Employment Law in Mexico

Mexico is one of the fastest-growing countries in Latin America. In recent years, Mexico has shown considerable growth in GDP, reaching $1.27 trillion in 2019. The easy availability of a young & high-skilled workforce attracts global companies seeking to expand their operations and scout for new talents. Further, a good understanding of local employment laws will help benefit international employers in the long term. 

CLA national authorities have established rules and regulations contributing to Mexican labor law. Any global firm looking to hire professionals from Mexico may abide by these employment laws in Mexico. Violating these regulations may leave employers vulnerable to consequences like fines or even suspension of license. 

This employment law in Mexico guide assists global firms and independent employers in navigating the employment rules in Mexico and highlights the critical points concerned with hiring and managing employees from Mexico. 

Who is Covered by the Mexican Employment Act?

Article 123 of the Federal Constitution of Mexico balances the employer-employee relationship and establishes the employee’s general rights. The Federal Labor Law (FLL) of Mexico protects workers’ rights. Apart from the FLL, the Social Security Law and the National Worker’s Housing Law also looks after the employees’ rights. 

All these laws together form the Mexican labor law. 

The labor act rules in Mexico do not differentiate between blue-collar and white-collar employees. However, the Latin American country categorizes employee types as follows:

  • Employees in positions of trust, otherwise empleados de confianza: These are employees in the role of general management, inspection, supervision, and overseeing tasks. Such employees are subject to individual and collective obligations. 
  • Specific categories of employees: These employees function in particular sectors of the economy. They can be women, minors, farmers, miners, artists, transportation crews,  and professionals like doctors and teachers.
  • Employees of any nationality performing tasks for a Mexican country remotely. 

As per the labor codes in Mexico, any employee, whether Mexican or foreign, has the same rights in the workplace, regardless of nationality. Employers are required to hire and manage employees as per the labor regulations in Mexico. 

Key Provisions of the Act

The Mexican employment rules are formed by including the Federal Labor Law, the Mexican constitution, the Social Security Law, and the National Worker’s Housing Law. Critical elements of the law include the working conditions like working hours, holidays, leaves, minimum wages, and other mandatory rules that an employer has to follow. 

These rules ensure that an employee’s rights are upheld in the workplace. An employer can provide better working conditions by providing additional employee benefits and compensation. However, they are legally bound not to go below the given limitations. 

Here are some of the crucial provisions of the labor code in Mexico:

  1. The corporate income tax in Mexico is levied at a standard rate of 30%;
  2. Mexican entities are not subject to special tax treatment on capital gains, and the use of capital losses is restricted in some cases;
  3. Value Added Tax is imposed at a standard rate of 16% and a 0% rate applies to food, medicine and certain other items with some exceptions;
  4. Dividends paid to resident and non-residents are subject to a withholding tax of 10%;
  5. Royalties paid to a non-resident entity are subject to a withholding tax rate of 35% in case of patents and trademarks or 25% in case of other kinds of royalties unless reduced under a tax treaty. A 40% rate applies where royalties are paid to a related party located in a tax neutral jurisdiction;
  6. Interests paid to a non-resident are subject to a withholding tax varying between 4.9% (interest paid to a bank) to 35%. A 40% rate applies where interest payments are made to a related party located in a tax neutral jurisdiction. The rate may be reduced under a tax treaty.
  1. Companies registered in the Export Processing Zones are exempt from corporate income tax;
  2. Business losses can be carried forward for up to 10 years, a carryback thereafter is however not permitted;
  3. Dividends received from a resident company are exempt from withholding tax;
  4. Mexico does not impose any exchange controls, and businesses can freely repatriate their funds.
  1. All companies must file annual tax returns with the Tax Administration within the first 3 months of the following the end of the fiscal year;
  2. VAT filings must be made monthly, before the 17th of each month;
  3. Statutory audit is required if i) the company’s annual revenue exceeds US$2.6 million or ii) the assets amount to US$5.2 million or iii) the company has more than 300 employees;
  4. All trading companies in all Mexico provinces are required to issue digital invoices for every actual transaction.
  1. Employers must contribute for social security to Mexican Social Security Institute (IMSS) at a varying rate of 15% to 25% of an employee’s monthly remuneration;
  2. Mexico has signed double tax treaties with 55 countries including Australia, Canada, China, UK and the United States;
  3. Mexico has also signed more than 20 multilateral and free trade agreements including North American Free Trade Agreement (NAFTA) and European Free Trade Association (EFTA) among others;
  4. CLA Consultants’ Mexico tax planning services are tailored to meet the precise needs of international entrepreneurs. Unlike many corporate services providers, we take a global approach to our tax planning services, thinking ‘outside the box’ to provide a creative solution which fits your needs;
  5. It is important our Clients’ are aware of their personal and corporate tax obligations in their country of residence and domicile; and they will fulfill those obligations annually. Let us know if you need CLA Consultants’ help to clarify your annual reporting obligations.
  1. Employers must contribute for social security to Mexican Social Security Institute (IMSS) at a varying rate of 15% to 25% of an employee’s monthly remuneration;
  2. Mexico has signed double tax treaties with 55 countries including Australia, Canada, China, UK and the United States;
  3. Mexico has also signed more than 20 multilateral and free trade agreements including North American Free Trade Agreement (NAFTA) and European Free Trade Association (EFTA) among others;
  4. CLA Consultants’ Mexico tax planning services are tailored to meet the precise needs of international entrepreneurs. Unlike many corporate services providers, we take a global approach to our tax planning services, thinking ‘outside the box’ to provide a creative solution which fits your needs;
  5. It is important our Clients’ are aware of their personal and corporate tax obligations in their country of residence and domicile; and they will fulfill those obligations annually. Let us know if you need CLA Consultants’ help to clarify your annual reporting obligations.
  1. Employers must contribute for social security to Mexican Social Security Institute (IMSS) at a varying rate of 15% to 25% of an employee’s monthly remuneration;
  2. Mexico has signed double tax treaties with 55 countries including Australia, Canada, China, UK and the United States;
  3. Mexico has also signed more than 20 multilateral and free trade agreements including North American Free Trade Agreement (NAFTA) and European Free Trade Association (EFTA) among others;
  4. CLA Consultants’ Mexico tax planning services are tailored to meet the precise needs of international entrepreneurs. Unlike many corporate services providers, we take a global approach to our tax planning services, thinking ‘outside the box’ to provide a creative solution which fits your needs;
  5. It is important our Clients’ are aware of their personal and corporate tax obligations in their country of residence and domicile; and they will fulfill those obligations annually. Let us know if you need CLA Consultants’ help to clarify your annual reporting obligations.
    • An employer must be aware of the following Mexican tax authorities:
    • Ministry of Finance and Public Credit
    • Tax Administration Service
    • Mexican Institute of Social Security
    • Worker’s National Housing Funds Institute
    • The employers are responsible for the following as per the Mexican Labor Law:
      1. Federal income tax withholding and remittances
      2. Social security withholding and contribution
      3. State payroll tax payments
    • The Federal income tax rates vary from 1.92% to 35% for Mexican residents, and 0% to 30% for non-residents. Most states require employers to file taxes with the authorities monthly or quarterly. 
    • Most Mexican states have a relatively lower payroll tax rate. For example, Mexico city levies a payroll tax of 3%. This payroll tax is payable by the employer and constitutes a tax-deductible expense.
    • The labor code of Mexico states that an employer must be registered if they want to process payroll for their employees in Mexico. Here are the requirements for the employment registration, after which an employer can give salaries to their employee: 
    • Registration of the public deed that contains the company’s establishment at the Public Registry of Property. 
    • Registration with the National Foreign Investment Bureau. 
    • Obtaining the Tax ID. 
    • Obtaining an Advanced Electronic Signature for filing tax returns. 
    • Employer registration at the Mexican Social Security Institute. 
    • Registration for the local payroll tax. 

    The procedure for registration takes up to 90 days and must be completed before an employer starts paying their employee. 

  • In Mexico, employers must generate an electronic payslip per the employment rules. This electronic payslip must be submitted, validated, and e-signed by the SAT (Mexican Tax Authority). 
  • To complete this procedure for employers, there is an intermediary called PAC, i.e., the authorized certification provider. 
  • The employer has to submit the payslip to the PAC, and then PAC will get back to the employer with an e-signed electronic payslip. 
  • The labor code of Mexico states that the payslip must contain: the personal and job information of the employer and employees, wage paid, type of wage, taxes withheld, other deductions, and the net pay that is paid.  
  1. The labor law of Mexico states that, as a general rule, there can be a 30-day or 60-day training period for executive levels. During this period, an employee provides their service, and the employer can impart the necessary knowledge so that the employee is skilled to do the job employers have hired them to do. 
  2. Employment contracts for indefinite terms or more than 180 days may have a probationary period of 3 months or six months for executive positions.
  3. The Mexican labor law states that if there is going to be a training period or probationary period for a job position, it needs to be in a written agreement. The written agreement must also state that the employee has all the social benefits. 
  4. Once the training or probationary period has elapsed, then the employment relationship is considered to be for an indefinite period. 
  1. The FLL does not state any notice period. However, the employer must disclose the cause or causes for the dismissal and the dates when those events occurred. 
  2. Article 47 of the FLL lists the types of conduct considered valid causes for dismissal. 
  3. According to the Mexican employment law for termination, the employer can hand over the notice to the employee while dismissing them, or they can communicate it to the Conciliation and Arbitration Labor Board, who will then communicate with the employee. The employer also has to provide the employee’s last domicile so the board can contact the employee. 
  4. The Mexican labor law says that if no action is taken within one month of the employee’s misconduct, those grounds are not valid for dismissal. 
  5. The labor code of Mexico also states that in unilateral termination, employers must make a severance payment to the employee. 
  6. The severance payment is calculated differently based on whether the employment contract was for a fixed or indefinite term. 

The Federal Law on the Protection of Personal Data held by private parties protects employee data in the workplace. It protects employees’ privacy rights regarding handling, controlling, and processing personal data. An employer must have the written consent of their employees to access and process their personal details.

If an employer violates the Data Privacy Law, they are vulnerable to actions taken by the Federal Public Administration. 

Penalties

If there is a violation of the Federal Labor Law, then the employer is subject to fines of different amounts imposed by the Social and Welfare Department. 

Compliance Strategies for Employers

Entrepreneurs and global firms follow the below common strategies to comply with the Mexican labor law for hiring and managing employees.

Employment contracts based on standard templates:

  • The labor code of Mexico states all the information employers must include in employment documents like offer letters, employment records, and termination notices.  
  • Following these standards helps you prepare top-notch employment documents.  

Recruiting an HR manager:

  • Hiring a dedicated HR manager to look after aspects like employee recruitment, development, training, employee benefits, etc. 
  • The HR manager can also oversee appraisals, reward management, manage payments, and deal with organizational changes and industrial relations. 
  • An employer can also hire an HR manager to ensure that the Mexican labor law and other local rules and regulations are taken care of while hiring talent from Mexico. 

Outsourcing:

  • An employer can hire a third party that provides innovative solutions for maintaining employment relations. 
  • The third-party solutions can oversee compliance audits and labor documents and protect your company from legal liabilities by complying with the labor code of Mexico. 
  • The outsourced firm can draft legal employment documents, and look after mandatory benefits, salaries, etc. 

Recent Changes in the Mexican Employment Law

The Federal Official Gazette published two decrees catering to labor and employment matters on April 28, 2022. 

  • Article 132 of the Federal Labor Law consists of 39 sections that list various obligations of employers in Mexico.
  • The addition to the labor code of Mexico in section IX of Article 132 was a special permit for employees to exercise their voting rights in a recall referendum if the vote is taking place during working hours. 
  • Article 512 of the Ninth Title in FLL deals with occupational risks. 
  • The changes in the Mexican labor law recognize the use of new technology and work tools that contribute to creating a safe work environment and protecting employee rights in high-risk workplace situations. 

How Can CLA Help?

Mexico made substantial changes to labor laws in recent years. Those looking to hire their first employee in Mexico must take care of these changes and abide by all applicable laws.

CLA offers global employment products and solutions compliant with local regulations and Mexican labor law. Working with CLA helps employers and international firms align their hiring process and legal documents as per the labor code of Mexico while working with talent in this country. 

Employers can partner with CLA to look after pay management, taxes, social contributions, and more for their internationally hired team of employees. CLA’s competent team can help you stay 100% compliant with the local laws and regulations of more than 150 countries.

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