Side b of the reform to outsourcing: it opens the door to informality

Note published on April 7 in Expansión, Empresas [Companies] Section by Nancy Malacara.
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Upon the impossibility of incorporating all subcontracted personnel into their payrolls, companies are more likely to fall into the informal sector to attract talent, warn third-party hiring firms.

The agreement presented this week by the government to go forward with the bill for regulating subcontracting – or outsourcing – maintains its essence. After dialoguing with employers and unions, the labor authority went forward with its intention of suppressing this hiring modality. Now, the decision is in Congress; however, labor specialists agree that the reform opens the door to informality in the country.

“Not all companies have the resources and experience to incorporate all subcontracted employees into their payroll. With this, there will be a loss of jobs and there will be informal hirings, whether by payment of fees, freelancing or assimilated to salaries”, states Héctor Márquez, president of the Mexican Association of Human Capital Companies (AMECH), which represents outsourcing companies in the country.

According to data from the association, if subcontracting is abolished, 60% of companies intend to negotiate with employees to hire them under an informal scheme. Only 30% of companies believe that they will incorporate all subcontracted workers into their payroll, while the remaining 10% will opt for employment termination.

In Mexico, according to the Inegi [National Institute of Statistics and Geography], there are 4.6 million employees hired through outsourcing, while six out of every ten workers work in the informal sector, that is, they have no access to legal labor benefits, such as social security. Márquez reiterates that this reform will cause the loss of over 2 million jobs and a significant upsurge in informal employment.

“That was our initial proposal, that subcontracting was not prohibited but we were unable to convince the authority”, says Lorenzo Roel, president of the Labor Commission of the Business Coordinating Council (CCE). “Benefiting activities in the business sector was not the backbone of the bill, the elimination of subcontracting was always its objective”, he adds.

Subcontracting is a legal concept that facilitates hiring formulas in Mexico and which is used in other countries to attract talent through a third party. It is this party who is in charge of the personnel selection, recruiting and training process and, in face of the Federal Labor Law (LFT), acts as the employer, even when the worker provides his services to another company.

However, the outsourcing scheme also lends itself to tax evasion, among other bad practices that revolve around it. The reform seeks to eliminate this, even if legal outsourcing is affected along the way; this type of outsourcing, according to the specialists who were consulted, does promote formal employment in the country and goes hand in hand with good international practices.

Among the agreements – and advantages – of the regulation of subcontracting we find that shared services are allowed in business groups, such as specialized services or works, as long as they are unrelated to the corporate purpose or the main economic activity of the client company.

That is, a company offering cleaning services, for example, will have to register with the Ministry of Labor as a company that offers this specialized service and, thus, can be hired by another company with a different line of business. There are no longer any intermediaries, and each organization has its respective workers in its payroll.

In regard to the disadvantages, Óscar de la Vega, labor law lawyer and partner at the De La Vega & Martínez Rojas Law Firm, points out that the reform limits the business of outsourcing companies, since, according to Article 12, they may participate in the complete recruitment, selection and training process, but they will no longer be the employers.

For this reason, Roel says that companies will have to polish their services in order to know which chips they can play in the labor market. This implies that they need to determine which specialty they can assume in order to offer it as such. Whether accounting or administrative services, that do not match the business objectives of their current clients.

Additionally, the reform does not mention ‘arrangements’ for Section B of the law, which corresponds to the public sector, that is, where the government is the employer. “The good judge, by his house begins” says De la Vega.

On the other hand, the bill gives companies three months and the Department of Labor one month to establish the bases to register in a registry governed by the labor authority. The registration of each specialized company has a validity of three years. And, in the event that the department does not provide an answer within 20 business days, the request is deemed as having been accepted.

“In the original proposal, a day was granted for companies to register. After the agreements, the term was extended to three months, but it is still insufficient and unpractical, because the companies that need to be regularized are numerous and the control that must be had by the labor authority is enormous”, states the lawyer.