Outsourcing in Guatemala: What Your Company Can (& Can't) Do
Outsourcing is a business practice that arises from the companies’ need to reduce costs in areas that, while not part of their core business, are nevertheless essential to their operations. It involves the subcontracting of specific services to ensure that a company’s core activities are not affected by inefficient personnel management or by an overload of labor and administrative obligations.
In Guatemala, many companies have adopted this strategy to achieve their goals; however, this practice is not yet regulated on our national legislation. This article will specifically address labor outsourcing. To understand the risks and benefits associated with entering into an outsourcing agreement, it is essential to know the background of this practice, as well as the applicable laws, and the measures that can be taken to mitigate the risks it entails.
The outsourcing contract began to develop in the 1970s in the United States as a response to companies’ needs to adapt to globalization and maintain their competitiveness. It was in the 1980s that it became popular when companies began to develop mechanical work models, considering that the most efficient way to produce was for individuals to perform the same task repeatedly to achieve better results and greater efficiency. Through this labor management model, industries found a way to focus on hiring labor related to their core business, while still addressing those activities that, although not essential, were nevertheless necessary.
As mentioned, the definition of outsourcing is not included in Guatemalan legislation, and its implementation has been developed over time. In general terms, it may be defined as a commercial contract through which one company engages another to hire personnel to provide specialized services that are not part of its core business. These services are provided independently and on a long-term basis, using the outsourcing company’s own means and tools, allowing the contracting company to focus on its core business by not being responsible for secondary activities.
Although outsourcing is a commercial strategy, it is closely linked to labor law, making it necessary to distinguish it from other models within this legal field, such as labor intermediation.
Article 5 of the Labor Code regulates the concept of the intermediary, defined as a person who, in their own name, hires the services of one or more employees to perform work for the benefit of an employer. The employer is jointly liable with the intermediary for the latter’s actions towards the employees, in terms of the legal effects arising from labor legislation. In other words, the intermediary’s employees maintain a subordinate relationship with the contracting company, resulting in both the intermediary and the contracting company being jointly liable as employers.
In an outsourcing contract, there should be no subordination between the employees of the service provider (outsourcing company) and the contracting company. The client company is only entitled to demand results, which means that the arrangement does not fall within the intermediary concept established in the Labor Code. Therefore, the outsourcing company is the employer and the sole party responsible for any labor claims, as it directly hires the employees using their own equipment and capital.
It is also important to consider the last paragraph of Article 81 of the Labor Code, which states: "If one or more companies hire employees to provide services to another company, the latter shall be responsible to the affected employees, in accordance with the law.” In other words, even though the outsourcing company is the employer, if it fails to comply with its labor obligations, the contracting company may be held liable to those employees. Although the Labor Code does not explicitly establish joint liability between both companies, this provision entails a potential risk for the contracting company, as it could be deemed co-employer together with the outsourcing company.
Given that Guatemala lacks specific legislation on outsourcing, and considering the provisions of the Labor Code, the provision of services through outsourcing is generally governed by a commercial services agreement. Under this contract, the outsourcing company undertakes to provide certain services to the contracting company, which requires the performance of specific activities by specialized personnel. The contract must clearly identify the outsourcing company as the employer of the employees assigned to render the service, in order to avoid creating a relationship that could be interpreted as labor intermediation. Furthermore, the corporate purpose of the outsourcing company should expressly include the provision of personnel outsourcing services.
Beyond these considerations, several preventive measures should be adopted when entering into an outsourcing agreement, including the following:
- The outsourcing contract must clearly define the scope of the activities delegated to the outsourcing company, specifying the expected results, as well as the obligations, and rights of each party.
- The outsourcing company must remain entirely independent from the contracting company to avoid the potential recognition of an economic unit in the event of a labor claim.
- The outsourcing company must be expressly obligated to hire qualified employees to perform the delegated activities and to comply with all employer obligations arising from a labor relationship, including salary payments, execution of employment contracts, social security contributions, payment receipts, and all other employer duties imposed under Guatemalan law. It must also assume full responsibility for any labor claims that may arise, holding the contracting company harmless.
- The contracting company, in addition to fulfilling its contractual obligations, must refrain from performing employer-related activities, such as participating in recruitment processes, paying salaries or other compensation from its own accounts, assigning tasks or responsibilities to the outsourcing company’s employees, imposing disciplinary measures, terminating personnel, or engaging in any act implying subordination or an explicit or implicit acknowledgment of a labor relationship with the outsourcing company’s employees.
Likewise, outsourcing facilitates improvements in customer service and reduces response times for meeting requirements, thereby ensuring greater customer satisfaction. It also provides easier access to specialized expertise in different fields, enabling the execution of complex projects that the company may require, often with access to advanced technologies that the contracting company might not otherwise be able to afford on its own.
While outsourcing offers clear advantages in terms of business efficiency, it also entails significant risks due to the lack of specific regulations. Among these risks is the possibility that the arrangement may be deemed labor intermediation or co-employment, which could result in the contracting company being held liable for the employer obligations corresponding to the employees hired by the outsourcing company. There is also a risk that process outsourcing may lead to the disclosure of trade secrets, resulting in a potential loss of control over procedures and confidential information.
Despite these concerns, an outsourcing contract can provide numerous benefits in both business and labor contexts. Therefore, it is crucial to implement it properly to avoid significant risks, especially in the labor sphere, that could compromise business operations.
The ARIAS' team is composed of professionals with extensive experience in labor advisory services for large, medium, and small companies, and they will be pleased to assist you with the proper planning and legal analysis required to implement outsourcing models that lead to greater business efficiency.
The information provided by ARIAS® is intended solely for informational purposes. It does not constitute legal advice and is not intended to create, nor does it constitute, an attorney-client relationship. Readers should not act upon this information without seeking professional advice from qualified experts in the field.