foresee a landslide of lawsuits, amparo suits and the closing of more companies.
Who benefits from capping profits?
Experts agree that this will not benefit employees, but rather certain sectors or companies since, for some large companies that are not very labor-intensive (labor does not represent the largest percentage of their spending), paying 10% of PTU is a lot of money, and in some cases, it reaches more than a year’s salary.
“They are not willing to pay, and they use insourcing (companies formed by the same business group), which do not have profits and they thus evade the payment of PTU. It is a modality that should be prohibited”, Leñero explains.
Those large companies, according to the president of the CEEF, in which profits can reach up to180 days, will save half with the cap of 90 days; therefore, in place of paying 10%, it would be reduced to 5.
While nothing will happen in other companies because they do not reach the cap, or they do not have the profits and are labor intensive. It does not benefit or harm them.
“Employees come last. Carlos Salazar is only looking after the interests of large businessmen, because he forgot about SMEs”, Leñero points out.
For his part, Martínez Rojas states that “paying 10% did not seem serious over three decades ago, but the current panorama is different, which caused many companies to implement subcontracting schemes in order to regulate profits. Now that the state is seeking to prohibit these schemes, many companies will have to pay PTU.”
What can be done?
For Martínez, instead of keeping the 10% or the cap at 90 days, a percentage that takes the economic reality of the country into account, such as 4%, should be considered, because this is added to other factors, such as the obligations for the payment of electricity and internet, deriving from the law on teleworking. “This will cause the formal employer to be unable to meet its obligations, and if you add that the cost of electricity will increase with the law on fuel oil, we will become a country that is not productive and jobs will be lost”, he states.
Close to 700,000 jobs have been lost and, therefore, these aggressive measures “will cause people to resort to informality. The pandemic has left us with a weakness in investment, companies and sectors that have been devastated, such as restaurants, movie theaters and services. Subcontracting helps employment and eliminating it is a serious blow to the country’s productivity and competitiveness”, explains Martínez.