New Mexican Labor Law Changes the Rules for Certain Operating Structures

The Mexican Government has provided us with a holiday gift this season in the form of a new Federal Labor Law that governs all employer / employee relationships with the country. The law, which became effective December 1, 2012, provides for some positive changes in the manner that companies may contract with employees. In addition, the law adds some additional requirements and rules that companies must follow if they wish to operate under the common captive employee leasing structure in Mexico. Highlights from the new law are as follows.

Many Mexican companies have operated using a dual entity structure for decades. Such structures normally include an operating company, which holds all of the company’s assets, completes sales to customers, etc., and a captive employee leasing entity that houses all employees and provides services to the operating company. This structure is utilized to allow the company to manage the amount of employee profit sharing otherwise mandated by Federal Labor Law.

The new law adds certain requirements that companies must meet in order to continue with such a structure. They include the following:

• The operating and employee leasing companies should have separate and different ownership to support the fact that they are truly separate operations.
• The operating and employee leasing companies should have very clear corporate purposes that do not overlap. The operating company should be established to complete its manufacturing, sales or other activity – but not to employ individuals. The employee leasing company’s corporate purpose should clearly state that it exists to provide services to operating companies.
• The structure may not be utilized in an abusive fashion to avoid the payment of proper social security or other payroll tax contributions.
  

While the consequences of noncompliance remain somewhat unclear, they would appear to include financial penalties and an effective combination of the two companies for the purposes of calculating the employee profit sharing and other contributions. It is also unclear how long current companies operating in this fashion will have to bring their structures in compliance with the new rules.

The new law also provides for various categories of workers including temporary workers and workers hired for a specific time period. It appears that these separate categories will allow employers to hire staff members on a temporary basis without incurring the severance liabilities that exist related to individuals hired under a “normal” employee status.