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The Generals in their Labyrinth: “Outsourcing” in Mexico

Over the course of the past year, I’ve been writing a bit (here and here, for example) about what effects the pandemic might eventually have on the political economy, and by extension, segments of the outsourcing space itself.

What if, for example, governments get significantly more aggressive in managing their economies? Or labor movements become more formidable? What might such scenarios look like? Could change come in somewhat unexpected, even surreal, ways?

In the United States, just this week President Biden signed an executive order creating a White House task force that will seek ways to reverse a decades-long decline in union membership.

However, it’s just south of the U.S. border that presents an even more compelling tale. Because last week Mexico offered up the latest twist in a wonderfully unique drama. And everything from the outsourcing of personnel to teleworking and perhaps even some national BPOs will be affected.

But to make it through this labyrinthine saga, we need to start at the beginning, in a time before Covid hit….

Plotting their Moves

In August, 2018, a colorful, well-to-do labor leader by the name of Napoleón Gómez Urrutia returned home to Mexico after years of comfortable exile in Vancouver, Canada.

Like a certain general of the same first name from a different era who also returned home from his own celebrated exile, Napoleón Gómez Urrutia was determined to fight, in his case for what he frames as the rights of workers in Mexico.

And he’d use his platform as a senator in the government of socialist President Andrés Manuel López Obrador to do so.

The battle was on, led by the Morena Party of Mexico, founded in 2011 by López Obrador and said to, “oscillate between populism and social democracy.” It would be joined by The International Confederation of Workers, founded by our somewhat controversial General Napoleón. The workers’ union would fight for the rights of labor against what it considered past “neoliberal governments.”

In short order, our two protagonists, Napoleón and the president, were proposing new legislation that would change the way business is done in Mexico.

The object of their campaign?

“Outsourcing” companies.

As a piece in Nearshore Americas pointed out when the legislation was first put forth:

The proposed legislation appears to be designed to include outsourcing firms doing business domestically, as well as those whose operations are in Mexico, while customers are in foreign markets…. (Gómez Urrutia’s) comments on outsourcing… don’t seem to have historical precedent and have unnerved business leaders within the outsourcing community who see the plan as an early test around how serious López Obrador and his people will be in placing more constraints on Mexico’s businesses.

In addition, “Sources within the Mexico outsourcing industry believe that the new legislative efforts will ultimately do more harm than good, making existing outsourcers less competitive and causing foreign customers to consider other locations to conduct services partnerships.”

But what, exactly, does the term, “outsourcing” actually mean in this context?

It seems that our two generals, Gómez Urrutia and López Obrador, are going to war against certain labor outsourcing agencies, what in Mexico is known as “staffing.”

Staffing in Mexico has become big business over the years, most prominently in the manufacturing sector.

As Nearshore Americas explains in another recent piece:

There are more than 6,000 so-called ‘staffing’ firms, or labor subcontractors, in Mexico. Employment at these firms grew from 1 million in 2013 to almost 5 million in 2018, according to estimates by the country’s Labour Department…. many large firms in the country often register their core workers as employees of third-party contractors in order to avoid paying employee benefits. In fact, this business practice has helped companies to evade tax as well as employment obligations….

Now, however, our generals seem determined to respond to this situation with a labyrinth of new rules and regulations.

Here Comes the Pandemic

By the time the pandemic hit the world in early 2020, events seemed to come in fast succession in Mexico, infused with all the magical realism of a certain Latin American novel by Gabriel Garcia Márquez.

By November 12, 2020, López Obrador sent a proposed bill to the Mexican Congress that would ban companies from subcontracting jobs to third-party firms, outlawing “outsourcing” and subcontracting under most circumstances and absent government approval.

In Mexico, estimates suggest that could impact anywhere from 3.5 to 4.6 million workers.

On December 7, 2020, the law firm Duane Morris clarified some misconceptions about what was happening as government, labor, and business interests haggled over details:

…the Mexican executive branch issued a press statement in which it established that, given the importance of outsourcing of personnel, it will take into consideration the recommendations of actors of different industries, and that its intention is to take appropriate measures to combat “wrongful” outsourcing by which employees’ rights are infringed, rather than prohibiting outsourcing altogether. The executive branch further stated that it has agreed with the private business sector to continue reviewing the terms of the bill with the purpose of submitting a new bill before Congress.

With respect to the rendering of services and the execution of works by services providers to third parties, the bill proposes that these activities should be provided on a specialized basis for them to be legal. This means that such activities should be different to the corporate purpose or to the economic activity of the contracting party, and they should be agreed to in a written contract that should further establish the purpose of the services or works to be provided, as well as the number of workers that would carry out such services or works….

Duane Morris went on to explain that:

In order to be able to provide services or execute works, services providers would be required to obtain an authorization from the Mexican Ministry of Labor. This would require demonstrating compliance with certain conditions such as the specialized character of the services or works to be performed, as well as full compliance with their labor, tax, and Social Security obligations. This authorization would need to be renewed every three years.

Two days later, on December 9, 2020, López Obrador signed an agreement with labor unions and business leaders to continue negotiations over the bill’s contents.

The horse trading was getting intense.

By early January of this year, López Obrador was claiming that Mexico had lost 277,000 jobs in the month of December, 2020, and he was blaming subcontractors that had cut employees so as to avoid paying benefits and year-end bonuses: “Outsourcing companies dismiss many workers registered in the Mexican Social Security Institute (IMSS) so they don’t have to pay benefits or give them bonuses,” he said, “and for that reason after we had been gaining jobs month after month, we lost 277,000 jobs in December.”

As Nearshore Americas noted at the time:

International organizations have warned Mexico that its proposed outsourcing reforms could cost the country millions of jobs and violate the free trade agreement it signed with the United States and Canada (USMCA).

The warning comes as the country’s socialist administration led by President López Obrador (AMLO) tables the legislative bill in the Congress, kick-starting a heated debate among elected representatives.

April, 2021

Which brings us to this month of April, 2021, when news came from the National Palace in Mexico City that López Obrador’s government had indeed reached a deal with union and business leaders on the bill to ban “outsourcing.” Stated more clearly, the deal would forbid the outsourcing of personnel to third-party firms (ie, staffing), “except for specialized work outside a company’s main economic activity.”

More details can be gleaned from an April 16, 2021, piece by Duane Morris. While outsourcing of personnel will indeed be prohibited, “Services or complementary or shared works rendered between entities of a same business group will be considered as specialized services… Entities that provide specialized services will be subject to new authorizations and registrations, especially before the Ministry of Labor and a public registry for companies that provide specialized services and works.”

Finally, last week, on April 20, 2021, the bill aiming, “to bring more workers into the formal economy by sharply limiting companies’ ability to subcontract labor,” cleared a final legislative hurdle with a vote of approval in the Senate.

According to officials in Mexico’s Labor Department, employers must now pay into their employees’ health and retirement plans, provide annual year-end bonuses, and offer profit sharing that will increase employee payments by more than 150%. The new rules also seek to close tax loopholes.

In other words, while staffing won’t be prohibited, subcontracting will be regulated in a labyrinthine manner like never before.

Meanwhile, according to sources I reached out to in the BPO industry, the international BPO space should remain more or less unaffected. Still, in some cases, national BPOs in Mexico might be impacted (depending on the specific activity and service, in which case, some national BPOs may have to register with the National Labor Secretary to receive approvals as a specialized service provider). Such cases could create additional administrative paperwork due to changes in the law related to taxation, social security, and housing. At this point it seems doubtful it would add much by way of financial costs, however.

During discussion in the Senate, Labor Commission Chair Gómez Urrutia, our General Napoleón, seemed thrilled. "What we are doing,” he said, “is claiming back the rights of workers.”

The Plot Thickens: New Laws on Telework

But there’s more palace intrigue for us to consider. The outsourcing labyrinth is even more complex than the aforementioned legislation suggests.

Because with the pandemic as possible catalyst, on January 11, 2021, President López Obrador also signed an amendment to Mexico’s Federal Labor Law that radically reforms its teleworking provisions. It took effect the next day.

Going forward, employers must establish written labor contracts with each remote worker it employs. A remote worker is defined as any individual who spends more than 40% of their total time working from home (or another location).

The requirements are many. For example, employers must provide, install, and maintain any required equipment and ergonomic furniture; they must pay any homeshoring-related costs (Internet, phone, electricity, etc.); protect each worker’s right to privacy; and allow each employee to completely disconnect outside of work hours.

For their part, employees must follow all supervisory rules and all policies of their employer, including those related to data security, data use, and data storage.

Interestingly, “The new law provides that the worker must consent to the decision to change from in-person to telework, except in cases of force majeure – which currently exists during the Covid19 pandemic. Parties must agree to the terms, processes, and timeframes if any changes are to be made to the teleworking framework.”

My BPO sources maintain that these changes were long overdue. Both parties, employer and employee, now have clearer rules to abide by. While it does indeed impose some additional financial costs on the employer, the new rules also more clearly articulate the right for employers to maintain high levels of information security through appropriate monitoring and recording where necessary. In that sense, standards have been raised. What may still be missing are important regulations regarding digital documentation and electronic signature, clarifications that would have made work easier for employees.

Overall, these new rules could be a positive development for the at-home model in the BPO sector.

To what extent developments in Mexico’s outsourcing drama will affect an array of foreign companies already doing business there or pondering such a move remains somewhat unclear.

In the meantime, the generals will almost certainly continue to plan new campaigns.

Image: from the cover of an early edition of the novel, ‘The General in His Labyrinth,’ by Gabriel Garcia Márquez.

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