Latin America Advisor

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Is López Obrador Making the Right Labor Reforms?

Mexican President Andrés Manuel López Obrador holding a microphone. Mexican President Andrés Manuel López Obrador has proposed legislation to ban job subcontracting without government permission. // File Photo: Mexican Government.

Mexican President Andrés Manuel López Obrador on Nov. 12 sent Congress legislation to prohibit the subcontracting of jobs by private companies without prior government authorization. López Obrador said the measure is needed because the practice has been used to commit tax fraud and deny workers their benefits. To what extent does subcontracting, or job outsourcing, hurt Mexican workers, and should lawmakers approve López Obrador’s prohibition of it? Which sectors would be most affected by a ban on subcontracting? What role will labor laws play in Mexico’s economic recovery, and what other regulatory changes should the country’s policymakers consider next?

Larry Pascal, member of the Advisor board and partner at Haynes and Boone: “Subcontracting for the purpose of avoiding tax or labor obligations hurts society and workers and is a legitimate policy goal to address. By the same token, Mexico has historically suffered from a large informal labor sector, and the Covid-19 pandemic has only aggravated the crisis. Hence, Mexican policymakers should strike the proper balance and seek to achieve a labor reform that enables Mexican businesses to be responsive to market trends, while still requiring the private sector to meet its tax and labor obligations. Under the López Obrador administration, Mexico, as part of the USMCA, has already adopted legislation implementing its labor commitments under the agreement, including promoting the ability to organize workers. Any additional labor reform should balance these above-mentioned twin policy objectives and allow Mexico to capitalize fully on the opportunities presented under the USMCA and the return of supply lines from Asia-Pacific back to North America. An actual outright ban on subcontracting is unlikely, as a new concept of ‘specialized service providers’ is likely to emerge. Nevertheless, much additional detail will have to be added (and is likely being negotiated between the government, the private sector and labor organizations). Numerous key sectors such as the energy, manufacturing and tourism/transportation sectors could be negatively affected if the proper balance is not struck. Mexico should continue to strive to promote investment, enhance transparency and reduce unnecessary bureaucracy, while still advancing the legitimate goals of society and workers.”

Tapen Sinha, professor of risk management at the Instituto Tecnológico Autónomo de México and professor at the University of Nottingham Business School: “As a general rule, any kind of ban is difficult to enforce. In this case, the companies are supposed to seek government authorization. We know that corruption is endemic in Mexico—in particular, corruption is endemic in government. There were five million subcontracted workers in Mexico in 2020 (before Covid). For example, in corporate offices, the janitors and security personnel are almost universally contracted out. In the services sector, nearly half are contract workers. In manufacturing, more than 25 percent are contract workers. In the past, especially during the government of Felipe Calderón, contract workers were actively encouraged. The current numbers reflect that strategy. Will the new regulation have any impact? It will probably dampen the demand for outsourced workers in the formal sector. Nevertheless, someone will do the jobs. We only have to remember that in Mexico, more than half the labor force is in the informal sector. No amount of regulation will make any dent on that part. Standard benefits in formal-sector employment add between 30 percent and 40 percent to the cost of employment for the firms. This regulation will simply move employment from the formal to the informal sector. In other areas, the current government has been setting up rules in order to encourage formal, rather than informal, work. This initiative will work against that process.”

José Carlos Rodríguez Pueblita, CEO and founding partner of Pondera Lab: “Reforming the Mexican labor market to improve conditions for employees and employers is a long-overdue task. The López Obrador administration began with the right foot forward when it implemented an increase in the minimum wage in 2019 in coordination with the private sector. Although subcontracting may facilitate fraud when used inappropriately—affecting workers’ welfare and public finances—trying to impose a definitive solution without considering the private sector is not optimal. Labor relations are not a zero-sum game; there can be arrangements in which both parties win if structured considering their concerns. Prohibiting subcontracting or so-called ‘insourcing,’ that is, when employers use one firm to hire but another firm operates, owns and distributes the profits, may cause even more distortions if the underlying causes of such practices are not addressed. Informality will inevitably arise. Blue-collar workers would be the most affected if contracting costs increase suddenly, especially in a context of an economic downturn and weak internal demand. A modern and more fair labor framework demands elements such as flexible contracts, online work and expanding tax deductions in order to grow the formal economy.”

Joyce Sadka, professor and researcher in the Economics and Law Departments at the Instituto Tecnológico Autónomo de México: “On the whole, outsourcing or subcontracting does not harm Mexican workers because it helps to provide more jobs for them. Given the rigidities built into Mexican labor law, it affords flexibility to firms that cannot guarantee a long-term position for workers by allowing them to hire workers through personnel services firms. However, outsourcing can be used to facilitate abusive practices, mainly of two types: tax evasion and the evasion of labor rights. Lawmakers should look closely at the proposal, because while it is apparently aimed at the abusive side of outsourcing, in reality it will most likely reduce all outsourcing, given that it does not carefully distinguish between abusive and nonabusive practices. The ban on subcontracting will most affect the services sectors. These sectors include tourism, specialized services to firms such as security or technology, and call centers. These jobs are not high-quality, but they provide income to millions of Mexican workers. If they suffer, an already disadvantaged group of workers will be worse off. In terms of outsourcing, what is needed is the correct application of Articles 15-A, 15-B, 15-C and 15-D of the Mexican labor law reforms of December 2012. These articles limit abusive outsourcing by preventing the outsourcing of the main value-added services that firms provide. This creates joint liability with the beneficiary firm in case the workers of the outsourcing firm do not have social security and are not accorded other standard labor rights correctly and penalizes the creation of outsourcing practices that are designed only to avoid fulfilling labor rights. What is needed is not a labor reform, but rather enforcement of current law.”

Lance Compa, senior lecturer (retired) at Cornell University’s School of Industrial and Labor Relations: “To the extent that job outsourcing leaves workers unable to form unions and bargain collectively for improvements in wages and working conditions, and denies them social protections such as health insurance, pensions, housing allowances, profit-sharing and other benefits, Mexican workers and their families cannot achieve a decent standard of living and the quality of life that their hard work merits. The sectors that would be most affected by a ban on subcontracting are all the sectors where subcontracting and outsourcing have expanded in recent years. As I understand it, this involves a broad cross-section of manufacturing and service industries. Labor laws play an important role in Mexico’s (or any country’s) economic recovery. Legislation that protects the right to organize and bargain collectively and which improves wages and social protections will advance the purchasing power of Mexican workers, helping to fuel recovery.”

Gerardo Valencia, head of the employment and social security area, and Karla Paola Jiménez, associate attorney, at Cuesta Campos: “ From a legal perspective, this initiative proposes the prohibition of subcontracting, where contractors carry out activities related to the corporate purpose or economic activity of the beneficiary of the service, in order to disadvantage those companies that do not carry out specialized services and establishing fines of as much as $21,000 for both parties. At Cuesta Campos, we have studied this initiative, and we consider that although it is true that it is necessary to regulate subcontracting by law, the measure is not very aggressive. We recommend that companies align their organizational structure to the current context of the labor reform and this initiative, if approved, in order to avoid any penalties or fines.”

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