Wednesday, August 7, 2013

Mexico - The Federal Labor Law Amendment - Flexibility Towards Productivity

By Pietro Straulino
R.Sánchez DeVanny

Mexican Labor Law (MLL) was finally amended last November 30, 2012 by President Calderón.  On the next day, President Peña Nieto took office.  This amendment was achieved after more than forty years of discussions, meetings and negotiations between different political parties, players and groups trying to reach a consensus at the Mexican Congress.

The MLL, intends to bring flexibility to employers and boost the productivity and investment in Mexico.  Some of the newest institutions in MLL are the following:
(i)    Probation/Training Labor Agreements;
(ii)   Regulation of the Out-Sourcing regime;
(iii)  Limitation to the back wages in labor litigation awards up to a year (and then payment of accrued interests); and
(iv)  The possibility to pay or to settle any labor claim at any point of the trial or before the final resolution has been issued.

Probation/Training Labor Agreements
In jurisdictions different from Mexico, it was possible to execute probation/training agreements with the employees.  Hiring them under those specific circumstances and then if they failed to perform under the probation period or if they did not score positively during their training period the labor relation was immediately terminated.  The terms provided by the MLL are:
Probation agreement[1].  The term shall be from 30 days up to 180 days, for employees under managerial positions or when the employees render technical or specialized services.
Training agreement[2]. The term shall also be from 3 months up to 7 months, for employees hired for executive, administrative or decision making positions, or when the services to be rendered are specialized.
In both cases the agreement must be executed in writing, they cannot be executed simultaneously or successively, and it is a onetime option for any employee of the company.  The employee hired under these conditions must receive payment and the same benefits as other employees and it is mandatory to pay for social security benefits. Once the termination day approaches, in order to avoid subjective and/or arbitrary decisions by the employer, the Joint Productivity, Skills and Training Committee[3] has to be informed.  We recommend preparing the appropriate data to inform the Commission in case the agreement needs to be terminated.  Failure to notify the Commission or the employee before the expiration of the corresponding term will result in the continuation of the labor relation indefinitely, and if it is terminated, severance payment will be applicable.  We also recommend having a receipt signed by the employee at the termination where all proportional benefits are paid and no further benefits are due.

Regulation of an Out-Sourcing regime
Prior to the amendment of the MLL, the Out-Sourcing regime was poorly regulated.  It was not clear when it was possible to outsource services and when this scheme went against the interests of the employees.  While numerous companies entered into the Out-Sourcing business, some of them illegally benefited from the employees since they avoided payment of adequate salaries, benefits and social provisions (health, pension and housing), all of which are mandatory in the current amended regime.
The Out-Sourcing scheme shall be applicable when an employer called Contractor executes or provides services with the employees under his dependence, in favor of a Client (either individual or entity), but the Client is responsible for setting the tasks and supervising the rendered services, normally at his own premises.
In order to avoid liabilities (fines that could be up to 250-5000 times the minimum wage in Mexico and litigation for discrimination or employment recognition), this regime has to comply with the following conditions:
a)      The services rendered by the Contractor shall not comprise all of the company’s activities[4], or be equal or similar to the ones rendered or developed by the company in the determined premises;
b)      The hired services have to be specialized; and
c)      The services shall not constitute similar or equal activities as the ones rendered by the company’s employees at the premises.

The Out-Sourcing agreement shall be executed in writing and the client has to make sure that the Contractor complies with the labor and social security’s obligations with its employees.  It is also important to ensure that the Contractor has the sufficient economic resources to respond for any claim.

Failure to satisfy the requirements mentioned above will bring as a consequence:
a)      The client shall be deemed as the employer of the Contractor´s employees with the following effects:
                              i.      Labor: payment of salaries, benefits and even profit sharing bonus; and
                              ii.      Social Security: payment of quotas, fines and inflation increases.
b)       If the labor authority considers that the Out-Sourcing regime was used fraudulently (when the main objective was to diminish the employee’s benefits, mainly profit sharing bonus) a fine shall be imposed.  This fine shall amount to approximately USD $1,250 up to USD $25,000 per employee.

It is be very important to analyze the corporate structure of the companies who have an operating company (and no employees) and a services company (with employees that render services to the operating company) in order to comply with the requirements mentioned above to avoid liabilities.

Limitation of the back wages up to a year (and then payment of interests)
Prior to the amendment of the MLL, if any employee sued its employer he/she had the chance to claim severance payment or reinstatement in addition to, in any of these cases, the back wages from the separation date until the employer finally paid or reinstated the employee.  Normally any labor claim filed in Mexico lasts from 2 to 4 years, so the amounts for back wages represent the biggest percentage of the contingency amount for any labor claim.
The amendment to the MLL establishes a limitation to the back wages.  Now the back wages shall be paid for a maximum of one year, starting on the day the employee was terminated.  After such year, a 2% monthly interest shall apply on the basis of 15 months of salary payment (3 months for severance payment and 12 months for the first year of capped back wages).
This limitation is creating a psychological effect on the employee and its counsel to make labor trials more agile and expedite.  Prior to the amendment, any plaintiff’s goal would be to extend the process so that the liability on any labor claim would increase proportionally to the time passed on a daily integrated wage basis.  According to our experience, labor claims are now being processed in shorter periods between 6 months and a year, and plaintiffs are more inclined to settle. Moreover, flexibility can be foreseen in case the employer decides to terminate the employment contract as a result of the labor costs (in case of litigation).

The possibility to pay or to settle a labor claim at any point or prior the final resolution has been issued
            One of the least discussed aspects on the MLL amendment, but in our opinion the most useful for any budget forecast, is the possibility to pay (fully or partially) any plaintiff’s labor claim.
If the plaintiff sues for severance payment (even if the amounts he/she is claiming do not correspond to the salary and/or benefits legally applicable) there is a possibility to pay the amounts that actually correspond to the plaintiff in front of the Board and stop the liability and back wages as soon as the amount is deposited before the labor authority. 
The pending benefits (those subject to evidence) can later be subject to the Board’s ruling throughout the process.  The importance of this possibility is mainly that even though the employee is suing for an amount or for benefits that he/she never gained, there is no impediment to solve the labor case promptly, stop the liability of the back wages and avoid long labor processes that participated in encouraging a negative perception of Mexico’s labor system, as inefficient for the present time. 
With the above examples of the latest amendments to the MLL, the government tries to incorporate 6.8 million individuals to the formal market in order to make them contribute to the Country’s growth and productivity.  Increasing flexibility and clarifying labor costs will boost Mexico’s foreign investment numbers and raise its worldwide exposure considerably as a competitive labor market.  However, this effectiveness will depend on the advance of other strategic legal reforms that are currently in progress.

[1] Whenever the employee has the skills and capabilities to render the agreed services, but yet needs to prove he/she can be reliable.
[2] The employee shall receive the skills and capabilities training from the employer, the employer shall mark the employee’s results of the training.
[3] This Commission, joined by representatives from the employer and employees is also a new institution of the MLL.
[4] We will need to refer to the scope of the Company’s activities in the By-laws.