/ Recursos Humanos / By

Mexico’s Outsourcing Ban: What EORs Can and Cannot Do

In 2021, Mexico enacted a sweeping labor reform that banned most forms of outsourcing—radically changing how foreign companies manage their workforce in the country. While the reform targeted abusive subcontracting, it also created confusion around what Employer of Record (EOR) providers are still allowed to do. This article breaks down what’s legal, what’s not, and how to remain compliant while leveraging EOR services in Mexico.

What the Outsourcing Reform Banned

Mexico’s labor reform amended several laws, including the Federal Labor Law, Social Security Law, and Income Tax Law, to prohibit:

  • Personnel outsourcing, where a company supplies workers to another entity who manages and benefits from their labor.
  • The use of “simulated” service providers to avoid employer obligations like benefits, social security, or profit sharing.

Any entity that provides personnel to perform core business activities for another company is now illegal, unless specifically authorized by the Ministry of Labor (STPS).

What EORs Can Still Do Legally

While traditional outsourcing is banned, Employer of Record (EOR) models are still valid if structured properly. An EOR in Mexico can:

  • Hire employees directly under its own legal entity.
  • Be responsible for payroll, benefits, tax filings, and social security contributions.
  • Assign the employee to perform non-core or specialized services for a client, provided this is outlined clearly in the contract.

To operate legally, EORs must:

  • Register with the STPS under the REPSE system (Registro de Prestadoras de Servicios Especializados u Obras Especializadas).
  • Prove that the services offered are specialized and not part of the client’s main business activity.

 

What EORs Cannot Do Under the New Law

EORs may not:

  • Hire employees who will carry out core functions of the client company.
  • Be used as a shell to reduce tax burdens or avoid labor liabilities.
  • Provide staffing to clients without REPSE registration, even if the services are non-core.

Violating these rules can result in:

  • Fines exceeding $225,000 USD per infraction.
  • The inability to deduct payroll expenses for tax purposes.
  • Criminal liability in cases of simulated employment relationships.

What This Means for Foreign Companies

If you’re a foreign employer looking to expand or hire in Mexico, you must reassess how you use outsourcing:

  • Don’t use an EOR to fill key internal roles (e.g., sales, marketing, engineering) unless the EOR is registered and the activity is non-core.
  • Work with a provider that is REPSE compliant and offers specialized HR, payroll, or back-office services.
  • Ensure that the employment contract and service agreement clearly define the relationship and job duties.

Common Missteps to Avoid

  • Treating EOR employees as part of your internal team. This can be seen as “disguised employment.”
  • Failing to verify REPSE registration. You are legally liable if your provider isn’t compliant.
  • Mixing core and non-core tasks. Job descriptions must be specific and aligned with REPSE-approved services.

Alternatives for Full Compliance

If you want to avoid REPSE complexity and still hire in Mexico, consider:

  • Opening a local entity and hiring employees directly.
  • Using an EOR for short-term or support functions like compliance, finance, or legal operations.
  • Engaging contractors for one-off projects, but with strict compliance to avoid misclassification.

Final Thoughts

Mexico’s outsourcing ban reshaped the employer landscape—but didn’t eliminate all flexible hiring options. EORs remain a powerful tool for global companies, provided they operate within the limits of the law. The key is to avoid “outsourcing in disguise” and ensure every employment relationship is properly structured, registered, and justified.

Working with a compliant EOR can help your company expand legally, reduce liability, and focus on growth—without crossing regulatory red lines.