Outsourcing reform: a thorn on the side for Mexico competitiveness.
In recent days, the reform to the Federal Labor Law regarding labor subcontracting, commonly known as the Outsourcing reform, came into effect. Among the main objectives of the changes to our legislation is eliminating tax evasion and avoidance carried out by some companies through outsourcing and guaranteeing that workers have all the labor rights granted by law. This law prohibits the subcontracting of personnel but allows the subcontracting of specialized services that are not part of the corporate purpose or the main economic activity of the company. It also establishes the obligation to keep a registry before the Ministry of Labor and Social Welfare (STPS, in Spanish) and the registration in the public registry of subcontracting companies of services and specialized works, the joint and several liabilities in case of non-compliance, the granting of a three-month term for the subcontracted workers to become part of the payroll, among others. While the intention is to protect workers and prevent abuse of subcontracting, these will undoubtedly have a significant impact on economic activity, competitiveness, and job creation.
Many experts have pointed out that the elimination of subcontracting will entail the risk of job losses and an increase in informality since many companies that currently have subcontracted personnel will not be able to hire them directly. In addition, the transition time for companies is very short (three months), and the penalties for non-compliance are very high (categorized at the same level as organized crime). Many of the large transnational companies operating in the country under this contracting scheme may be forced to reduce their operations and will not rehire the personnel under their payroll. Usually, these companies, most of them small and medium-sized, use this contracting system not to avoid their responsibilities but because it allows them to optimize their production processes and reduce costs. These savings, in turn, allow companies to invest in innovative systems that add extra value to production, making them more competitive. In addition, outsourcing allows for greater labor flexibility and adaptability, which are essential factors to face the rapid changes in the market.
In this sense, specialists consider that the new regulation does not manage to eliminate the fundamental problem of tax evasion and avoidance, since those who carry out this type of practices have other mechanisms to evade responsibilities, such as the payment of fees to continue reducing their labor costs and to carry out temporary contracts, among others. This reform will also increase bureaucracy by imposing more requirements to register with the STPS.
The elimination of subcontracting has all the characteristics to become the thorn on the side for Mexico’s competitiveness. It represents a radical change in the labor market that will generate uncertainty among economic agents and be detrimental to competitiveness. Additionally, the timing could not be worse. This reform is being promoted just when needed, perhaps more than ever, to reactivate employment and generate confidence to attract investment to the country.
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About the author
Monica Lugo graduated from ITAM with a degree in International Relations and has experience in both, private and public sectors. She has led negotiations on Sanitary and Phytosanitary Measures, Competition Policy, Trade Remedies, State-Owned Enterprises, Technical Barriers to Trade, and Sectoral Annexes of several trade agreements. Monica advised on ratifying the NAFTA and trade negotiations with the United States, also collaborating on trade promotion and innovation issues. In addition, she collaborated by giving courses and conferences on international trade negotiations in different institutions, organizations, and associations.