Mexico’s Labor Reform Omits Outsourcing, Provokes More Uncertainty

The labor secretary announced that the reform does not include any “severe regulations” on outsourcing, but acknowledged it is a theme that needs to be addressed.

Outsourcing

Mexico’s senate is set to debate a labor reform package, but which does not include any regulations regarding outsourcing, despite the labor secretary having pledged that legislation would be introduced to regulate the sector.

Labor Secretary Luisa María Alcalde announced in mid-April that the reform does not include any “severe regulations” on outsourcing, but has acknowledged that outsourcing and subcontracting are themes that still need to be addressed.

To that end, five government ministries, including the treasury, the social security institute (IMSS) and the fiscal prosecutor’s office, are working on a strategy to prevent abuses by the outsourcing industry in Mexico.

The labor reform is the first major legislative package of President Andrés Manuel López Obrador (AMLO), who took office in December, and will create a law granting workers the freedom to choose their trade union, while stipulating that trade unions must freely elect their leadership structure. The reform also creates a conciliation and arbitration center.

“Alcalde has been very vocal about the intentions to reduce or even prohibit sub-contracting in outsourcing, and it was expected the reform would include outsourcing, but the theme is absent,” Sergio Legorreta, principal partner at Baker McKenzie in Mexico City, told Nearshore Americas.

Mexican Labor Secretary Luisa María Alcalde

Legislators and Mexico’s association of human resources companies (AMECH) have expressed the need to further regulate outsourcing in Mexico, to avoid the abuse of workers through low pay and inadequate health and pension schemes, as well as tax avoidance by outsourcing companies.

On April 25, IMSS director Germán Martínez Cázares decried the labor reform as a “criminal simulation,” as outsourcing allows companies to deceive workers and avoid paying taxes, and called on the government to introduce more legislation to protect workers.

‘It’s a big issue how workers are treated in Mexico’

AMLO has said the labor reform was necessary to secure the ratification of the United States-Mexico-Canada Agreement (USMCA), as Washington had insisted on such a reform as a condition for signing the new free trade pact signed last year that replaces the North American Free Trade Agreement (NAFTA).

“Unless you do this, we can’t even consider it. We have to see that [Mexico passes] the legislation […] because it’s a big issue how workers are treated in Mexico,” House speaker Nancy Pelosi said in early April.

That need to pass the legislation to smooth the entry of the USMCA was criticized by Mexico’s workers’ confederation (CTM).

“We are offering a made-to-measure suit requested by the US and Canada to renew the trade agreement,” CTM spokesperson Patricio Flores was quoted by local media as saying. “The reform comes when there is pressure from the US and does not respond to what Mexico needs.”

Opponents of regulation of the outsourcing sector argue that it would harm outsourcing companies that do not engage in abusive practices of employees or avoid paying taxes.

“Outsourcing has been demonized in Mexico, because some companies have abused the system and done things badly, and their revenues cannot be explained,” according to Raúl Beyruti Sánchez, president of Mexican human resources company GINGroup.

‘Wait and see’

But the continued lack of regulation for the outsourcing sector adds to the general sense of uncertainty among investors and threatens to stunt the growth of Mexico’s emerging tech sector, according to Baker McKenzie’s Legorreta.

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Mexico was ranked 13th in Latin America as an IT outsourcing destination by the 2017 Kearney Global Services Location Index.

“The government is like a ship adrift, and its discourse regarding technology has been absent,” he said.

Sergio Legorreta, Principal Partner at Baker McKenzie in Mexico City

“There is much interest among cloud computing companies to install data centers in Mexico, but this uncertainty is making them think twice,” he said, warning that if Mexico is not careful other countries will take the leadership in tech industry development.

“It is undeniable that the demand is there,” he said. “Mexico could also become a regional leader in hosting contact centers, for example.”

“But the signal AMLO is giving to the tech sector is ‘wait and see’,” he said.

That uncertainty among investors was first provoked by AMLO’s cancelation of a planned US$14 billion new airport for Mexico City, shelved following a referendum last October in which 69.9% of the 1.06 million people that participated in the vote rejected the project. That was followed by the suspension in January of a planned tender for a high-capacity fiber optic wholesale network to connect the country’s more remote areas and offer additional capacity for  telecommunications services. The tender was relaunched in March.

That project is part of AMLO’s ‘Internet for All’ plan, with the winning bidder obligated to provide free internet in public plazas, schools and healthcare facilities, and which will require an investment of around US$1.5 billion.

Investors were also taken by surprise in January by the cancelation of the planned fourth electric power auction, which was expected to increase the country’s renewable power generation capacity by 5% and bring in US$4 billion in investment, according to the national energy control center (Cenace).

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