Agenda: Global HR Mexico Adapts to Labor Reform

Curbs on outsourcing are among the first regulations to have an effect.

By Diane Cadrain Jun 1, 2013
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In Mexico, where labor laws enacted in 1970 just got a major overhaul, employers are facing a steep learning curve as they absorb all that the rules require. Among the new rules are:

  • Curbs on outsourcing.
  • Changes in laws affecting hiring and firing.
  • Reduction of back-pay liability in wrongful discharge cases.
  • Anti-discrimination provisions.

Outsourcing regulations are “one of the most important aspects” of the reform, notes Laura Barbieri, market director of human resources for JW Marriott Hotel Mexico City.

“Employers are taking close care in the outsourcing process in order to comply,” adds Jorge Jauregui, HRMP, president of the North American HR Management Association and secretary general of the World Federation of People Management Associations.

Limits on Outsourcing

Until the reform law took effect Dec. 1, 2012, many employers outsourced operations to avoid two mandated expenses: profit-sharing payments of 10 percent of the company’s taxable income and social security contributions covering disability insurance, health care and retirement. They would set up an outsourcing company to employ workers and another corporate entity to make profits. Now, the law prohibits outsourcing contracts that are created in an effort to avoid labor obligations or payment of benefits. It bars such arrangements unless three conditions are met:

  • An outsourcing arrangement cannot cover the totality of the company’s activities.
  • It cannot include tasks equal or similar to the ones carried out by company workers.
  • It must be justified by the specialized nature of the jobs, such as work that requires a company to bring in a specialist only once in a while.

Companies using outsourcing arrangements to avoid labor obligations could face major fines.

“We’ve already started making adjustments,” says Barbieri, whose company outsources some hotel operations—waiting tables, cleaning and laundry, for example—when facilities are at 100 percent occupancy.

“We are reviewing the outsourcing contracts we have and are planning to insource some of the workers we had outsourced,” she adds. “Now we are more responsible than before” the reform.

“The question is whether employers still need an outsourcing company—and to pay it a 10 percent fee,” she continues. “Many companies are reducing the number of outsourced employees and making them employees of the company. They’re eliminating the administration fee and hiring the people.”

Some experts, though, raise questions about the three conditions outsourcing operations must meet. They’re asking, for example, whether such arrangements must satisfy all three conditions or whether adherence to one or two would be adequate. “That issue will be decided in the court system,” Jauregui says.

The former HR corporate director at Bristol-Myers Squibb Mexico and past president of the Mexican Association of HR Directors notes that “There are no economic incentives for employers to follow the new rules.” Jauregui contends that economic incentives would make it easier for employers to bring formerly outsourced employees into a company’s workforce. For example, employers might be offered a break in social security contributions for the first one or two years of employment, he suggests, and such a plan could be enacted as an amendment to the reform measure.

Hiring and Firing

Until now, Mexico’s labor law made it difficult to discharge poor performers or lay off workers in a downturn. The reform makes it easier to bring in new faces and part ways with workers if employment relationships don’t pan out. By making it easier to hire and fire, the reform is expected to bring more workers out of a shadow economy, where as many as 30 percent of the nation’s labor force has worked without benefits.

Previously, it was difficult to fire an employee once he or she was on the job, says Melanie Khamis, professor of economics and Latin American studies at Wesleyan University in Middletown, Conn. “Employers preferred to hire workers informally, without benefits, and in some ways ‘off the books,’ often without written contracts, so they could fire them easily,” she explains.

“These workers paid no taxes [and] received no social security, no benefits and no severance,” says Monica Schiaffino, a shareholder in the Mexico City office of Littler Mendelson. “They weren’t protected.”

Now, employers may hire employees on a seasonal, probationary or training basis. Before, the law offered only narrow categories of temporary jobs. For all other workers, employment became permanent after one month and continued for an indefinite term, with entitlement to generous severance payments. “Your job was your job for life,” says Mark Zelek, leader of the international labor law practice for Morgan Lewis & Bockius.

Employers now may impose trial periods—three months for rank-and-file employees, six months for managers—on new workers. Similarly, employers may require training periods of up to three months. These periods allow employees to gain necessary knowledge and employers to determine whether the workers can perform satisfactorily. Terminating an employee hired under a training or probationary arrangement will not be considered wrongful, as long as the employer takes into account the advisory opinion of a Joint Commission on Productivity and Training. A commission must be formed at each employer that has more than 50 staff people and will serve as an employer-employee task force.

Opinions about the efficacy of these changes are mixed.

“The expansion of types of employment will give employers more flexibility and encourage them to take chances and create jobs,” Zelek contends.

But to Jauregui, the changes aren’t so momentous. “They’re not really making it easier to hire and fire,” he says. “Mexico still has a long way to go toward creating more formal jobs and getting rid of the shadow economy. It’s too soon to say whether new jobs are being created.

“Five months are not enough to show whether unemployment is reduced,” he continues. “Statistics are not solid in this part of the world, so it’s hard to track. There are no reliable or specific ways to measure.

“But the Mexican economy is growing,” he observes. “If there are new jobs, would the cause be the new law or the country’s economic growth?”

Wages and More

Other changes in Mexico’s labor law include the following:

Limits on back wages. The reform limits employers’ liability for back wages in wrongful discharge cases, says Manuel Molano, adjunct director of the Mexican Competitiveness Institute. Researchers at the economic think tank helped develop the reform.

Mexican labor law previously was structured to allow only a narrow range of just-cause reasons for termination, such as perpetrating workplace violence or causing damage to company buildings. If an employee challenged a termination, resolution of that dispute could take years. Meanwhile, the employer would be liable for continuously accumulating back pay and other fines until the case was resolved, even if the employee found a new job.

These open-ended liabilities encouraged companies to operate in the informal economy, where workers could be hired and fired easily and were not entitled to benefits.

The reform created a one-year cap on the accumulation of back wages, regardless of the duration of litigation. Back-wage payments are also subject to a monthly interest rate of 2 percent on up to 15 months’ worth of the employee’s wages, payable after the litigation has concluded.

“Because of this change, the law now gives more certainty about the amount to be paid and makes it easier for employers to predict their liability,” Molano says.

Payment of wages. Mexican labor law used to require employers to calculate wages on a monthly rather than an hourly basis. Now, however, the reform allows hourly wage payments, as long as they correspond to a daily rate, and gives companies more flexibility to hire hourly employees such as students.

The reform also approves wage payment by direct deposit to a bank account or through other electronic means, with the employee’s consent.

Merit-based employment. Previously, seniority, not merit, was a major factor in promotions. Under the reform, employers will be able to use merit-based systems and offer productivity and performance bonuses. In promotions, companies may now consider a worker’s skill and productivity before seniority. Furthermore, workers may be promoted only if they are one step below the desired job and if they demonstrate the aptitude and skills the new position requires.

Sexual harassment and bullying. As before, employers are entitled to terminate employees for just cause, such as falsifying employment application materials, immoral conduct on the job, insubordination, using drugs or alcohol while at work, or refusing to comply with safety requirements. The reform adds harassment, sexual harassment and bullying to the list and requires employers to terminate an employee within 30 days of incidence of any of these.

Child labor. The reform bars certain types of child labor, including children younger than 14 working for employers who are not close relatives. Workers older than 14 must be compensated on the same basis as adults. Violations may carry prison terms of one to four years and fines of 200 to 5,000 times Mexico City’s daily minimum salary.

Discrimination. The reform bars discrimination based on ethnic origin, nationality, disability, age, religion, immigration status, health status, sexual preference and marital status.

Family leave. Workers now have a mandatory right to paternity leave for five days and maternity leave for six weeks for birth or adoption.

Pregnancy. An employer may no longer request a pregnancy test as a condition of employment and may not ask a woman to resign because she is pregnant. In addition, women now have more flexibility in using their legally mandated six weeks of required leave before and after a birth.

Disability. Employers with 50 or more employees are required to make accommodations for those with disabilities. Companies have 36 months to make the changes. At JW Marriott Hotel Mexico City, “We’re working on inclusion,” Barbieri says. “We have to modify everything—offices, bathrooms—starting with the employee entrance.”

Unions. The reform eliminates the closed-shop rule that required employers to hire only union members. Now, union leaders also must report to the government every six months on how union assets are managed.

Enforcement

Opinions on enforcement remain mixed. “The government is not hiring more inspectors. Companies have to make these changes happen on their own,” Barbieri says. “Enforcement isn’t really happening.”

Jauregui disagrees. “The government does have the inclination to enforce the new law and will look for and investigate high-profile companies and publicize what they found,” he says. “Labor law will be a top priority. As long as the economy is doing well, the new law has created the framework for economic growth and will be reinforced.”

What to Do

Employers that do business in Mexico should “hire competent lawyers [and] look at every contract and every type of labor relation,” Molano says. In particular, HR professionals should study their organization’s:

Outsourcing contracts. Companies contemplating or already involved in this type of arrangement should review operations in light of the new requirements. “If employees come from outsourcing firms, look at the outsourcing company, see what they’re doing, and determine whether the arrangement is in compliance,” Molano says.

Training and probation periods. To take advantage of the provisions covering training and probation periods, an employer must set up a Joint Commission on Productivity and Training to develop these programs.

Potential for discrimination. HR professionals should review their hiring processes for violations of anti-discrimination provisions.

Merit systems. To avoid automatic seniority-based promotions, employers should set up systems of incentives or bonuses for employees who help increase productivity. This task should be completed in conjunction with the organization’s Joint Commission on Productivity and Training.

Economist Khamis predicts a favorable outcome from the reform. “Less-stringent laws will give employers the incentives to create more jobs in the formal sector,” she says. “The government does not receive any taxes from the wages from these informal workers, a huge loss in terms of finances.”

But ridding Mexico of its shadow economy will be a long haul. “It’s very early still,” Jauregui says. “It’s going to take one or two years to have really effectual job creation.”

Diane Cadrain is an attorney and writer based in West Hartford, Conn., and a member of the Human Resource Association of Central Connecticut.

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