On May 27, 2019, the preliminary draft of the Resolution through which the Energy Regulatory Commission issues the contract model for suppliers of basic services and the methodology for compensation applicable to collective distributed generation (“Draft Regulations”) was submitted to the National Regulatory Improvement Commission for public comment. The Draft Regulations expand the possibilities for small electric power generators to supply multiple load centers, whose demand is met by a supplier of basic services. Consequently, it allows the option for load centers to benefit from distributed generation even though they may not have the physical space to install systems of this kind, such as solar panels. This modality is known as collective distributed generation.The Draft Regulations are based on the concept of distributed generation, which in lay terms refers to a capacity lower than 0.5 MW. Distributed generation has several benefits in comparison to other modalities, including a simplified interconnection procedure and the exemption for generators to own a permit from the Energy Regulatory Commission (“CRE” for its acronym in Spanish).To better understand the context of the Draft Regulations, consider that on March 7, 2017 the CRE published the General administrative provisions, the contract models, the methodology for calculation of compensation, and the general technical specifications applicable to distributed generation and clean distributed generation power plants (“DACG” for their acronym in Spanish). These DACG established an additional benefit for distributed generation, namely, the possibility of using three alternative methods of compensation: 1) net metering, 2) net billing, and 3) total energy sales. The net metering method is the most commonly used of the three, where compensation is calculated based on the difference between delivered energy and consumed energy, as measured by a bidirectional meter.As noted above, the Draft Regulations are subject to public comment and set forth a new modality called collective distributed generation, which allows exempt generators to assign generated electricity to more load centers. To further the development of a collective distributed generation system, a collective compensation contract is required to be signed by the exempt generator and the basic services supplier. Such collective compensation contract will also identify the beneficiary/end user(s) under the contract.The operations and procedures discussed above may only be conducted using the net metering and net billing methods. With respect to the first method, the beneficiaries’ load centers must share a common point of interconnection and have the same basic supply rate. For the second method, it is not necessary for the load centers to share a common interconnection point or have the same basic supply rate.It is important to emphasize that exempt generators and end users do not have the freedom to agree upon the compensation to be paid. Compensation must be calculated pursuant to the DACG and the Draft Regulations. However, it is possible for them to negotiate and agree upon the payment terms. In reality, although the compensation is regulated, the limit to become an exempt generator is the same, and an additional contract must be entered into between the exempt generator and the basic services supplier. Thus, the Draft Regulations do not provide much of an incentive for use of this new modality. Nevertheless, the Draft Rules will await the publication of their final version in the Official Journal of the Federation. At such point, one may have a clearer view in determining whether the proposed changes actually offer attractive opportunities for participants in the electricity industry and, above all, for end users.The Draft Regulations have already been the subject of several comments. Although such comments are mostly positive, three important questions have been raised. The first revolves around the justification for preventing the exempt generator from assigning a collective distributed generation contract. The second is the question of why total energy sales are not considered as a compensation method for this type of generation. Lastly, some commenters expressed concerns regarding the finances of basic service suppliers under the proposed new scheme.Finally, it is important to mention that this is the last proposed rule to be submitted to the National Regulatory Improvement Commission under the CRE presidency of Commissioner Guillermo García Alcocer. He expressed confidence regarding the Draft Regulations and their benefits at the last public event where he spoke before resigning his post (at the Gulf Coast Power Association annual Mexico conference). However, the reality is that the future of this and other regulations is uncertain, given the new configuration of the CRE.

Companies that enter into services contracts with service providers in Mexico that are individuals or companies should review their internal procedures and contracts to ensure compliance with applicable Mexican legal requirements. Such include verification that that the service provider is:

1. Registered with the Mexican Federal Tax Administration.
2. Has its own physical address.
3. Provides services to numerous clients and has multiple sources of income.
4. Is current in meeting all applicable tax reporting and payment obligations.
5. Registered with the Mexican Social Security Institute (“IMSS”), and the employees it intends to assign to provide the services are also registered with the IMSS.
6. Complies with all applicable reporting and payment obligations to the IMSS, National Housing Fund Institute and the Retirement Fund System (SAR), with accurate information regarding wages paid to its employees.
7. Sufficiently capitalized to meet all its legal obligations.
8. Compliant with procedures pertaining to furnishing badges and vests or uniforms to identify its employees, as well as work tools needed to provide the services

If the contractor is an individual, it is generally advisable to forego providing a work schedule and to allow the vendor to provide services to other clients and have multiple sources of income in order to remain truly independent. The service contract alone is not enough to create or support an independent contractor relationship between the parties. Further, if the services are provided by a company, it is advisable to not give direct orders to the employees assigned by the vendor to avoid creating a subordinate relationship with such employees.Failure to address potential issues may create an employment relationship between the company and its contractor, or the contractor’s employees, based on the fact that the company benefits from the contractor’s or contractor’s employees’ work. In such cases, the contractor or its employees could potentially file labor claims under Mexico’s Federal Labor Law for severance or other employment benefits. Moreover, if the Mexican labor authorities determine that an employment relationship exists, a risk exists that employees could demand retroactive enrollment in the Mexican Social Security Institute, which could lead to exposure for paying IMSS dues, penalties, inflationary adjustments and late fees from the date of hire.Finally, it is essential for all parties to Mexican services agreements to comply with applicable tax obligations arising from such agreements. In principle, a company hiring a service provider must verify that the contractor pays, on a timely basis, all wages, income tax withholding payments, IMSS social security contributions, as well as any applicable Value Added Tax (IVA). Proof of compliance with income tax and IVA obligations may be obtained by submitting a verification application to Mexico’s Federal Tax Administration.Based on the foregoing, it is essential to verify that contractors meet the requirements outlined above prior to entering into a services agreement and to continually verify compliance with all applicable employment, tax and social security obligations for the duration of the agreement.

Mexico has enacted a major reform of the existing Federal Labor Law (the "Reform"), which was published in the Official Journal of the Federation on May 1. The Reform is designed to fit within the framework of the proposed new trade agreement among the United States, Mexico and Canada (USMCA). Although the signatories have not yet ratified the agreement, its proposed terms require Mexico to modify its current labor laws and regulations. The three core aspects of the Reform are: (a) freedom of association and collective bargaining; (b) democracy in union procedures and affairs; and (c) the introduction of an entirely new system for adjudicating labor matters and disputes. Notably, the difficult issue of how to regulate labor subcontracting ("outsourcing") remains pending. Mexico’s Congress may debate this matter in September.Another main topic is the creation of Labor Mediation Centers at the state level, as well as the creation of the Federal Mediation and Labor Registry Center (“Federal Center”). This Federal Center will carry out mediation activities on federal matters and will oversee the registration of unions, collective labor agreements and internal labor rules throughout Mexico.The background facts underlying and preceding the Reform are as follows:Background

• Article 123 of the Political Constitution of the United Mexican States, regarding labor, was amended on February 24, 2017. The amendment to the Constitution provided the basis for the Reform.
• Convention 98 of the International Labor Organization (ILO) was ratified by Mexico in September 2018 and will enter into force in November 2019. Such Convention guarantees union and organizing rights, including freedom of association and collective bargaining rights.
• The USMCA contains Mexico’s commitment to reform the Mexico Federal Labor Law (“Law”), as seen in Annex 23-A, in which Mexico commits to amending its labor laws, specifically regarding collective labor relations.

The main purpose of this article is to describe the core aspects of the Reform, discuss new obligations for companies and cover other topics that will be relevant in the Reform’s implementation and application.Freedom of Union Association and Collective BargainingIn union collective organizing and bargaining matters, various mechanisms are established to guarantee the rights of employees’ freedom of union association and collective bargaining. Pursuant to Article 358 of the Law, the freedom of association right entails the following aspects: (a) no one can be required to be part of or not to be part of a union; (b) the election of the union’s board members must be carried out by each member’s individual, free, direct and secret vote; (c) said board members may not be elected for undetermined periods; and (d) the board members must be accountable to the union and provide complete and detailed rendering of accounts of the management of union dues and finances.Employers are prohibited from any act or omission that violates the right of the employees to decide who should represent them in collective bargaining and perform any act tending to exercise control over the union. Among the actions of employers considered as interference are encouraging the creation of employer-controlled unions or attempting to control a union in any manner.For purposes of requesting the registration of a collective bargaining agreement, unions must obtain a Certificate of Representation, which will be issued by the Federal Center, if the union proves it represents at least 30% of the employees in a workplace. If another union joins the request to obtain the Certificate, the Federal Center is required to issue the Certificate to the union that obtains the largest number of votes. For this purpose, the Reform includes a voting procedure that is supervised by the labor authorities.In instances involving more than one union, the right to negotiate and conclude the collective bargaining agreement will belong to the union that obtains the greatest number of votes. In all cases, the number of employees voting must be at least 30% of the total employees covered by the proposed collective bargaining agreement. Regarding votes to obtain the Certificate of Representation, employees who have been dismissed three months before or after the filing of the application will be considered.In consultation procedures to approve collective agreements and their renewals, employees will have the right to exercise their personal, direct, free and secret vote. The protection of these principles is considered to be an indispensable element underpinning the validity of collective bargaining agreements.Employers are now obligated to provide employees a printed copy of the collective bargaining agreement no later than 15 days following its execution and filing, or any amendment to its terms (and renewals), as well as to post in a visible place in the workplace notices or calls for consultations as to the signing of collective bargaining agreements and union applications for Certificates of Representation.Existing collective bargaining agreements should be reviewed and revised as necessary in accordance with the Reform at least once during the next four years. If such revision is not carried out, the agreement will be terminated. Article 923 of the Law provides that the labor court will admit a notice to strike when there is no collective agreement registered in the Federal Center or, if registered, it has not been reviewed in the last four years.Transitory Article 11 of the Law states that, when reviewing collective agreements, the labor authorities shall verify that the employees are aware of the contract, that the employer provides a printed version of the document and that the agreement has the approval of a majority of the employees, which approval was granted by means of an individual, free, and secret vote. Based on the fact that the Federal Center will begin its registry activities within the next two years, in the next three months the Mexican Department of Labor will issue detailed guidelines on how to verify voting procedures and union consultations. This plan will include the required elements for compliance and will establish the role of the Federal Labor Board in said procedures.To register a collective bargaining agreement or amendment thereof, the Federal Center will be required to verify that its terms were approved by the majority of employees voting through their personal, free and secret choices. If the proposed initial collective bargaining agreement or amendment lacks the majority support of the employees covered by it, the union may exercise its right to strike or to extend the pre-strike period and continue negotiations and submit the proposed agreement to a new vote. It should be underscored that during the legislative debate process, this topic was met with concern by the chambers of commerce, given that union leadership will continue to have the ability to initiate strikes without a vote from employees.Collective bargaining agreements may not contain a separation exclusion clause. Therefore, when an employee exercises his or her right to leave the union or is removed from it, such employee may not be dismissed from the job for the decision to leave the union. The collective bargaining agreement may be terminated by mutual consent of the parties, with the approval of the majority of the employees, as provided by the Federal Labor Law.A union may lose its trade union registration if its leaders, attorneys or legal representatives engage in acts of extortion against employers, including a demand for payments in cash or in kind, in exchange for calling off a strike or a claim of union rights.With the express purpose of protecting freedom of association, the Reform stipulates that employees may organize themselves in any manner they choose, and such choice will not be limited to forming employer or industry unions or any type of union set forth in Article 360 of the Law. Likewise, the employee may state in writing his or her refusal to pay union dues, in which case the employer will not withhold dues from the employee’s wages.Labor AdjudicationsAccording to the Reform, Labor Courts will be responsible for adjudicating labor disputes, so that the current Local and Federal Conciliation and Arbitration Boards will eventually disappear. The Local Courts (state) are required to begin operating within three years, and the Federal Courts within four years. Both courts will focus on processes that comply with the principles of orality, immediacy, continuity, concentration and transparency, for which a much more efficient procedure is expected, where labor courts will provide justice promptly and expeditiously. The current Conciliation and Arbitration Boards will resolve all disputes pending before them and will not transfer pending cases to the new Labor Courts.Parties must participate in a required mediation process, either at the state or federal level, prior to appearing before a Labor Court, and if they reach a settlement, such will constitute a final, unappealable judgment, which will give legal security to the parties who enter into the settlement. If the parties do not reach an agreement during the settlement stage, the Mediation Center will issue a non-settlement certificate, so that the affected party may file a lawsuit before the Labor Court. In some specific cases established in the Law, the mediation phase is not mandatory, such as in cases alleging any type of discrimination, the designation of beneficiaries, an employee’s freedom of association, disputes between unions and disputes contesting a union’s bylaws.The filing of the mediation request will suspend the term (statute of limitations) for filing a claim. Once a non-settlement certificate has been issued, the term will continue to run. Documentation provided by the parties during the mediation process will not be considered as evidence in any administrative or judicial procedure. Likewise, statements from or aspects of the mediation process may not be invoked during a subsequent judicial procedure. Finally, the mediation process must conclude within 45 calendar days.If the mediation process concludes without a settlement, the plaintiff must file a lawsuit before the Labor Court stating his or her case and providing accompanying evidence. The plaintiff must notify the Labor Court of any previous claims involving the same parties and include the non-settlement certificate referenced above and its evidence in the case. The defendant will then have fifteen business days to file its formal answer, which must be accompanied by its evidence.A preliminary hearing will be held at the opening of the trial to simplify the legal process by stipulating uncontested facts, admitting evidence, resolving preliminary appeals, and setting the trial date. At trial, all admitted evidence will be presented and, when concluded, the parties will present their arguments to the Court, which will then issue its decision. The judge must be present in the hearing and is entitled to freely question the parties and all participants. Likewise, the judge can disregard depositions if such are deemed unnecessary or would cause an undue delay. The judge may also limit the number of individuals who are requested to be deposed. The Reform requires these new Labor Courts to implement a digital platform to perform certain notifications electronically, including establishing an e-mailbox for the defendant, through which it will have access to the case file.According to the Reform, a new provision states that in Labor Court trials a general denial of dismissal will not serve to shift the burden of proof in the case. It also provides that an employer’s job offer to an employee does not exempt the employer from the burden of proving its case. This means that employers must meet a complex burden of proof to prevail in labor cases.The Law provides that, as a precautionary measure, the judge may order the employer to refrain from canceling the social security registration with Mexico’s Social Security Institute, in case of dismissal of a woman who is pregnant or is a victim of discrimination or harassment.Other Important Aspects of the ReformFor a printed receipt to be considered as evidence, it must be signed by the employee. The Tax Digital Certificates (CFDI, for its initials in Spanish) may substitute for printed receipts and will be considered as evidence, as long as such are verified in the Tax Administration Service’s electronic portal. For this purpose, the Court will designate a notary public to confirm that the provided links match the information contained in said website.The Reform states that provisions in a separation agreement that contain a waiver of rights may be declared null and void, if the agreement is not ratified by the parties before the competent authorities. Therefore, it continues to be advisable to ratify agreements with the labor authorities.The Reform establishes the obligation to register household employees (previously called domestic employees) in the Mexican Institute of Social Security.Equality between men and women is recognized and the Reform stipulates that work must be carried out under conditions that ensure employees and their dependents a dignified life and health.Failure to deliver the notice of termination to the employee or through the labor authorities, will create the presumption that the dismissal was unjustified, allowing the employer to offer evidence to the contrary to prove that the dismissal was in fact justified.Matters Requiring Immediate ActionThe Reform establishes the obligation for employers, in conjunction with their employees, to implement a protocol to prevent discrimination based on gender and resolve cases of violence, hostile environment and sexual harassment. The Mexican Department of Labor has a protocol for employers that may be useful: Protocol for handling labor cases involving violence and sexual harassment directed to companies in the Republic of Mexico (Protocolo de actuación frente a casos de violencia laboral, hostigamiento y acoso sexual, dirigido a las empresas de la República Mexicana).Individual employment contracts must contain a designation of beneficiaries for the payment of salaries and benefits upon the death of employee or those benefits that apply upon the employee’s death or disappearance. Notwithstanding the designation of beneficiaries in employment contracts, it is advisable to continue the practice of conducting searches to determine if there are other potential beneficiaries.Final CommentsWe recommend that all our clients carefully analyze the Reform and all its implications. They should also continue to monitor the general labor environment and design plans to update their labor agreements and related procedures to comply with the new obligations established by the Reform.Please contact us if you need advice or assistance to implement changes to comply with new obligations set forth in the Reform.

On October 23, 2018, a Promulgation was published in the Official Journal of the Federation, which sets forth several amendments to the General Rules and Criteria applicable to Foreign Trade Matters issued by the Department of Economy, particularly with respect to Annex 2.4.1. (Promulgation of Official Mexican Standards). Pursuant to these amendments 64 new Official Mexican Standards or NOMs, per its Spanish acronym were added. Compliance with these new NOMs may not be exempted by means of the document commonly referred to as a no-marketing letter (“carta de no comercialización” in Spanish) once the products subject to such NOMs enter Mexico. It is imperative for companies that import and were previously able to qualify for an exemption from compliance with the NOMs by means of a so-called no marketing letter, to understand the effects of these amendments. Companies must plan the importation of such products in advance and have the corresponding certifications to demonstrate compliance with the NOMs with respect to the importation of such products, as well as evaluate the cost of such transactions.These limitations will become effective June 3, 2019, in accordance with an amendment to the referenced Promulgation published in the Official Journal of the Federation on February 28, 2019.