Outsourcing 2019 Second Edition

Last Updated October 28, 2019

Mexico

Law and Practice

Authors



Sánchez Devanny is a leading Mexican law firm that provides full-service legal advice both to Mexican and international client from offices in Mexico City, Monterrey and Querétaro, as well as several strategic alliances worldwide. The Labour Social Security and Immigration practice advises clients on compliance with labour and social security laws, and in the design and implementation of labour structures to avoid risk. We assist in processing immigration documentation for top-level executives and their families, with employment agreements, terminations, and fringe benefit planning, and represent clients in employment litigation. The team in this practice area is one of the largest teams at Sánchez Devanny and comprises two partners and more than 15 associates with extensive experience in labour matters, individual and collective litigation, social security matters and immigration processes.

Information technology (IT) outsourcing continues to be a thriving industry in Mexico, both in the domestic and cross-border markets.

In the domestic market, it is common for companies to outsource all or part of their IT functions to third parties in order to benefit from the specialised knowledge of IT suppliers, gain access to new technologies, focus on the core business of the company and transfer employment liabilities to external suppliers. Even though outsourcing is regulated by employment and tax legislation in Mexico, outsourcing of specialised services such as IT is not forbidden, allowing companies to benefit from this. 

In the cross-border market, Mexico has been a long-standing alternative for international organisations aiming to reduce their operational costs by outsourcing functions such as IT to a country that has lower labour rates than those in many developed countries. In fact, there appears to be a growing trend in IT outsourcing, particularly in companies in the United States and Canada, to leave typical offshore IT destinations, such as India or China, and seek nearshore outsourcing destinations, due to closer cultural and time-zone proximity. In this regard, Mexico stands out from other countries in Central and South America due to the increasing number of highly qualified professionals available in the IT industry.

Business process (BP) outsourcing has become a regular way of operating for companies in Mexico due to the increasing regulation of outsourcing employment structures.

Mexican Federal Labour Law (FLL) regulates subcontracting structures so that the beneficiary of the services determines and supervises the activities carried out by the personnel of a service provider. Outsourced work that falls within the scope of the subcontracting regime, as defined by the FLL, must comply with the following conditions:

  • it cannot cover the totality of the activities carried out in the workplace of the customer;
  • it must be justified pursuant to its specialised nature; and
  • it cannot encompass activities that are equal or similar to those carried out by the employees of the customer (jointly, the “Subcontracting Conditions”).

In addition to the foregoing, other employment and tax obligations apply to parties to a subcontracting regime, including the obligation on the part of the customer to audit the supplier's compliance with regard to its employment, social security and tax obligations to its outsourced personnel.

In cases where parties to a subcontracting regime do not comply with the Subcontracting Conditions, there is a risk that the customer will be regarded as the direct employer of the personnel of the supplier for all employment and social security purposes. In order to mitigate the aforementioned liability, many companies in Mexico who use outsourcing schemes have switched from structures where they procure all their personnel from one supplier, to structures based on BP outsourcing where they procure specific business processes from several service providers, thereby achieving compliance with the Subcontracting Conditions.

New technologies appear to have transformed the Mexican labour market, as opposed to having a detrimental effect on it.

The arrival of new technologies has changed the way in which many industries operate, and the human resources that they require. In this regard, there have been reductions in employment and, in limited cases, even the shutting down of companies in industries which are particularly exposed to technological innovation and automation. There has, however, also been an increase in the demand for highly technical work/human resources to design, operate and maintain the systems brought by new technologies.

In the highly competitive business environment worldwide, outsourcing continues to offer economic benefits in the view of many companies. At the same time, there have been changes in the demands of users of outsourcing schemes, such as:

  • a requirement for increasingly specialised personnel;
  • a requirement for services to be provided in real time; and
  • an increase in the demand for high-quality services.

These factors have resulted in the creation of more sophisticated outsourcing companies which specialise in specific industries in order to provide a better and more tailor-made service.

There has also been an increase in global outsourcing arrangements. These schemes consist of agreements between the global headquarters of both the company that requires the service and the outsourcing company, with the latter either directly or indirectly (through its subsidiaries or subcontracted local outsourcing companies) agreeing to provide outsourcing services to the former and to its subsidiaries worldwide. This results in complex international outsourcing agreements that have to take into consideration the legal particularities of each relevant jurisdiction in connection with outsourcing regulation, often in the form of individual annexes per each country.

Outsourcing employment structures are not illegal per se; however, the FLL regulates the different mechanisms whereby a company provides personnel or services to another company.

On the one hand, the FLL provides that in the event a company benefits from the services rendered by employees of a third party and the latter lacks sufficient financial resources to comply with its labour obligations before its employees, both companies could be deemed jointly and severally liable by Mexican labour authorities for payment of, and compliance with, all applicable employment and social security obligations.

On the other hand, the FLL regulates the subcontracting regime, which is defined as the arrangements whereby an employer, named contractor, agrees to perform activities or provide services using its own employees, in favour of a contracting party that determines and supervises the activities performed by the employees of the contractor. Pursuant to the FLL, parties to a subcontracting regime must comply with the following conditions:

  • the subcontracting arrangement cannot cover all of the activities performed at the contracting party’s workplace;
  • subcontracted services to be rendered must be of a specialised nature; and
  • subcontracting may not involve similar activities to those performed by the contracting party’s employees (the “Subcontracting Conditions”).

Failure of the parties to a subcontracting regime to comply with any of the Subcontracting Conditions, may result in the determination that the contracting party is the direct employer of the contractor’s employees, for all employment and social security purposes. The FLL expressly prohibits parties to a subcontracting regime to transfer employees for the purpose of reducing the employment benefits of said employees.

Finally, Mexican labour courts issued a resolution providing that when a company supplies the workforce and another the infrastructure and capital, in such manner that acting jointly both companies achieve the production of goods or services, said companies fall within the scope of the FLL's definition of an “economic unit” and consequently, for labour purposes, both companies will be responsible for the employment relationships of the employees under such unit. The practical effect of this is that both entities could be deemed jointly and severally liable by Mexican labour authorities for payment of, and compliance with, all applicable employment and social security obligations.

In general terms, regulation in connection with outsourcing applies equally across all industries. Some exceptions to the aforementioned general rule are manufacturing operations under a “maquila” scheme and certain entities in the financial services industry, which may be required to hire employees directly or through a subcontracting regime in order to receive the necessary permits to operate in those industries.

Mexican entities, in their position as data controllers, are accountable at every stage of the personal data processing required to conduct business, and have the following key legal obligations:

  • to provide fair processing notice to all data subjects;
  • to gather consents for processing personal data;
  • to abide by personal data principles while processing personal data; and
  • to implement technical and organisational measures to protect personal data against damage, loss, alteration, destruction or unauthorised use.

If the outsourcing scheme requires the transfer of personal data and/or a change of data controller (eg, the transfer of databases incorporating personal data from identifiable individuals to a different data controller), whether on a domestic or cross-border level, then data subjects must be informed of this situation through a data privacy notice, and consents must be timeously collected by the original data controller before any transfer of personal data occurs. In cases where the outsourcing scheme implies a transfer of employees, contractual protections should be reviewed, along with implementation assessment or monitoring for the fair processing of their personal data.

The following fines may apply where there is breach of data processing and data security legislation:

  • in a case where the obligated party fails to provide the requisite privacy notice to data subjects, or processes (including collecting) personal data in violation of the personal data principles (including giving notice), it may be liable for administrative penalties ranging from 100 to 160,000 times the Measurement and Actualisation Unit (Unidad de Medida y Actualización or UMA) which, based on the current value of the UMA, will result in penalties ranging from approximately USD400.00 to USD700,000.00; and
  • in a case where the obliged party collects or transfers (domestic or cross-border) personal data without the express consent of the data subject, when applicable, or materially changes the original data processing purpose set forth in a privacy notice, it may be liable for administrative penalties ranging from 100 to 320,000 times the UMA which, based on the current value of the UMA, will result in penalties ranging from approximately USD400.00 to USD1,400,000.00.

The fines described may be imposed per each infringement if the process is initiated ex officio by the Federal Regulator, or per each affected data subject if the process is initiated by an individual. Fines can increase, up to double, if the violations occurred while processing sensitive data. A data controller may also face civil proceedings if there has been a serious breach of the data protection principles.

The corresponding authorities take into consideration the following elements when determining the specific amount to be imposed as a penalty in case of breach of the aforementioned obligations:

  • what type of data was exposed pursuant to the breach of data processing and data security legislation;
  • whether data controllers refused to carry out the actions requested by data subjects;
  • whether the action or omission arising in the sanction was intentional or not;
  • the economic situation of the party responsible for the corresponding violation; and
  • the recurrence of the action or omission arising in the sanction.

Inclusion of standard contractual protections involving the use, storage or processing of personal data are highly recommended in outsourcing contracts. In outsourcing schemes, the personal information processed may pertain to the customer's employees and contractors, its own customers, business partners or other third parties. Standard clauses are usually drafted in protection of the data subject to honour the legal principles contained in Mexican legislation. Such clauses may be incorporated into all agreements that entail any processing activity, or may even be attached as a schedule to the relevant agreements.

Along with the inclusion of standard contractual clauses in outsourcing schemes, it is recommended that both the customer and the supplier compile and share a matrix of obligations governing the disclosure of personal information under applicable laws, including those applicable to foreigners under the General Data Protection Regulation, if needed, as well as existing guidelines and standards on personal data processing. Specific laws relating to health, financial regulations, consumer protection,etc may impose additional requirements on the parties pursuant to the processing of personal data that may be identified as sensitive information. It is therefore recommended that all entities should review the privacy and security requirements of those statutes to ensure that their agreements fully comply with additional obligations relating to the disclosure of personal data to third parties.

The standard supplier customer model in Mexico is an arm’s length structure whereby each party is independent, with suppliers openly offering their services to other parties in the market apart from the customer, and customers being free to engage other suppliers at any time.

Even though alternative contract models are not standard, they are sometimes implemented in particular cases where specific synergies exist and where parties pursue long-term arrangements, large-volume commitments, and joint products and services development. The most common example of the former is partnerships. In this regard, “informal” partnerships may be formed, whereby suppliers and customers enter into agreements to work in co-ordination towards a common end goal, while maintaining a degree of independence. Likewise, there has also been an increase in “formal” partnerships, whereby suppliers and customers associate and incorporate jointly owned entities for the pursuit of a business opportunity, separate from the rest of the participants’ activities.

Captives or shared services centres have become a common way of operating for large corporate groups which have numerous legal entities specialised in different businesses. In order for each unit to focus on its core businesses, the corporate group has certain specialised entities, the purpose of which is to provide companies in the group with internal business functions, such as human resources and accounting. 

Standard customer protections would include the representation of the supplier to comply with the following:

  • Evidence of having experienced personnel to perform the services;
  • Produce evidence that the supplier complies, at all times, with all labour, social security and tax obligations before its personnel;
  • Evidence of having clients other than the customer, which renders the supplier a non-exclusive and independent services provider;
  • The supplier does not perform activities that are similar or the same as those developed by the customer’s personnel

Additionally, customers would want to have remedies in an outsourcing relationship similar to the following:

  • retain/deduct payments to the supplier for non-compliance of contractual obligations;
  • terminate the agreement/relationship without liability or additional formalities;
  • have a remediation period for the supplier to correct or improve services, followed of a termination process; and
  • indemnity for any loss or damage cause for non-compliance with contractual obligations.

Generally, termination will be subject to the parties giving each other a notice with a certain period in advance. Where the supplier has personnel providing services to the customer and the termination of the contract may imply with termination of such personnel, it is advisable exercising care with the termination process, because in the absence of an express provision stating otherwise, the supplier may require the customer to pay the cost of such terminations. A recommended practice is to enter into a termination agreement where the supplier will assume any and all potential liabilities arising from the personnel hired, during the term of the services contract, including a “hold harmless” clause in favour of the customer.

Outsourcing agreements in Mexico are governed by the Federal Civil Code (FCC) and although the parties can agree on specific type of liabilities for failing to comply with their respective obligations, the affected party may be entitled to:

  • the cost of the obligation it failed to comply with;
  • damages, which are defined as the loss or impairment caused to the patrimony of the affected party due to the lack of compliance with the corresponding obligation;
  • indemnification for liquidated damages, which are defined as the loss of any profits that would have been made by the affected party had the corresponding obligation not been violated; and
  • the payment of legal fees incurred by the affected party as a result of the lack of compliance with the corresponding obligation.

In order for the payment of damages (daños) and liquidated damages (perjuicios) to apply, such must be an immediate and direct consequence of the lack of compliance with the corresponding obligation.

In order to avoid conflict regarding the determination and quantification of the damages (daños) and liquidated damages (perjuicios) caused due to lack of compliance with the corresponding obligation, parties may agree in the contract to the specific amounts payable to the affected party should one of the parties fail to comply with any of their obligations. Where the parties agree to the payment of a specific amount of money should any of them breach their obligations, in principle such sum may not exceed the legal standard interest, which is currently 9% of the cost of the corresponding obligation, unless the parties expressly waive such protection. However, any penalty agreed by the parties in excess of the aforementioned standard penalty may be reduced should a judge consider such penalty to be clearly disproportionate and abusive.

Direct and Indirect Loss

Even though the FCC does not expressly refer to direct and indirect loss, as mentioned above, the law differentiates between damages (daños) and liquidated damages (perjuicios). On the one hand, damages (daños) can be considered as equivalent to direct loss and they are defined as the loss or impairment caused to the patrimony of the affected party due to the lack of compliance with the corresponding obligation. On the other hand, liquidated damages (perjuicios) can be considered as equivalent to indirect loss and they are defined as the loss of any profits that would have been made by the affected party had the corresponding obligation not been violated.

Legal or Market Practice Regarding Loss of Profit, Goodwill, Business Etc

As mentioned above, the FCC regulates loss of profit and/or business through liquidated damages (perjuicios), which are defined as the loss of any profits that would have been made by the affected party had the corresponding obligation not been violated.

Goodwill is not regulated by the FCC. The affected party may seek indemnification regarding goodwill through damages (daños), which are defined as the loss or impairment caused to the patrimony of the affected party due to the lack of compliance with the corresponding obligation. However, in practice it is not common for a civil court to determine indemnification relating to goodwill due to the subjective nature of this. In order for a judge to determine payment of damages (daños) in connection with goodwill, the affected party must prove through objective elements that its reputation has suffered as an immediate and direct consequence of the lack of compliance with the corresponding obligation, and objectively quantify such situation, which is very complex.

The FCC does not contain specific provisions in connection with outsourcing arrangements; therefore, the general civil rules in the FCC apply to these contracts.

Mexican civil legislation allows parties to agree to any terms they are willing to, without setting forth implied terms. However, the FCC contains provisions indicating the legal consequences of a civil arrangement where the parties have not reached an express agreement in connection with a particular issue.

Some examples of these provisions are as follows:

  • the obligation to render a service can be carried out by a third party, unless the parties expressly agree the obligation of the supplier in the agreement to carry out the corresponding services personally;
  • if the parties have not agreed when payment must be made, the obligation of the customer to make any outstanding payments will be made effective when the supplier claims such;
  • if the parties have not agreed to a different payment mechanism, the payment will be made to the address of the customer;
  • the customer is entitled to suspend payment to the supplier should the latter not deliver corresponding documentation that proves receipt of payment; 
  • the legal standard interest payable as loss should either of the parties breach their obligations;
  • the obligation of the supplier not to disclose any confidential information it obtains from the customer in terms of their relationship;
  • the application of the jurisdiction of Mexican legislation and courts in case of conflict, etc.

The FLL does not contain specific rules regarding employee transfers for outsourcing schemes, but it prohibits such transfer when the purpose is to reduce employment benefits.

The FLL allows transfer of employees by any of the following means:

  • employer substitution (no consent required from the employee, no payment required);
  • employment termination with payment of severance and rehire under new terms of employment (consent required from the employee, severance pay required);
  • employment termination without payment of severance, and rehire under the same terms of employment agreed with the previous employer (consent required from the employee, payment of accrued benefits required).

The FLL does not provide any statutory obligation to consult with or obtain consent from unions, when a customer enters into an outsourcing agreement. However, in certain collective bargaining agreements, unions have negotiated to prohibit outsourcing of certain activities, which are performed by union employees.

In practice, outsourcing of certain activities within a company, have created unrest with union employees and this normally requires negotiation with the union. In extreme cases, the union has the right to call for a strike for an alleged violation of the applicable collective bargaining agreement, if the outsourcing services affect the existing union employees.

Transfer of employees depend on several circumstances, including without limitation, the ability to modify employment conditions upon transfer, the cost associated with employee transfers, whether employees are represented by a union, among others. There is no established market practice for this type of transfers.

5.1 Rules Governing Employee Transfers describes the methods available to transfer employees and its main legal effects.

It is not common the transfer of assets involved in an outsourcing agreement, unless the outsourcing arrangement is part of a transactional operation. Suppliers must have their own assets and infrastructure to perform services, or otherwise, they may not be considered as an independent party to the outsourcing agreement, leading to a potential joint liability with the customer. In accordance with Mexican labour law, the customer must verify, at all times, that the supplier complies with all applicable legal obligations, including having the necessary assets to perform the services.

Sánchez Devanny

Paseo de las Palmas 525
Piso 6
Col. Lomas de Chapultepec
Ciudad de México
11000 México

+52 (55) 5029 8500

+52 (55) 5029 8501

www.sanchezdevanny.com
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Law and Practice

Authors



Sánchez Devanny is a leading Mexican law firm that provides full-service legal advice both to Mexican and international client from offices in Mexico City, Monterrey and Querétaro, as well as several strategic alliances worldwide. The Labour Social Security and Immigration practice advises clients on compliance with labour and social security laws, and in the design and implementation of labour structures to avoid risk. We assist in processing immigration documentation for top-level executives and their families, with employment agreements, terminations, and fringe benefit planning, and represent clients in employment litigation. The team in this practice area is one of the largest teams at Sánchez Devanny and comprises two partners and more than 15 associates with extensive experience in labour matters, individual and collective litigation, social security matters and immigration processes.

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