what is the difference between a subcontract and an OUTSOURCING (personnel administration) service?

Currently in Mexico, there is a big uncertainty in this subject. I’m aware that normally this shouldn’t be a confusion, but given the way it has been handled in Mexico in the past years, well… it is. Even the Mexican Labor Law itself is not really clear on this; but I’ll try to explain the topic in this article. 

I’m aware that it is very clear that a subcontract is when you hire a specific service for a specific activity. I will refer to those kind of companies as SUBCONTRACTORS. And then, there are payroll companies that help in all the labor and payments to the employees matters; and I will refer to those companies as “OUTSOURCING”, which are personnel administration firms, but that’s the name that is more commonly known in Mexico.

The difference between a SUBCONTRACTOR and an OUTSOURCING FIRM, can be found (or deducted) in Article 15°A of the Mexican Labor Law (MLL):

“The subcontractor model is in which an employer, called subcontractor, execute activities or provide services with its own employees for a customer. This customer will mandate what and how to do to the subcontractor”

Then, the MLL states 3 VERY OBVIOUS requirements (Articles 15°B and 15°C of the MLL) for these kind of services to be considered as SUBCONTRACTORS. These kind of services are, for example, when we hire a landscaping company to do our company’s lawn; or when we hire a security company to provide us security services; or when we hire a professional CPA firm to have them do our accounting and taxes. In these cases, the invoice that these SUBCONTRACTORS will issue would be read, respectively, as: “Landscaping services in x feet of lawn”, “24/7 surveillance in ABC company for the month of October”, or “Financial and tax accounting for the month of October”. All these are examples of services of a SUBCONTRACTOR.

That being said, and just like it says in Article 15°A of the MLL, when the requirements that that article states don’t get meet, then is when we pass from a SUBCONTRACTOR to an OUTSOURCING SERVICE (personnel administration).

When we get involve in an OUTSOURCING (PERSONNEL ADMINISTRATION SERVICE) it means that a specialized firm, enroll our employees in their social security and legal records, once we disenroll them (with no malice, according to Article 15°D of Mexican Labor Law), so that this firm manages the technical part of all the labor relationship with our employees. Between the activities of this technical part, are the following:

a) Full HR Database, electronic and physical administration and custody.

b) Control, follow up, and custody of legal contracts with the personnel and unions.

c) Issuing, coding and electronic delivery of payroll receipts.

d) Periodic payroll calculations, with all its benefits, taxes and any deductions needed.

e) Control and administration of loans and personnel deductions between your Company and the employee.

f) Fulfillment of any kind of annual State and/ or Federal declaration applicable to HR Management.

g) INFONAVIT and INFONACOT credits control.

h) Calculations and payments of every tax and fee related to HR Management (Salary’s income tax, IMSS, SAR, INFONAVIT, INFONACOT, and ISN).

i) IMSS movements processing and follow up: new personnel, terminations, and wage adjustments.

j) Reception, processing and clarification of any requirement from any authority related to HR management, such as IMSS, INFONAVIT, SAR, State payroll taxes, and Federal salary income taxes.

k) Accurate application and analysis of Actual and new Federal and State’s parameters and Laws applicable to the regular payroll, taxes and fee calculations and payments.

l) Control, updating and using of advanced payroll system.

m) Control, entry and activation of bank debit cards for the employee.

n) Web banking system operation for electronic payroll payments, and its maintenance and necessities.

o) Activity, cost, and results professional reporting.

p) Solutions between bank and the employees, plus solving any other need with the objective of assuring the on time and correct payroll payments to the employees.

This is done with the objective of getting rid of a huge administrative burden, like we can see above, from companies’ management, and that normally implies an important error range, between other circumstances that end up in big losses for organizations.

With the synergy of an OUTSOURCING FIRM (PERSONNEL ADMINISTRATION SERVICE), organizations accomplish a much more efficient and lean management, that facilitates them in meeting their most important strategic goals.

The OUTSOURCING FIRM (PERSONNEL ADMINISTRATION SERVICE), does not mean to affect the employees, or that the client (company who hires the service) quits or lower down the responsibilities or benefits that it normally or currently have with its employees, since those responsibilities and/or benefits should and must remain after hiring an OUTSOURCING FIRM (PERSONNEL ADMINISTRATION SERVICE).

Of course, in an OUTSOURCING (PERSONNEL ADMINISTRATION SERVICE) model, there are ways to save in costs directly related with personnel taxes, social security fees, and administration costs, independently form the saving in costs that companies that hire an OUTSOURCING FIRM will have by optimizing its administration. However, these savings must be very carefully analyzed to determine their viability and application scope, which is among the responsibilities and added values of an OUTSOURCING FIRM.

Let’s remember and consider that, by hiring an OUTSOURCING FIRM (PERSONNEL ADMINISTRATION), the client will lose ABSOLUTELY NONE of its obligations with its employees. The key here is to hire an OUTSOURCING FIRM (PERSONNEL ADMINISTRATION) well established, recognized, and that meet the required parameters so that those obligations get properly fulfilled, so that those obligations don’t turn into a double responsibility for the client, because of a firm that fails to meet the required parameters.