A Path for Better Understanding of Mexican Labor RegulationBy Monica Vera Ibañez | Wed, 02/24/2021 - 13:06
In my previous article, when I talked in general about the complexity of doing business in Mexico, I briefly touched on the issue of compliance with labor regulations. Because it is an extremely sensitive issue that has the potential to impact not only the productivity and competitiveness of companies but also their working climate, I want to devote more attention to it.
In the Global Business Complexity Index (GBCI) published by TMF Group in mid-2020, Mexico ranked 13th, where the first jurisdiction in the index is the most complex. When we specifically approach the details of labor regulations, we find that Mexico improves its position. Yes! Good news! In this respect, Mexico ranks 22nd while Belgium ranks first on the list. I can already hear your sighs of relief knowing that you are not thinking about doing business in Belgium but in Mexico. The not-so-bright side is that it still has 48 positions to go to become the least complex jurisdiction.
The fundamental principle behind this perception of complexity is the protective nature of Mexican labor law toward the employee, which in turn is based on constitutionally granted rights, such as the right to access socially useful work, limited working hours and a decent wage.
How does this reflect in the life cycle of a working relationship between your employee and you? Let's take a look.
To be able to employ, you must register your company with the relevant authorities, in this case the Mexican Institute of Social Security (IMSS), Institute of the National Housing Fund for Workers (INFONAVIT), Institute for the National Fund for Employee Consumption (INFONACOT) and the Treasury agency of each state in which your company operates, all procedures that must be carried out by a legal representative with the respective powers of attorney.
Now that you can proceed with hiring, you should decide on the type of salary and frequency of payment. Agreed wages may be daily, weekly or monthly while the frequency of payment may vary between weekly and fortnightly, both considered in the Labor Law, or the 14th and monthly, adopted as use and custom by some companies based on ambiguities of the law.
Conditions of employment and wages are accompanied by benefits granted by law, among which we can highlight the Christmas bonus, traditionally known as aguinaldo and consisting of at least 15 days of salary and mandatory pay before Dec. 20 each year – hence, the Christmas reference – paid vacations, which start with a minimum of six continuous days and increase as the worker's seniority increases in accordance with the Law, and the vacation premium, which is an additional payment of 25 percent of the worker's salary for each accredited vacation day. You could grant these benefits in greater amounts if you deem it relevant and competitive, both for the labor market and for your own company.
When I arrived in Mexico some time ago, the comment made by my non-Mexican colleagues was that I should be prepared for many holidays. The surprise is that, stipulated by law, there are only seven holidays, with some additions for special circumstances such as presidential transitions or electoral calendars. Other than that, companies grant holidays as part of their own policies and to get closer to the significant cultural aspects of the country, such as Easter, Mother's Day, and Day of the Dead, among others that are customary.
The law has incorporated concepts that promote the growth and well-being of the family, such as maternity leave and paternity leave, both with different conditions but allowing workers the opportunity to be present and dedicated to the arrival of a new child, whether conceived by the worker or adopted.
One of the most controversial benefits that Mexican law provides to workers is the PTU, or Participation of Workers in Profits from the second year of operation onward. The worker is entitled to participate in 10% of the profits reported by your company on the annual tax return, calculating individual participation based on wages received and days worked. Given the burden this benefit places on employers, companies have resorted to operating models where the perception of profit is separated from the creation of it, using outsourcing or in-sourcing schemes. In the coming weeks, the discussion will likely resume in Congress to pass a law to regulate both outsourcing and in-sourcing activities, forcing changes to the latter models or, in some cases, getting rid of them. I'll elaborate more about that in coming articles.
As in many other jurisdictions, payroll is subject to withholding income tax. The difference in Mexico is that you, as the employer, are required to reflect payroll payment and corresponding withholding through the authority's electronic system with the digital fiscal receipt (CFDI). For new employers in Mexico, whose payroll volumes are high, it is highly recommended to integrate their payroll systems with certified suppliers in order to issue CFDIs. Although a critical requirement, it is not an insurmountable obstacle. There are suppliers and systems that are already prepared to make this process transparent and fluid for you, if you get organized in a timely fashion. You could also outsource the calculation and processing of your payroll.
In addition to federal tax, a percentage of payroll taxes must be paid depending on the federal state in which the employment relationship occurs, which will be entirely borne by your company.
There are certain contributions shared by the employer and employee, such as social security, pension insurance for termination and retirement and the contribution to INFONAVIT. These contributions have minimums and maximums determined by reference measures that you must be aware of, like the minimum wage, the Unit of Measurement and Update (UMA) and the INFONAVIT Mixed Unit.
As an employer, you are also obligated to report payroll details to different institutions oriented to the welfare of the worker. From registration IDs, payroll values, deductions, contributions made by your company and the worker to deposit bank accounts and tax receipts issued, all these elements are primary data that will be required to meet the reporting requirements of different institutions. Noncompliance with these requirements could incur penalties.
While the employees are entitled to work by law, an employer in Mexico can terminate the employment relationship without prior notification or justification. To mitigate this, the legislation mandates payment of indemnity for the worker whose employment ceases under these conditions. Like the PTU, termination of work is a controversial aspect in Mexico because there are always very different opinions regarding where the worker's rights end and where the employer's rights begin in terms of justified termination and, therefore, the right to indemnity.
I am sure that, after this walk through the life cycle of the working relationship in Mexico, you will be overwhelmed and think that it will be very difficult to keep the focus on your value proposition, market dynamics, productivity and competitiveness if you require so much attention dedicated to complying with the rules and requirements of the Mexican labor market. The key, once again, is to have local knowledge at hand to guide you through this complex web of rules and customs, giving you the time you need to think about how to achieve success with your business in Mexico.