December 09, 2021

Compliance With USMCA Labor Requirements: What Businesses Need to Know

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For many businesses, compliance with labor requirements of the United States-Mexico-Canada Agreement (USMCA) may have seemed like an afterthought until recently. However, earlier this year, United States Trade Representative (USTR) started investigations of two automotive industry facilities in Mexico pursuant to complaints about non-compliance with USMCA labor obligations.

The Biden Administration has made it clear that it intends to use this mechanism as part of its trade policy and commitment to workers' rights. Companies across all industries involved in cross-border transactions under USMCA should be aware of these requirements and how to remain compliant.

The USMCA entered into force on July 1, 2020, replacing the North America Free Trade Agreement (NAFTA). One of the areas in which both agreements diverge is labor. Unlike NAFTA, the USMCA includes comprehensive labor provisions and specialized enforcement mechanisms that allow the imposition of company-specific sanctions in case of non-compliance.

Companies in the United States and Mexico should be aware of the USMCA labor requirements and the importance of complying with those requirements to prevent disruptions in their cross-border operations.

The USMCA contains two new provisions affecting labor, Annex 23-A (worker representation in collective bargaining in Mexico) and Annex 31-A (rapid response labor mechanism).

Although Annex 23-A applies to Mexican companies only, its non-compliance could result in an investigation under Annex 31-A that eventually could impact U.S. companies that rely on the supply of goods and services from Mexico.

USMCA Annex 23-A

Under Annex 23-A, Mexico committed to amending its labor legislation to warrant workers the right of free association and collective bargaining. For example, Mexican legislation must require:

  • Verification by an independent entity "that collective bargaining agreements meet legal requirements related to worker support in order for them to be registered and take legal effect," and
  • Registration of an initial collective bargaining agreement, and adequate verification by an independent entity that workers were aware of the content of the agreement's content before the vote, and that workers supported it "through a personal, free, and secret vote."

Annex 23-A also provides that existing collective bargaining agreements must be revised at least once during the four years after the amendments to Mexico's legislation enter into force.

On May 1, 2019, Mexico amended the Labor Law to, among other things, incorporate the obligations outlined in Annex 23-A, including a procedure to certify collective bargaining agreements within four years. That is, no later than April 30, 2023.

USMCA Annex 31-A also includes a new dispute settlement mechanism to address allegations that workers at a covered facility "are being denied the right of free association and collective bargaining" ("Denial of Rights"). In the case of Mexico, it would cover an alleged violation of Mexico's labor law as amended to comply with Annex 23-A.

The mechanism might be activated by a Party with "a good faith basis to believe" that a Denial of Rights is occurring in a covered facility. In that case, the complaining Party requests the other Party to investigate if a Denial of Rights exists. If the allegation is confirmed, the Parties must agree on a "course of remediation." Upon submitting a request to investigate an allegation for Denial of Rights, the complaining Party "can delay final settlement of customs accounts related to entries of goods from the facility under investigation."

If the Parties do not agree on the existence of a Denial of Rights or a remediation plan, the complaining Party can request a panel to conduct verification and make a determination.

If a panel determines that there has been a Denial of Rights, the complaining Party may impose remedies which may include (i) "suspension of preferential treatment for goods manufactured at the facility investigated" and (ii) "the imposition of penalties on goods manufactured at or services provided."

In 2021, the USTR activated the mechanism to request the Mexican Government investigate Denial of Rights allegations in two facilities. In both cases, the Parties and the companies agreed on remediation plans, and no panel was requested. However, in one case, the USTR directed the Department of Treasury to suspend the liquidation of entries of goods imported from the facility under investigation. Even though the suspension was eventually lifted, the uncertainty it can cause can be disruptive to the supply chain.

Final remarks

  • Due to the integration of industries in Mexico and the United States, the lack of compliance with the USMCA Annex 23-A and Mexico's Labor Law could negatively impact the supply chains between Mexican and U.S. companies if a Rapid Response Labor Mechanism is activated.
  • An investigation under USMCA Annex 31-A can be requested anytime, regardless of the four-year period provided in Mexico's Labor Law to certify collective bargaining agreements.
  • U.S. companies are advised to confirm that their suppliers in Mexico comply with USMCA Annex 23-A to avoid disruptions in their supply chains due to penalties or sanctions imposed on suppliers as a result of a USMCA labor investigation.
  • Mexican companies are advised to certify their collective bargaining agreements pursuant to Mexico's Labor Law within the four-year period.

Clark Hill's International Trade Group advises companies in the United States and Mexico on compliance with the requirements set out in the USMCA Annex 23-A and Mexico's Labor Law.

If you have any questions regarding this alert, please contact Mark Ludwikowski ([email protected]; 202-640-6680); Aristeo Lopez ([email protected]; 202 552-2366); Kevin Williams ([email protected]; 312-985-5907); William Sjoberg ([email protected]; 202-772-0924); or another member of Clark Hill's International Trade Business Unit.

The views and opinions expressed in the article represent the view of the author and not necessarily the official view of Clark Hill PLC. Nothing in this article constitutes professional legal advice nor is intended to be a substitute for professional legal advice. 

ALM expressly disclaims any express or implied warranty regarding the OnPractice Content, including any implied warranty that the OnPractice Content is accurate, has been corrected or is otherwise free from errors.

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