Mexico at a Glance

Contracts for a fixed term or for a specific task may be entered into when the needs of the employer require such an engagement. To enter into such an agreement validly, the employer must justify the reason for hiring an employee for a fixed term or for a certain undertaking, and hence the contract will terminate automatically at the end of its term (fixed-term employment) or at the completion of the undertaking (employment for a specific task). If the activities under which the employee was originally hired continue after the end of the contract, the employment relationship will be automatically extended and accordingly deemed to be for an indefinite term.

Under the provisions of the FLL, employers have the obligation to establish work environments in accordance with the principles of worker safety and health.

All employers are obliged to prevent work-related stress by constantly evaluating the organizational environment and applying any necessary control measures.

The Mexican Constitution includes the general principle of “freedom of work”, whereby an individual cannot be prevented from working or performing a lawful activity, unless there is a judgment stating otherwise issued by a competent court. Based on this, the general accepted interpretation is that post termination non-compete obligations and in general restrictive covenants are not enforceable in Mexico. This interpretation would not vary, even if the obligation is limited to a certain period, territory, product or to identified competitors.

Post-termination non-compete, customer non-solicit and employee non-solicit clauses are therefore not enforceable. However, such provisions are often included in employment agreements because they can have a deterrent effect and even create a sense of moral obligation on the part of an employee.

Trade unions are prevalent in certain sectors, such as the sugar, railway, automotive, and mining industries, as well as the public sector (especially education and energy). A union may be formed by at least 20 employees in a certain workplace; however, employees that are affiliated to an existing union may request, through that union, to sign a collective bargaining agreement with their employer. There are no works councils or other employee representatives.

Employees hired pursuant to an indefinite employment agreement or a fixed-term agreement of at least 180 days can be hired subject to a probationary period of up to 30 days, extendable by up to 180 days if the employee is hired as an executive, manager or director or fills an administrative position.

Per GoGlobal’s policy, probation period will not be included in our contracts.

The Federal Labour Law (FLL) states that for every six days worked, employees shall be entitled to one day of rest. It also recognizes three types of work shifts, as follows:

• eight hours a day for daytime work (48 hours a week);
• seven hours for night-time work (42 hours a week); and
• seven-and-a-half hours for a mixed work shift (45 hours a week).

The principle of a 48-hour workweek, is officially the law of the land. However, in many employment relationships throughout much of the private sector, a 40-hour workweek has been established.

The FLL also provides that employees are entitled to at least 30 minutes of rest or to have a meal during their shift, and this time shall be considered as part of their working day.

An employee must not be required to work more than 3 hours more than the number of hours in the statutory workday during a given shift, or more than 9 hours in each week. An employee working overtime on a given day is entitled to double compensation for each hour of overtime. In the event the employee works more than 9 hours overtime in each week, the employee is entitled to triple compensation for each hour of overtime.

Although, as a matter of law, all employees are entitled to overtime pay, it has become common practice for employees holding managerial positions not to claim any overtime pay, because it is implied that their salary already includes and covers the extra time they need to work in view of their role. Nevertheless, this should not be assumed to mean they are not entitled to overtime pay, because it is possible under the FLL to claim overtime pay.

Grounds

An employer may terminate an employment relationship without incurring any liability only under one of the justified causes established by law, as follows:

• use of false documentation to gain employment;
• dishonest or violent behavior against the employer or the employer’s family;
• dishonest or violent behavior against co-workers that disrupts work discipline;
• acts of harassment or sexual harassment directed toward any person in the workplace;
• sabotage of the workplace;
• negligence;
• carelessness that threatens the safety of the workplace and of other workers;
• immoral acts in the workplace;
• disclosure of trade secrets;
• more than three unexcused absences in a 30-day period;
• insubordination;
• failure to adopt preventive measures or to follow procedures to avoid accidents or illnesses;
• reporting to work under the influence of alcohol or narcotic drugs;

Strictly, the employer cannot otherwise terminate the employment without cause. However, under Mexican labour law, “integrity at work” is mandatory behavior for the employee. An employee is deemed to act with integrity when the work is carried out with intense effort, care, and attention, in the agreed-upon time, place, and manner. “Lack of integrity” is a generic cause for dismissal.

In practice, however, exposure under an unlawful termination lawsuit is mostly limited to the statutory termination payments, so most terminations can be implemented either through employee resignations or through a mutual termination (with severance).

Restricted or prohibited terminations

If the employment relationship is at that time suspended (e.g., an employee on maternity leave).

Under Mexican legislation there is no minimum notice period to terminate an employment relationship. That is, when the employer dismisses the employee the employment termination will be effective immediately. However, the employer must notify the employee in writing of the cause or causes for the dismissal. When an employer terminates an employee under the justified causes established in article 47 of the FLL, the employer must notify the employee within 30 days of the cause or causes of the termination.

Garden leave is not a common practice in Mexico, since the employer can terminate the employment relationship immediately.

Directors do not need to be Mexican residents, but a legal representative who is a resident must be appointed to act on behalf of the company.

A local resident must be appointed as the company’s administrator (legal representative) in Mexico. Foreign nationals can be appointed, but they must have the appropriate legal status to reside and work in the country. Appointing a local administrator is common, as it helps streamline operations and ensures compliance with local regulations.

Upon incorporation, businesses in Mexico must obtain certain insurance policies:

• Mandatory Insurances: Workers’ Compensation Insurance, and Social Security Contributions.
• Recommended Insurances: General Liability Insurance, Property Insurance.

To legally operate and register a business, a physical office is required in Mexico. A registered business address is necessary for the company’s legal documentation and operations.

Requirements of setting up a Sole Proprietorship

• No shareholders are needed since it is a business owned by one individual.

Requirements of setting up a General Partnership

• Requires at least two partners.

Requirements of setting up a Limited Partnership

• Requires at least two partners – one general partner with unlimited liability and one limited partner with liability limited to their contribution.

Requirements of setting up a Limited Liability Partnership

• Requires at least two partners.

Requirements of setting up a Limited Liability Company

• Requires a minimum of two partners and can have up to 50 partners.
• No mandatory minimum capital requirement. Recent reforms allow companies to be formed with as little as 1 MXN of nominal capital.
• Debt/Equity Rules: Mexico follows thin capitalization rules, with a 3:1 debt-to-equity ratio for interest deductibility on related-party loans.
• Require at least one manager.

Requirements of setting up a Stock Corporation

• Requires at least two shareholders, with no maximum limit.
• No mandatory minimum capital requirement. Recent reforms allow companies to be formed with as little as 1 MXN of nominal capital.
• Debt/Equity Rules: Mexico follows thin capitalization rules, with a 3:1 debt-to-equity ratio for interest deductibility on related-party loans.
• Require at least one director or a board of directors.

Requirements of setting up a Simplified Stock Corporation

• Can be formed by a single shareholder, with no upper limit on the number of shareholders.

In Mexico, it is a legal requirement for businesses to maintain accounting records. These records are crucial for both tax and regulatory compliance and must adhere to either the Mexican Generally Accepted Accounting Principles (NIF) or International Financial Reporting Standards (IFRS). The applicable accounting standards depend on the size and nature of the business. Keeping accurate records is essential to meet these obligations.

In Mexico, companies can choose any 12-month period as their fiscal year. However, the most common fiscal year follows the calendar year, ending on December 31st.

For businesses that use the calendar year as their fiscal year, the annual corporate tax return must be filed by March 31 of the following year. If a business operates on a different fiscal year cycle, the tax return is due within three months after the fiscal year ends.

Companies operating in Mexico must fulfill various tax obligations, which include:

• Corporate Income Tax (Impuesto sobre la Renta, ISR)
• Value Added Tax (Impuesto al Valor Agregado, IVA)
• Payroll Taxes (Impuesto sobre Nómina)

Foreign businesses operating in Mexico must appoint a tax representative if they establish a taxable presence or engage in taxable activities in the country. This representative is responsible for managing the company’s tax obligations, including VAT, corporate tax filings, and other compliance requirements.

Profits from a business in Mexico can be repatriated through dividends or by transferring funds abroad. However, businesses must comply with all tax regulations and ensure they meet the legal requirements for repatriating profits.

Mexico follows the OECD guidelines for transfer pricing, requiring businesses to apply arm’s length pricing for transactions between related parties. The primary transfer pricing methods recognized include:

• Comparable Uncontrolled Price (CUP)
• Cost Plus Method (CPM)
• Resale Price Method (RPM)
• Transactional Net Margin Method (TNMM)
• Profit Split Method (PSM)

The SAT enforces these methods to prevent tax base erosion and profit shifting.

Since 2011, electronic invoices, or Comprobantes Fiscales Digitales por Internet (CFDI), have been mandatory in Mexico for most business transactions. These invoices are required for the provision of goods and services, and businesses must use them for compliance with tax regulations.

The severance payment is calculated depending upon the cause of termination:

Voluntary resignation: The employer must pay all benefits due, including sales incentives, on a prorated basis up to the termination date. If the employee has at least fifteen years of seniority, he is also entitled to a seniority premium of twelve days’ salary for each year of service, capped at twice the minimum daily salary in force.

Termination with cause: The employer must pay all benefits due, including commissions, on a prorated basis until the date of termination, and the seniority premium of twelve days of salary for each year of service (but with a cap of twice the minimum daily salary per the terms above).

Termination without cause: Employees who are terminated without cause are entitled to the following lump sum severance: (1) three months of the employee’s daily aggregate salary, plus; (2) twenty days of the employee’s daily aggregate salary for each year of service; (3) a seniority premium of twelve days’ salary for each year of service (but with a cap of twice the minimum daily salary as outlined above; and (4) any benefits due.

The basic salary is the primary component of an employee’s compensation package. It varies depending on the role, industry, and the employee’s experience and location. Companies should research appropriate salary ranges for the specific market segment they are operating in.

An employer must make all salary and statutory payments from an in-country bank account.

The process of issuing payslips to employees is fully electronic. All payroll must go through a process before it can be issued to the employee. Indeed, the electronic payslips must initially be submitted, validated and e-signed by the Mexican Tax Authority.

The payslip must contain personal and job information of the employee, the bank account number, tax Id (RFC), citizen Id (CURP), social security number, position, cost centre, etc. Also, it must include each wage type paid including in the payment, perception, taxes withhold, other deductions and net to be paid. The amount must also match the amount sent from the employer’s account to the employee’s bank account.

All employees must enjoy vacations period which cannot be inferior to 12 days per year for the first year and will increase by 2 working days for each following year until it reaches 20 vacation days. Thereafter, the vacation period increases by 2 days for every 5 years of service.

This will continue to increase two days every five years.

In addition to this, employees in many states are entitled to a minimum of 25 per cent of the salary earned during their holidays as a vacation bonus.

***Vacations must be approved at least 30 days in advance.

An employee is entitled to sick leave depending on the type of illness and degree of disability. In case of illness or injury, an employee must obtain a doctor’s certificate. The Mexican Social Security Institute (IMSS), not the employer, pays the employee’s income during the leave.

There is no mandatory unpaid medical leave of absence in Mexico. If the employee needs an unpaid medical leave of absence due to a condition not recognized by the IMSS, then the employer has the discretion to grant the leave.

The economic benefits paid by the IMSS due to illness are based on 60% of the employee’s registered salary, and they are paid as of the fourth day of absence and up to 52 weeks.

Women have the right to 6 weeks of paid leave prior to the birth of a child and 6 weeks following the birth of a child. Women can allocate up to 4 of the 6 weeks of the pre-birth leave to the post-birth leave period. The salary during this period is paid by the IMSS.

During the nursing period of 6 months, the new mother is entitled to two additional thirty-minute rest periods per day.

A male employee is given 5 business days of paid paternity leave when his spouse gives birth, or he adopts a child.

The FLL provides that women are entitled to a paid maternity leave of absence of 6 weeks after they receive the adopted child. Fathers are entitled to a paid paternity leave of absence of 5 days following the adoption of a child.

There is no statutory regulation governing leave in the event of a bereavement, although such policy may be included in the individual contract.

There are 9 mandated national public holidays per year. These include December 1st every six years, on the day of the national presidential inauguration and the election day scheduled by federal and local electoral laws.

Employees who are required to work on a mandatory holiday are entitled to double pay.

The Mexican Social Security Institute (IMSS) is responsible for administering social security programs which are governed by the Social Security Law (LSS) of 1997.

The social security system is financed from contributions by workers, employers, and the government. The contributions are based on salary levels. The system protects workers in the following matters:

• Occupational accidents and illnesses
• Old age
• Retirement and survivor pensions
• Disability
• Medical benefits
• Maternity
• Childcare
• Social services

Profit Sharing: employees who have worked at least 60 days for a company are entitled to share in the employer’s profits, currently fixed at 10% of the company’s gross, pre-tax income, that should be paid between the months of April and May. Profit sharing payments are capped at three months of an employee’s salary and prorated for employees with less than a year of service.

Employers must contribute to several mandatory benefits on top of the employee’s salary:

• Housing Fund (INFONAVIT): Employers must contribute about 5% of an employee’s salary to the National Fund for Workers’ Housing (INFONAVIT). Contributions to the housing fund must be submitted monthly, by the 17th of the following month.
• Retirement Fund (SAR/AFORE): Employers are also required to contribute around 2% of the employee’s salary to the retirement savings fund.
• Profit Sharing (PTU): By law, companies must share 10% of their pre-tax profits with employees, which is typically distributed annually, based on the company’s profitability.

All employees get public health care coverage through the Mexican Social Security Institute. However, many employers offer their workers supplementary health insurance options. Other common optional benefits include:

• Car allowance
• House allowance
• Grocery tickets
• Gas coupons

In competitive job markets, employers may offer additional perks to attract and retain talent. Some common optional benefits include:

• Private Health Insurance: Many companies offer private health coverage alongside IMSS.
• Food Vouchers and Transportation: Employers may provide food vouchers or transportation allowances.
• Bonuses and Performance Incentives: Additional financial incentives may be based on employee performance or company profitability.
• Vacation and Holiday Pay: Employees are entitled to at least 12 paid vacation days after one year of employment, with an additional two days for each year of service. Employers must also pay a vacation premium of at least 25% of the employee’s salary during the vacation period.
• Christmas Bonus (Aguinaldo): A mandatory Christmas bonus of at least 15 days of salary must be paid to employees by December 20th each year.