Businessmen start legal battle against the reform on outsourcing

Note published on May 18 in El Economista, Capital Humano [Human Capital] Section by Gerardo Hernández.
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Appeals against the new subcontracting regime argue violations to constitutional mandates, such as the freedom to engage in the activity that best suits one’s interests, as long as it is lawful, and international conventions.

Faced with the reforms that closed the door on subcontracting based on the provision of personnel, some companies have started filing amparo suits against the package of amendments to eight pieces of legislation that came into force on April 24 of this year and seeks to regulate third-party personnel provision for specialized works and services.

The deadline for filing amparo suits against the reform is May 24. Companies that have opted for this legal defense have argued the unconstitutionality of several legal changes and the breach of international agreements.

The reform established a new regulation for contracting specialized works or services, including a registry of contractors. However, it prohibited the activity of personnel provision; that is, when a company places its workers at the service of another company for the benefit of the latter.

According to specialists, there are criteria to challenge the new subcontracting regime in court, on the grounds that it prohibits an economic activity and that it limits the country’s competitiveness.

In the opinion of Ricardo Martínez Rojas, partner of the D&M Abogados Firm, prohibiting personnel subcontracting goes against several constitutional mandates, in particular, the freedom to engage in any activity, as long as it is lawful.

Additionally, he explained that the new regulation violates the constitutional obligation of the State to establish the bases for the country’s competitiveness and looking out for the best interests of the social, private and public sectors.

“There are, indeed, serious violations, particularly in the case of companies that provide personnel outsourcing; they are the hardest hit”, stated the labor lawyer.

Along the same lines, Martínez Rojas considered that the cancellation of personnel supply contracts, a process that some companies will have to carry out in order to regularize themselves, gives a retroactive effect to the reform, and this is prohibited in the Constitution.

Amparo suits against the reform have been the subject of debate since before the reform was promulgated. Even though the amendments to the subcontracting regime were the product or an agreement between the government, business leaders and workers’ representatives, organizations have a right to legal defense.

“We know that amparo suits will be filed individually by companies; therefore, the fact that businessmen and unions were in agreement with the reform does not limit or restrict the right of companies to challenge the terms of the reform”, said Luis Ruiz, a partner at Hogan Lovells.

For Carlos Ferrán, director of the Ferrán Martínez Abogados Firm, the appeal against some of the terms of the reform constitutes a live debate among the academic community and it could be discussed in greater detail.

“There is an interesting academic discussion about the San José Pact, ILO Convention 88 and certain articles of the Constitution, such as Article 25, which imposes on the State the obligation of protecting and encouraging economic activity and, additionally, it must be taken into account that harmful practices are not exclusive of subcontracting; the academic discussion goes along these lines”, explained Carlos Ferrán, who is also Coordinator of the Committee on Labor Law of the National Compliance Commission (Canacom).

He pointed out that the discussion on challenges revolves around international treaties, some articles of the Constitution and feelings of unconventionality in the statement of reasons of the reform.

What does the Constitution say?

Among the points made by legal defenses against the reform on subcontracting, we find the possible violation of Constitutional Articles 5, 14 and 25. These articles establish:

  • Article 5 refers to the freedom that every person has to engage in the profession, industry, commerce or work that best suits his needs, as long as it is lawful. The exercise of this freedom can only be limited by judicial pronouncement when the rights of others are infringed upon.
  • Article 14 establishes that “no law shall be given a retroactive effect to the detriment of any person.”
  • Article 25 imposes on the State the obligation of leading the development of the nation, strengthening sovereignty and democracy and, through competitiveness, fostering economic growth, employment and a fair distribution of income and wealth, guaranteeing the full exercise of the freedom and dignity of the people.

Héctor Márquez Pitol, president of the Mexican Association of Human Capital Companies (Amech), acknowledged that the legal amendments in this matter pose a complete turnaround for companies that engage in third-party personnel provision. And even though the amparo suits are an alternative, they would not fully solve the amendments in tax matters, which would complicate the operation of the companies that win a permanent injunction.

“The amparo may be filed both by the outsourcing supplier and by the client. But the issue is that invoices will cease to be deductible as of August 1, which is definitively a problem for a company. One could not remain in that situation in which they are not deductible”, he said during a Holmes HR forum.

In this vein, the representative of third-party personnel provision companies considered that the best thing to do is to adapt to the new legislation, understanding that personnel subcontracting has been forbidden and that there are ways to transition into the new regime. “My recommendation is to always comply with the law, and even more so because this is not a situation that is impossible”; he stated.