Revised framework of Mexico's employment legislation would help promote formal job creation

Labour market reforms undertaken in 2012 did not produce the intended results of facilitating the creation of formal employment in Mexico, essentially reforming workers’ rights to give employers more power over their staff. Four significant changes can be observed in articles 15 A, 15 B and 15 C, which, unsuccessfully tried to regulate outsourcing through third-party hiring or subcontracting, thus holding back investment. They unsuccessfully tried to ease individual hiring regulations, encouraging incorrect expectations for employers in Article 39 of the Federal Labour Law, which has been far from practical. In addition to payment limitations for lost wages in 12-month terms, new payments now include three months of compensation, plus 2% of capital – defined as the value of an investment based on the profits that the same might be able to generate.

Complex Situation

Looking at the wider picture, in 2017 Mexico is facing complex labour situation, with the election of President Donald Trump in the US being a significant factor in this. The US president has announced his intention to reduce foreign direct investment (FDI) in Mexico from the US, Japan or any other major market, in the hopes of increasing levels of FDI in the US. In addition, he discusses the possible repatriation of 3m or more Hispanic workers to Mexican territory. This large group would be unlikely to find formal employment in the country.

Reforms

Our government must thus redesign its strategy to foster formal employment in Mexico, requiring immediate actions directed towards this purpose. First, it must take advantage of the situation: the executive branch sent an initiative that has already been chartered by both chambers of Congress, requiring approval of a new Federal Labour Law, which in turn will be governed by executive and judicial powers. In the future, labour law will be administered by the Arbitration Boards (Tripartite) and Labour Courts. One of the actions that will be necessary is – for the first time since 1931 – a new Federal Labour Law, fostering investment and preventing the inhibition of the same, whether it is local or foreign.

Outsourcing has been wrongfully criticised. Third-party hiring, or subcontracting, has been condemned by tax and labour authorities as a tax evasion process; while in many developed markets, it has been fostered as a strategic ally and a job generator. When it comes to formality, the authorities ignore the fact that due to the high percentage of charges for formal employment, the employer is penalised for each formal job that is generated with – on average – 3% in payroll expenses.

Formal & Informal Markets

The National Institute of Statistics and Geography has calculated that around 60% of employment is informal, with 40% in the formal sector. Therefore, tax authorities should be focused on securing revenues from the informal economy. Currently, taxes are collected only from the formal economy, and not from street sellers that may sell stolen goods or have overstock, which break all social security rules as outlined by the Department of the Interior and the Civil Protection Department. This is detrimental to the creation of formal employment.

For this reason, the new labour reform project must have the purpose of including not only changes that occur in relation to lost wages, with the aforementioned limitations, but also replace detrimental charges with unemployment insurance. This 3% levy penalises the employer (individual or corporation) and should be assigned to the payment of the aforementioned unemployment insurance,thus putting an end to compensations due to lost wages. Approximately 98.5% of Mexican companies are small and medium-sized enterprises, and a single labour lawsuit may bankrupt a company that lacks the financial capacity for litigation, ultimately resulting in the disappearance of jobs.