EXECUTIVE SUMMARY
Since entry into force of the U.S.-Mexico-Canada Agreement (“USMCA”) in July 2020, the United States has brought two known complaints against Mexico under the Agreement’s Facility-Specific Rapid Response Labor Mechanism (“RRM”), concerning allegations that workers at two different factories in Mexico were being denied their fundamental right to organize.
The Office of the U.S. Trade Representative (“USTR”) submitted these complaints to Mexico in May and June 2021, respectively, and requested that Mexico review the allegations to evaluate their legitimacy. This process entailed significant interaction among U.S. and Mexican government officials as well as the companies that were the subject of the complaints.
Ultimately, both complaints were resolved through negotiation. The United States did not resort to a USMCA panel or impose punitive measures against the factories in question, both of which are potential options under the USMCA when a complaint under the RRM cannot be resolved between USMCA Parties.
Because both complaints were successfully resolved in the early stages, neither case materially tested the mechanism, though additional complaints are likely to materialize in the future as Mexico continues to implement the labor reforms required under the Agreement. Future cases may provide greater insight into the functioning of mechanism with respect to the establishment of panels or the imposition of penalties on individual facilities.
As outlined in our prior alert, the USMCA contains labor-related obligations and enforcement mechanisms never before seen in a free trade agreement (“FTA”). For instance, the USMCA requires Mexico to pass legislation recognizing the right of workers to organize and engage in collective bargaining, and through the RRM allows one USMCA Party to petition another to investigate complaints that specific facilities are violating labor rights.
The RRM applies to a list of certain “priority” sectors that is reviewed annually. The list of priority sectors currently focuses primarily on automotive and aerospace manufacturing, industrial food operations, electronics, call centers, and raw material mining and production. Under this government-to-government enforcement mechanism, a complaining USMCA Party may request that the responding USMCA Party review allegations that labor rights are being denied at a particular facility in the responding Party’s territory. Where the responding Party declines to conduct a review, or where the Parties disagree on the result of a review or on a course of remediation, the complaining Party may request the establishment of a panel to investigate the matter. If the responding party agrees, that panel may conduct on-site inspections of factories and facilities subject to the complaint. If a verification visit is not allowed, the panel may take that fact into consideration in determining whether worker rights at that facility are being denied. Where the panel makes a determination that the facility in question is failing to respect labor rights, that facility may be subject to punitive measures by the complaining Party, including the denial of preferential tariff rates and other penalties on goods or services provided by the facility. In some cases, other facilities owned controlled by the same person or entity that owns the facility where a violation has been found may also be subject to penalties.
While complaints under the RRM can be initiated only by governments, the United States has established a petition mechanism through which private parties can ask the U.S. government to initiate a complaint under the RRM. In addition, the United States has also set up a confidential hotline for private parties to provide information relevant to the initiation of such complaints. Of the two complaints initiated thus far under the RRM by the United States, the first stemmed from information provided via the confidential hotline, while the second was the result of a petition filed by the AFL-CIO and others.
In addition to establishing the RRM, the USMCA required Mexico to implement labor-related reforms in its domestic law, including new measures to (1) allow workers to organize and engage in collective bargaining; (2) prohibit employer interference in union activities; (3) provide for personal, free, and secret votes by workers for union elections and agreements; and (4) establish impartial bodies to register union elections and resolve disputes over collective bargaining agreements. To implement these obligations, Mexico passed a labor reform bill in 2019. This law aimed at enhancing Mexican worker rights by ensuring that workers can vote for union representatives by secret ballot, establishing the right to join unions of choice, and creating the Federal Center for Labor Conciliation and Registration, an entity that is responsible for providing conciliation services in labor conflicts, verification of democratic union governance, and registration of Collective Bargaining Agreements (“CBAs”). These reforms also replaced the prior domestic system for the resolution of labor disputes, which going forward will be handled in new Federal and State level labor courts.
WHAT TO WATCH
- Through the Coordination Council for the Implementation of the Labor Justice System Reform, Mexico imposed staggered deadlines for each of its 32 states to comply with the new labor law. These deadlines are set out in three phases. As of today, 21 states have implemented the labor reform with the remaining 11—which belong to the third implementation phase—expected to complete implementation by 2022. Of the 11 states that have yet to implement the labor law and create new labor courts, five are border states that include important manufacturing hubs for American companies.
- With its 2022 budget, the Mexican government is sending mixed signals on labor reform implementation. The budget reduces funding of the judicial system, the key institution in charge of creating the new labor courts. The budget was approved by Congress and could have a negative impact on the implementation of the labor reform in the 11 states where implementation is still pending and new labor courts need to be created and staffed.
- Ratifications of CBAs are proceeding slowly. As required by the new law, all CBAs need to be legitimized through personal, free, direct, and secret-ballot voting by May 2023. At present, 3,585[1] have gone through the ratification process, however, since there is no official number of existing CBA’s in Mexico, it is expected that an important number contracts will not go through the process and therefore be canceled.
- Under the new law, employers in Mexico must ensure the protection of workers’ rights, including the right to freedom of association and the right to collective bargaining. While employers cannot interfere in unions’ operations, they can report any irregularity to the labor authorities in order to minimize the risk that the employer’s facility could be subject to punitive measures.
- Employers also should maintain a close relationship with their unions and workers to better understand areas for potential improvement, as well as opportunities for collaboration in complying with the new provisions of the labor law.
- In early 2022, two important labor union votes tested Mexico’s new union voting system:
- For the first time in more than 80 years, over 75,000 workers from the Mexican state oil company PEMEX were able to vote for a union leader under a free and secret voting system. With more than 45,000 votes cast, Pemex employees elected as their new Union Secretary General a powerful union veteran who had served as treasurer of the union for 25 years. Despite the chance to elect new leaders, PEMEX employees opted for continuity, notwithstanding the criticisms that union leadership has received over the years.
- Eight months after the initiation of the first RRM complaint under USMCA, and after a previous election needed to be re-run due to irregularities, a recently created union overwhelmingly won a majority of votes in an automotive manufacturing facility in central Mexico. The vote was supervised by the Mexican authorities, the International Labor Organization, and other international observers.
Both election processes went smoothly, and employees were able to cast their votes freely for the first time. However, companies should take care to ensure that any unions claiming to be new and independent are, in fact, as advertised. Some reports indicate that old-school union bosses are attempting to recast their influence via new unions in a new, more favorable light.
WHAT TO EXPECT
- Labor disputes initiated under Mexico’s prior system (i.e., before implementation of the new law) are expected to remain under the old system until they are completed. As a result, the old local boards in each state will likely continue to function after the reform is implemented, as only new disputes will go to the new labor courts.
- The slow pace of CBA legitimization could provide a basis for disputes and related enforcement actions under the RRM.
- The strong focus placed by the Biden Administration on the enforcement of labor-related provisions in trade agreements may encourage private groups or unions in the United States to make use of the RRM petition process.
- In Mexico’s labor reform process, 2022 is likely to be a critical year: the remaining 11 states will move toward implementation of labor reforms; pressure will mount to legitimize all CBAs in advance of the May 2023 deadline; and in the run-up to the November 2022 mid-term elections, the United States will likely continue its strong enforcement posture as part of the Biden administration’s “worker-centric trade policy.”
- Companies in Mexico that have yet to undertake their CBA legitimization process should anticipate that the process may generate increased competition among unions, particularly as unions that portray themselves as “independent” attempt to unseat more traditional incumbent unions.