R egulation of Essential Activities in Mexico in the COVID-19 Environment

Creel, Garcia-Cuellar, Aiza y Enríquez, S.C.®

Few pieces of regulation come to mind that have drawn more hours of interpretation by lawyers, managers and businessmen over the brief span of three weeks. The “Order to establish the extraordinary measures to respond the sanitary emergency caused by the SARS-CoV2 virus” issued by the Ministry of Health on March 31, 2020 (the “March 31 Order”) is one of those rare cases.

One of the main purposes of the March 31 Order is to ensure that activities essential for the Mexican economy may continue during the period envisioned for controlling the COVID-19 pandemic while prioritizing the health of workers. However, the conceptual and obscure drafting of the March 31 Order has compromised this objective. Rather, these shortcomings have forced companies throughout Mexico to struggle with its gaps and try to find a coherent reading of its provisions that is consistent with economic reality.

The period of suspension of non-essential activities as contemplated in the March 31 Order was originally set to end on April 30, 2020; by an amendment published on April 21, 2020, the period has been further extended through May 30, 2020.

The March 31 Order does not clearly make the essential activity treatment extensive to the supply chain of goods and services that needs to flow in order to ensure that the core essential activity continues operating undisputedly. The March 31 Order contains a limited and vague reference to the supply chain concept with respect to the health sector, and with respect to some segments of the transportation industry -as per a clarification order issued on April 8, 2020- . The Mach 31 Order is silent, however, on a supply chain approach for other essential activities.

The March 31 Order does not contemplate a formal process for obtaining confirmation of a company’s essential status. Therefore, management should take a pro-active approach to develop a self-assessment of its essential activity status. To that end, a file should be kept with evidence of the supply relationship with customers at the core of the essential activity and should be available for when an inspection visit takes place. An important consideration when performing the self-assessment will be the extent to which suspension of the company’s activities would contribute to the shortage of supplies and disruption to the customer’s essential activity.

Precisely because of the absence of clear rules in the March 31 Order with respect to the essential activity treatment of supply chains, having a self-assessment file in place will not guarantee a favorable decision by the inspectors but will at least ensure that the relevant elements are available for review. Because compliance inspections of the March 31 Order have been delegated to local health agencies at each of the 32 States of Mexico and to Federal Government offices at the States (i.e., Department of Labor) enforcement criteria have diverged considerably. While inspectors at some States will conduct a reasoned analysis of a company’s self-assessment, the analysis in other States will be summary and narrow oftentimes leading to shutdown warnings or the sealing-off of access points to the facility.

An important shortcoming of the March 31 Order is that it fails to harmonize its essential activity classification with the essential critical infrastructure framework in the United States, with ensuing disruptions of cross-border NAFTA supply chains. A criterion that has been applied by Mexican authorities when determining the essential nature of manufacturing activities is whether the goods manufactured are sold into the Mexican market: according to this interpretation only goods supplied domestically into Mexico will be considered essential. Manufacturing facilities that export all or most of their production for integration into essential industries in the United States -including paradoxically the medical industry- are faced with the prospect of having to shut down because of failing to meet the criterion.

The extended suspension period for non-essential activities through May 30, 2020 will bring about additional challenges in the application of the March 31 Order. Labor issues are bound to become more acute because employers have not been afforded relief on payment of wages to a workforce that may be idle as a result of a misapplied essential activity criterion. The ramp up of contagion of COVID-19 in Mexico will also pose challenges to essential industries that remain operational.

*This article or news brief does not constitute legal advice and is protected by copyright.