(Expansion) – Historically, and especially with the passage of NAFTA in 1994, US companies (and global companies in general) recognized that the relatively less expensive, and geographically convenient, skilled labor in Mexico provided the opportunity to expand its supply chains, thereby passing on lower costs to customers around the world and continuing to advance its quality manufacturing and service support functions. It is probable that 25 years later we think that “neither the promised paradise nor the diagnosed hell”.
Perhaps one of the substantial differences between the two labor markets is that, while labor law in the United States generally focuses on how to efficiently (and legally) operate a profitable business, Mexico’s labor law generally focuses on rights of the worker.
Simple concepts such as severance pay schemes in both countries show the radical differences between both systems; Another example is the issuance of a power of attorney: in the United States it is a fairly routine ministerial process; in Mexico it is done (only) by the best, most experienced and knowledgeable lawyers in the country.
But then … how do the two changes that recently occurred in Mexico and the T-MEC affect the global labor market and employers? We refer to:
1) The implementation of the labor provisions in the USMCA (T-MEC) whereby a member country, at the initiative of an employer, union or individual, who “presumes” a violation of the labor law mandates of the Treaty, may initiate a complex claims process, and
2) The recent change in Mexican labor and tax legislation to eradicate practically all forms of “outsourcing.” These two seemingly unrelated laws have changed the labor market for global employers operating in Mexico.
USMCA / T-MEC
As has been seen by recent activity on both sides of the border, the United States and Mexico clearly see that the labor provisions of the Agreement will allow “interested parties” to try to influence employers and their investments. The Biden Administration (and the Trump Administration that signed the Treaty) have expressed their concern in multiple ways with a commercial relationship where labor costs are significantly lower in Mexico than in the United States (the minimum wage in Mexico can be up to 700% higher lower than the United States).
Our northern neighbor has lost jobs for multiple causes and some of those jobs have moved to Mexico, precisely because wages are lower, thus Mexico achieved competitive advantages based on low wages and a unionism in many cases, inactive.
It is to be expected that under the T-MEC the unionized labor force, on both sides of the border, will exert additional pressure on employers to comply with all the labor technicalities of the Treaty. We anticipate that even smaller groups of dissatisfied employees, perhaps even one particularly “expressive” individual, will soon lead to a steady stream of complaints about employers operating in Mexico.
Sometimes these complaints will be motivated by the pure intention of fair treatment; other times we predict that the underlying motivation will be of more political or even competitive business origin. To the extent that they have not already done so, it is prudent for employers to engage their employment advisers in a strategic discussion about how their workforce is represented, if it is a dormant union that should be activated, if there is no union, or even if there is an active union group.
The consequences of ignoring any issue on the issue not only impact unions; they will have a huge financial and reputational impact on the global employer.
Outsourcing
The approval of the subcontracting ban, published on April 23, 2021, and its full entry into force on August 1, 2021, as a result of significant abuses, have completely changed the employer landscape for companies in Mexico.
While most global companies operated legally (and presumably paid their taxes) under the previous law, the new prohibition will require each company to distract significant time, in consultation with their labor and tax advisers, defining and articulating more strictly its “corporate purpose” to ensure that all ancillary functions outside of that purpose are suspended or transferred to external registered specialized service providers.
Those specialized service providers must ensure that they move quickly through their own registration process. This change is not just about changing the corporate purpose; In many companies it means registering new documents, getting rid of certain functions, moving employees to payroll corrected with impacts on social security, and ultimately not only to ensure their own compliance, but also to guarantee that of their suppliers. There are estimates of the increase in the net cost to employers for the implementation of this new legal framework of between 20% and 25%.
As can be seen, this change is serious… global companies operating in the country must bring their corporate, labor and tax advisers together to sit down with management to quickly determine “what stays, what goes” and what is records. Labor lawyers in the country have never been so busy! (And tributaries are not far behind).
If a global employer is “waiting for the labor law to change” in Mexico, that is unlikely to happen any time soon, even with last week’s elections and what can be assumed to be some slowdown in upcoming laws.
Is it worth continuing to invest in the Mexican labor market?
Without a doubt!… Workers in Mexico are a skilled, committed workforce with high levels of performance; Employers operating globally on a routine and regular basis ask this question in every country in which they have investments, but smart employers know that sitting back and bemoaning the challenges they face does not move the business forward.
With proper attention to corporate, tax, and labor strategy, and the right level of engagement with global employer legal counsel, companies can continue to navigate the impacts of these two great legal compliance challenges. These important reforms constitute a unique opportunity for a “homocentric” Mexican labor market.
Editor’s Note: You are the most recent past president of Littler Mendelson, PC and Littler Global. Jorge Sales Boyoli is a partner of, SC. The opinions published in this column belong exclusively to the authors.
