Proposal to Regulate Outsourcing and Fight ‘Fiscal Fraud’ Stirs Concerns in Mexico

A controversial figure in Mexico, who once battled big mining interests in pursuit of workers’ rights, is initiating a new fight aimed at protecting workers employed by outsourcing firms.

Napoleón Gómez Urrutia, who only recently returned to Mexico after 12 years in exile and now serves as a senator in the new government of Andrés Manuel López Obrador, has announced he will seek to increase regulation of outsourcing companies in Mexico and put a halt to ‘fiscal fraud’.

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.

Critics such as Gómez Urrutia argue that subcontracting firms, or outsourcers, manage to skirt around existing laws by under-reporting wages that are actually paid to workers and providing those workers with less rights than are normally granted.

They further argue that when outsourcing workers are dismissed, they receive less than what they are owed because the ‘reported’ amount of their wages turns out to be lower than their actual compensation.

Gómez Urrutia charges that some firms in this area do not respect the law and evade paying the right amount of tax, according to El Financiero.

“In the last few years this sector has grown in the country and we need to review the labor reform project to regulate it, and if they do not comply with the new provisions these businesses will disappear,” he said.

Gomez Urrutia has a background as a union boss, focused at one time on protecting mining workers from exploitation by big mining interests.

His comments on outsourcing, however, 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 AMLO and his people will be in placing more constraints on Mexico’s businesses.

A Problem Brewing?

One source told Nearshore Americas that the move would “bring a lot of problems to Mexico”.

“With the increase in social changes, this would mean an increase in the rates, and by this time the clients are going to turn around and see other countries that are less expensive with their costs and social charges, such as Argentina, Venezuela and India,” said the source.

Part of the argument Gómez Urrutia is making is that a 2012 labor reform law Mexico, meant to increase protections for outsourcing workers, has – in his view – largely has gone unenforced.

“Under the mandate of president Andres Manuel Lopez Obrador we are going to work together to start a labor reform project, to modify different law proposals and agreements, so that we can regain union democracy,” he was quoted as saying in a recent El Universal report.

It is estimated that there are more than 2,000 outsourcing companies in the country , according to ManpowerGroup, but only 40 reportedly pay the taxes they owe and only 20 meet the standards established by the Mexican Association of Human Capital, which require legal and fiscal audits.

It is estimated that as many as 3.5 million Mexico citizens work in some outsourcing capacity.

Mexico’s new Secretary of Labor, Luisa María Alcalde, has made statements in the last week indicating that regulation of outsourcing companies will be looked at closely in the new year.

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.

At the same time, sources admit that the noise coming from the AMLO administration had been expected – his defense of workers rights and battling large businesses is well known. Also there appears to be a building appetite in the general public for improving workers’ pay and work conditions, at the expense of employers.