Establishing a business in Mexico can be an exciting and lucrative project, considering its huge, well-connected country with a low cost of living and a burgeoning economy. However, understanding labor laws in Mexico and the Mexican payroll system can be a daunting task, especially for foreign businesses looking to expand their operations in this country. Hiring local staff and managing their payroll setup can be a complex process, often plagued by long waiting times and delays that hinder expansion. This blog aims to provide a comprehensive overview of Mexican labor law reforms; the rights of workers, working hours, benefits, and the intricacies of payroll regulations in Mexico.
An Overview of Mexican Labor Laws
Mexican labor laws are enshrined in the Federal Labor Law, which outlines the rights and obligations of employers and employees. In addition, one of the key aspects of Mexican labor law is the requirement for employers to provide their employees with a well-drafted contract. This contract must detail the terms of employment, including the nature of the work, contract duration, salary, and workspace.
Mexico labor law compliance covers various critical areas, according to Article 123 of the Mexican Constitution, the use of labor of minors under fifteen years of age is prohibited. Children older than fifteen years old and less than sixteen shall have a maximum working day of six hours. Likewise, the minimum wage shall be established in a general way or according to the occupation. The general minimum wage shall govern over the different economic zones. Professional wages shall apply on specific industries, professions, trades or special works. In addition, in cases where a company terminates an employee’s contract without cause, there is a Mexican labor law termination; they must provide a severance pay (finiquito) equal to three months of the employee’s salary.
Rights of Workers in Mexico
There are several benefits for Employees in Mexico, including the right to a safe and healthy working environment, as well as social security provided through registration with the Mexican Institute for Social Security (IMSS). This ensures access to healthcare and guarantees income during sickness or maternity. Additionally, workers can create a retirement fund with employer support, ensuring financial security in their later years.
As part of labor rights in Mexico, employees have the essential right to join trade unions. These unions play a crucial role in negotiating collective bargaining agreements that establish terms and conditions of employment, covering various aspects such as wages, working hours, and health and safety standards.
In addition, Maternity leave includes 6 weeks of paid leave before and after birth, while adoption allows for 6 weeks of leave following the child’s placement.
Moreover, for employees with 15 years or more of work experience, there is a Seniority Premium provided upon termination or voluntary resignation, including pending wages, bonuses, unused holidays, a Christmas bonus known as “Aguinaldo”, and severance pay (equivalent to 3 months’ salary).
Furthermore, the Social Security System ensures that all workers are registered with IMSS, and the Retirement Savings System (SAR) provides life and disability insurance. The Workers’ Housing Fund (INFONAVIT) allows employees to participate in housing programs and access mortgage credits, further securing their financial well-being.
Detail overview of Mexico’s payroll
Payrolls are documents that detail an employee’s salary, as well as the components they are receiving, such as compensations, social security, or taxes being deducted from the base salary. The following information is presented in most types of payrolls:
- Incomes: Regardless of the different types of payrolls, the perceptions, or incomes that the employee receives for the work performed during the payment period are always reflected in detail. Additionally, overtime, vacation bonuses, and subsidies are shown in case of any additional expenses.
- Deductions: Here, the amount of money deducted from the total earnings is simply detailed. Some of the most common deductions are as follows: Worker-employer contributions (IMSS), Income Tax (ISR), Value Added Tax (IVA), Housing Fund (Infonavit), Afore (retirement fund).
- Period: All types of payrolls exist to reflect the payment period; otherwise, the document is completely invalidated. This could be bi-weekly (the most common payroll type in Mexico, paid on the 15th and 30th of each month, subject to change if a non-working day falls on those dates), bi-monthly (payment made every exact 2 weeks), monthly (on the 1st-5th of the month, the stipulated salary is received), quarterly or semi-annually (common payroll types for contractors, construction workers, etc. Payments are received every 3 or 6 months).
- Type of Contract: This is the type of contract the worker has signed. It outlines the services provided and the regulatory conditions between both parties (employer and employee). Common types; Work contract, Fixed-term contract, Seasonal contract, Indefinite contract, Probationary period, Initial training.
Types of Mexican Payrolls and Strategies
Talking about the Payroll taxes in Mexico, are the four following:
- Salaries and Remunerations: This payroll is widely prevalent across the country and is commonly chosen by most companies. Those who receive Salaries and Remunerations as per legal regulations are entitled to various benefits, including Christmas bonuses, holiday premiums, profit sharing (PTU), social security, Infonavit, Afore payments, vacation benefits, and severance payments.
- Salaries Assimilated to Wages: Workers are categorized as service providers, leading to reduced deductions. While this results in a higher salary, it may also lead to lower withholdings and benefits, without the legal requirement to offer mandated benefits.
- Professionals Fees: This payroll focuses on freelancers and independent service providers. Under this arrangement, professionals receive an all-inclusive payment, covering taxes, and handle their own tax filings. This option grants higher gross pay but lacks contractual protection and certain benefits. Workers are also responsible for reporting earnings to authorities and providing invoices for verification.
- Salaries and Remunerations Mixed: This payroll combines the Salaries and Remunerations and Salaries Assimilated to Wages. Salaries and Remunerations ensure legal benefits like bonuses, vacations, and more, while Salaries Assimilated to Wages raise the base salary with lower taxes. In this approach, the company and employee agree on the income split. The company often suggests a tax-efficient strategy for a higher net salary. In Mexico, an effective split is 25% Salaries and Remunerations, 75% Salaries Assimilated to Wages.
Implementing an effective payroll strategy involves several key considerations:
- Automation and Technology: Use payroll software to streamline calculations, tax deductions, and payment processing, reducing errors and saving time.
- Clear Compensation Structure: Establish a transparent payment structure that includes base salary, bonuses, incentives, and benefits, fostering employee trust and motivation.
- Partnering with Staff Agency: Collaborate with a staff agency to simplify payroll administration, as they can manage aspects like tax calculations, employee of record, benefits, and compliance, allowing your company to focus on core operations.
Work Schedules and Benefits for Employees
Mexican labor law hours of work stipulate a maximum working week of 48 hours, spread over six days, with at least one day off per week. Mexican labor law overtime is paid at double the normal rate for the first nine hours and triple the rate thereafter.
Moreover, there are Mexican labor law benefits for employees, such as Aguinaldo and a Profit-Sharing (PTU), where 10% of declared profits are distributed and paid within 60 days after the federal tax filing deadline (May 30th).
Also, there is a Mexican Labor law vacation, employees receive vacation days ranging from 12 to 22 days based on seniority, with one day of rest for every six days worked. The vacation bonus amounts to 25% of the corresponding salary during the vacation period. Furthermore, there are eight paid public holidays, and those working on Sundays receive an additional 25% of their daily salary. Employees are also entitled to a Christmas bonus equivalent to a minimum of 15 days, paid before December 20 each year.
Difference between USA and Mexico Labor Law and Payroll Costs
Even though both countries, US and Mexico, have minimum wage laws, overtime regulations, and require written employment contracts, the challenges in Mexican Labor Law are more extensive.
The labor laws and payroll costs in the USA and Mexico differ significantly, with a notable consideration for Mexican employment law for foreigners. While the USA’s labor laws are governed by federal and state regulations, Mexico’s laws are guided by the Federal Labor Law, which includes specific provisions for foreign workers. Key areas of variation include minimum wage, overtime pay, vacation entitlements, and termination rights. In Mexico, foreign employees must adhere to the country’s employment regulations, including the national minimum wage and double overtime pay. Additionally, Mexico’s labor laws offer comprehensive provisions for vacation entitlements and severance pay. As labor costs generally differ, businesses employing foreign workers in Mexico should be mindful of these distinctions for compliance and financial planning in both countries.
Are you considering expanding your business or operating in Mexico? Understanding the intricacies of Mexican legal requirements can be challenging but essential for your business’s success. With Mexican labor laws explained, at Remote Team Solutions, our team of experts can help you with these complex laws, ensuring your business remains compliant while taking full advantage of the opportunities the Mexican market offers. Contact us today, and we will support your business’s growth in Mexico.
