Mexico Revamps Its Labor Law, Creating Increased Protection For Employees And Greater Clarity For Employers

On November 13, 2012, for the first time in 40 years, after extensive consideration by both Mexico's House of Representatives and its Senate, the Senate approved a significant labor reform bill, with far-reaching and substantive implications for foreign companies doing business in Mexico and local Mexican employers alike. Mexico's government stated that the purpose of this bill is to increase productivity and better paying jobs, while also allowing greater employment access for women and younger workers. Most of these changes will be familiar to U.S. employers, as in many ways they bring Mexican labor standards more in line with those that we are accustomed to here in the United States. However, employers that have been doing business in Mexico will find other changes more significant, such as the revisions designed to ensure more extensive coverage of Mexico's Federal Labor Law (FLL) employee benefits, as well as clarifications to the procedural requirements for employment terminations in Mexico.

Some of the key changes in the law are outlined below.

Outsourcing/Subcontracting: Historically, many companies doing business in Mexico have managed labor obligations through outsourcing or subcontracting to a service company, which provides the workforce for a fee. Although the employees render services that benefit a particular commercial company, they are employed by and on the payroll of the service company, which is contractually responsible for labor obligations. This is important in all aspects of the FLL, but particularly so in regard to the law's 10 percent employee profit-sharing requirement. Under a typical subcontracting relationship 10 percent of the profits of the service company—as opposed to the commercial entity that benefits from the services—are shared with the employees, thus limiting the commercial entity's obligations to the service company employees. Recently, a Mexican federal court foreshadowed the end of this practice by holding that when an employer enters into a "professional services agreement" or "any other legal arrangement" in order to avoid its labor-related obligations, the service company and the operating company will be deemed to be a "single economic unit" under the FLL. The amendments create new restrictions for service companies as employers, as well as for the beneficiary companies, by essentially codifying the federal labor court's holding that these two entities will be deemed a single economic unit for...