RRLM: an effective mechanism for compliance with collective labor standards
ESG criteria (environmental, social, and corporate governance) are increasingly the basis on which investment decisions are made worldwide. Although these criteria are a tool for assessing the sustainability of companies, they are not incorporated into Mexican legislation and, therefore, are not mandatory.
Some countries and trade blocs are discussing alternatives for their enforcement, both within their own jurisdictions and in those of the countries with which they maintain commercial relations. Europe, for example, is considering imposing tariffs on the importation of goods manufactured in countries that do not prioritize climate change, a measure that must be carefully analyzed in order to avoid violating any international treaty in force. Social Responsibility Standards under the USMCA Complying with ESG criteria entails achieving an effective balance between the generation of jobs and income and the protection of workers’ fundamental rights, as well as certain labor standards. However, the complexity of global supply chains makes it enormously difficult to validate labor relations in each jurisdiction. Nevertheless, the United States of America and Mexico took a significant step when they included in Annex 31-A of the Agreement between Mexico, the United States, and Canada (USMCA) a labor mechanism designed to enforce collective labor standards set forth in Chapter 23 of that instrument, as well as certain fundamental labor rights under specific circumstances. The so-called Facility-Specific Rapid Response Labor Mechanism (RRLM) seeks to ensure that companies with a physical presence in Mexico guarantee their workers’ right to Freedom of Association and Collective Bargaining at “covered facilities.” The companies that may be affected by the RRLM are those that manufacture goods or provide services at “covered facilities” within sectors deemed “priority” sectors. Failure to comply with such standards would result in the United States adopting, after following an expedited arbitration procedure, measures to restrict or discourage Mexican exports from covered facilities or from other facilities controlled by the same company. General Aspects of the RRLM under the USMCA Any person may file a complaint before the United States Department of Labor and the Office of the United States Trade Representative. If a denial of labor rights is deemed to exist, that country’s trade representative may request the activation of the RRLM. The mere presumption that a denial of rights exists is sufficient to activate the RRLM, thereby shifting to Mexico the burden of proving otherwise. The RRLM is designed to be resolved between Mexico and the United States. However, Mexico will have to work with the company involved and its union in order to respond in a firm and timely manner. Its response may consist of denying or accepting the existence of a denial of rights and proposing and implementing a remedial measure. Any dispute in this regard shall be brought before an arbitration panel, whose determination will serve as the basis for imposing sanctions. Potential Sanctions and Restrictions Sanctions or restrictions may affect only the company involved and not the productive sector. The United States may, as a precautionary measure, delay the settlement of the corresponding customs account for the importation of the goods. That nation may also impose fines on the company’s merchandise at its point of entry into the United States, the amount and conditions of which shall be determined in accordance with local customs provisions. Alternatively, it may also deny the application of preferential tariff treatment under the USMCA, with the Most Favored Nation Tariff under the World Trade Organization becoming applicable. If a company is found responsible for a denial of rights for a second time, the United States may impose fines again, as well as deny preferential tariff treatment with respect to goods manufactured at other covered facilities. If a company is found responsible for a third time, that country may block the importation of the goods into its territory. The RRLM has begun to operate and has demonstrated results. For example, two companies with operations in Mexico have been the subject of RRLM activation requests, as a result of which they implemented remedial measures to ensure their compliance.5 One of them was accused of allowing “irregularities” during the legitimization procedure of its collective bargaining agreement—an essential mechanism for complying with the Federal Labor Law and with the USMCA provisions related to Freedom of Association and Collective Bargaining—while the other was accused of preventing its workers from organizing into another union. Conclusions ESG criteria, which are used to assess the sustainability of companies, are gaining greater importance in the business arena worldwide. However, their development and use by investors, financial institutions, and the business community in general are growing faster than the legal framework of the countries that require their compliance. In this context, the United States has found in the RRLM an effective instrument to encourage Mexican companies to guarantee compliance with certain collective labor standards under the USMCA. By including in the USMCA both the RRLM and the associated sanctions, the parties eliminated the possibility that either of them could argue that the restriction on exports from covered facilities constituted a violation of other international commercial agreements. While it appears unlikely that other countries will accept this type of mechanism in their upcoming free trade agreements, this could change in the immediate future as ESG criteria become an even stronger and more widespread trend. We believe that, in this context, several countries and trade blocs will attempt to influence compliance with ESG criteria by imposing sanctions and restrictions on commercial exchange. ESG labor standards must already be complied with in Mexico thanks to market-based and legal mechanisms. To reduce risks, companies must clearly understand the applicable rules and assess their compliance. For this reason, it will be essential that they have legal counsel to help them clearly understand the scope of ESG criteria in the labor field and to avoid non-compliance with international provisions, with the consequent negative impact on their operations and financial results. For additional information on the subject of this note, please contact our experts: Luis Miguel Jiménez, Partner: +52 (55) 5258-1058 | lmjimenez@vwys.com.mx Rodolfo Trampe, Partner: +52 (55) 5258-1054 | rtrampe@vwys.com.mx
