(a) No (except in case of employment misclassification).
(b) No, the social security and income tax legislation set forth the specific rules applicable to contingent workers.
(c) Same as (b).
(a) No. If employment elements are present, contingent workers could be considered as employees for employment purposes.
(b) If the elements of an employment relationship are not present, specific tax rules apply. As of 1 January 2022, misclassification of employees is considered tax fraud subject to criminal sanctions for the party classified as "employer." If elements of an employment relationship are not present, the social security sets forth specific rules applicable to contingent workers (i.e., if employment elements are present, contingent workers will be considered subject to the mandatory social security regime in Mexico. If they are considered as contingent workers, employees may voluntarily register in the "Voluntary Social Security Regime" in Mexico). On 28 May 2024, the Social Security Institute opened a new regime for "Independent Workers," under which individuals not subject to a labor relationship can voluntarily register and contribute to the mandatory social security regime. The incorporation of independent workers and their contributions to this new regime (Regime 10) will not eliminate an employer's liability in the event of a misclassification of the employment relationship.
(c) Pensions are part of the Mexican social security system, therefore response (b) above applies.
As of 1 January 2022, the Mexican Fiscal Code stipulates that simulating an independent professional relationship with an individual that should be classified as employee is considered tax fraud.
With the rise in digital platform services, we are seeing an increasing global trend in case law and legislation aimed at protecting platform workers' labor rights. For more insight on these developments, along with other employment law updates, click here.
On 28 May 2024, the Social Security Institute opened a new regime for "Independent Workers" under which individuals not subject to a labor relationship can voluntarily register and contribute to the mandatory social security regime. The incorporation of independent workers and their contributions to this new regime (Regime 10) will not eliminate an employer's liability in the event of a misclassification of the employment relationship.
- The contingent worker may claim the existence of an employment relationship and therefore be entitled to all labor benefits established in the Mexican Labor Law (benefits and severance applicable to terminations).
- If the contingent worker is classified by the social security authorities (Social Security Institute and Housing Agency) as an employee, the company will be required to register the employee retroactively to the effective date the relationship was in effect and pay the omitted contributions for the full period, plus charges, surcharges and fines. Moreover, in case of an accident or illness, the social security authorities could require the company to pay the cost of all cash and in-kind benefits provided to the employee by the Social Security Institute. In addition, misclassification is considered fraud to the social security regimes that carry criminal liability.
The new administration has enacted more strategic labor inspection procedures and is applying new criteria in relation to misclassification.
Penalties for the misclassification of employees have increased with the current administration, and include the following:
- Payment of benefits and severance
- Fines applied by the Labor Ministry in the range of 50 to 5,000 times the value of Unity of Update Measure per employee (for 2024, equal to MXN 108.57 per day).
As of 1 January 2022, misclassification of employees is considered tax fraud, subject to criminal sanctions for the party classified as "employer." Tax authority audits rarely lead to the reclassification of contingent workers, but this may change with the new administration.
As of 1 January 2022, the Mexican Tax Code provides that simulating an independent professional relationship with an individual that should be classified as an employee is considered tax fraud.
A finding of guilt for tax fraud may result in penalties including a fine of up to MXP 347,220 (approximately USD 17,000) and imprisonment of the responsible parties up to nine years (depending on the amount of omitted tax obligations).
There are also criminal sanctions in certain outsourcing schemes.
The worker will not be covered by the Social Security Mandatory Regime (no access to in-kind and in-cash benefits established in the Social Security Law, including pensions).
The new administration has enacted more strategic audit procedures, increased its activities on reviewing compliance by employers, and is applying new criteria in relation to the misclassification of employees.
Determination of misclassification of employees and sanctions for the above conduct may become more common as a result.
- Payment of unpaid contributions as of the effective date of the relationship, plus charges and surcharges
- Payment of a fund to provide the employee with in-kind and in-cash benefits for the provision of the mandatory social security benefits they would be entitled to
- Fines of 20% to 125% of the Unity of Update Measure per employee (for 2024, equal to MXN 108.57 per day)
- Criminal sanctions
Please refer to the comments in the social security section. Pensions are part of the social security system in Mexico.
Please refer to our answer from a social security perspective.
Yes, every officer of the company involved in the decision and execution of the conduct related to the misclassification of the employee will be criminally charged.