Employer of Record (EOR) Mexico

Employment Contracts in Mexico

• Mandatory Written Agreements: In Mexico, every employee must sign an individual employment agreement that lays out the terms and conditions of their job. No “employment-at-will” here—termination requires a justified cause, or the employer must pay up for unjust dismissal.
• Unions and Collective Bargaining: When it comes to unions, a Collective Bargaining Agreement (CBA) is negotiated to enhance working conditions for employees. This agreement can’t strip away any basic rights and must always be better than the minimum standards set by law.

What’s in the Agreement? Article 24 of the Federal Labor Law (FLL) requires that working conditions be documented. Each party gets a copy of the employment agreement, which must include details like:

• Employee and employer info (name, nationality, domicile, etc.)
• Job specifics, work location, and schedule
• Salary, benefits, and payment dates
• Training provisions
• Rest and vacation days

Implied Trust: Every employment agreement comes with an unspoken bond of trust. Employers can’t force employees to waive their rights to legal protections or minimum benefits.

Details of CBAs: CBAs must also be in writing, outlining:

• The parties involved and their addresses
• Work schedules and rest days
• Salary specifics and training provisions

Fixed-Term vs. Open-Ended Contracts: Most employment agreements are assumed to be indefinite unless otherwise stated. Fixed-term contracts are permissible for specific jobs or training purposes but must be clearly defined.

Trial Periods: Training contracts typically last up to three months (or six for executives), while probationary periods can last 30 days or up to 180 for executive roles. These agreements must be in writing and can’t be extended or consecutively executed.

Notice Period: While there’s no formal notice period, employers must provide written notice of dismissal reasons. If proper notice isn’t given, the dismissal could be deemed unjust.

Working Hours

According to employment law in Mexico, the typical workweek consists of 48 hours, spread across six days of eight hours each, with Sunday usually designated as the day of rest.

13th Month Salary

The Aguinaldo, commonly referred to as the 13th-month salary, is a mandated Christmas bonus that employers are obligated to disburse to their employees by December 20 each year.

Calculating the Aguinaldo

The Aguinaldo is calculated as a minimum of 15 days’ worth of an employee’s regular salary. Here’s an example for clarification:

If an employee’s annual salary is $720,000 pesos, their Aguinaldo would amount to $30,000 pesos.

Calculation:

Termination and Severance Pay

When Is Severance Pay Necessary in Mexico?

Conditions for Ending Employment in Mexico

• Voluntary Resignation: When an employee decides to leave their position, they are entitled to compensation for any unused vacation days, a vacation premium, and a prorated Christmas bonus. This payout, often referred to as a “finiquito” (settlement) in the context of Mexican labor, reflects the benefits accumulated until the time of resignation. For employees with more than 15 years of service, an “antiquity premium” may also apply, which grants them 12 days’ worth of salary for each year worked, capped at twice the Mexican minimum wage.
• Justified Termination: If an employee is dismissed for valid reasons, the severance compensation remains consistent with that provided for voluntary resignations. This includes the basic settlement along with the antiquity premium if the employee qualifies.
• Wrongful Termination: In instances of unjust termination, the severance pay is more generous. Employees in this situation are entitled to:
  • Three months’ salary.
  • An additional 20 days’ salary for each year of employment.
  • The basic settlement and antiquity premium, if applicable.
• Voluntary Resignation: Understanding Severance Pay in Mexico In cases of voluntary resignation, the employee chooses to end their employment, and the associated severance payout is called the “finiquito.” This includes the benefits accrued up to their departure. The calculation for this payment will be detailed shortly.

Employees vs Independent Contractors

As companies expand into new markets, they frequently encounter complexities related to local employment laws. A critical area of confusion in Mexico revolves around the differentiation between independent contractors and employees. This distinction is essential for ensuring legal compliance, managing financial obligations, and maintaining operational flexibility. This guide outlines the implications of these classifications and highlights the key differences that businesses need to be aware of.

Key Differences Between Independent Contractors and Employees

• Understanding Employees and Independent Contractors: In Mexico’s labor landscape, employees are defined as individuals who work for a company in a continuous relationship, subject to the employer’s control regarding how tasks are performed. These employees are entitled to a variety of benefits and protections outlined in Mexican labor law. Conversely, independent contractors operate as self-employed professionals brought on for specific tasks or projects. They maintain autonomy over their work processes and do not receive the same benefits as employees.
• Legal Protections and Rights: Mexico’s Federal Labor Law grants specific rights and protections to employees classified as “subordinated,” including social security benefits, paid leave, and profit-sharing. Independent contractors, however, are not entitled to these benefits and are regarded as operating their own businesses. The principle of subordination is vital in this context; if a company dictates the timing, methods, and execution of an individual’s work, that person is likely to be considered an employee. In contrast, independent contractors enjoy greater freedom in how they achieve their results.
• Financial Considerations and Tax Responsibilities: The financial advantages of hiring independent contractors can be significant for businesses, as it eliminates the need to provide employee benefits, taxes, and social security contributions. However, misclassifying employees as independent contractors can lead to severe penalties and legal ramifications. Employers are responsible for withholding taxes from employees’ wages and remitting them to the government, while independent contractors handle their own tax obligations according to the nature of their services.
• Flexibility and Engagement Models: Utilizing independent contractors can offer businesses enhanced operational flexibility, enabling project-specific hiring without long-term commitments. Nevertheless, it’s crucial to understand that if a contractor’s work is highly controlled by the employer, they may inadvertently fall under employee classification according to Mexican labor laws.
• Termination and Liability Considerations: In Mexico, the termination of employees is subject to strict legal regulations designed to protect their rights, often requiring severance pay for unjust dismissals. In contrast, independent contractors have less protection under labor laws; their relationships are governed primarily by contractual agreements that typically lack severance provisions. This highlights the importance of establishing clear contracts with independent contractors to define the terms of their engagement.

Social Security in Mexico

In Mexico, social security contributions are determined by an employee’s Base Listed Salary (BLS). Both employers and employees contribute varying percentages toward different social security schemes.

According to Article 27 of Mexico’s Social Security Law, the BLS is critical for calculating benefits, as it encompasses not just the regular salary but also additional forms of compensation like bonuses and commissions.

The Base Listed Salary serves as the foundation for calculating the contributions owed to the Mexican Social Security Institute (IMSS) by both parties. To accurately determine the BLS, all cash payments made to the employee must be taken into account, including:

• Daily Salary
• Bonuses
• Premiums
• Commissions
• In-kind Payments

By incorporating these components, the BLS ensures a comprehensive approach to social security contributions and benefits in Mexico.

Class I (Clase I) – Low Risk:

• Office work
• Retail and commercial businesses
• Educational institutions
• Financial services

Class II (Clase II) – Moderate Risk:

• Restaurants and catering services
• Telecommunications
• Textile manufacturing
• Certain construction and maintenance activities

Class III (Clase III) – Intermediate Risk:

• General construction
• Light manufacturing
• Transportation and logistics services
• Health services (excluding high-risk procedures)

Class IV (Clase IV) – High Risk:

• Heavy manufacturing and assembly
• Mining operations
• Chemical production
• Major construction and infrastructure projects

Class V (Clase V) – Very High Risk:

• Oil and gas extraction
• Nuclear facilities
• High-risk health procedures (e.g., working with infectious diseases)
• Emergency response and firefighting

Occupational Risks

In Mexico, Social Security Premiums are classified according to five risk classes, which determine the percentage that employers must pay based on the nature of the work performed. Class I, which encompasses the lowest-risk jobs, has a premium rate of 0.54355%. As the risk increases, the rates escalate accordingly, with Class II at 1.13065%, Class III at 2.59840%, Class IV at 4.65325%, and Class V at 7.58875%. This classification system is crucial for employers to understand, as it impacts their financial responsibilities and the coverage available for their employees.

Disease and Maternity Insurance

Disease and maternity insurance in Mexico provides comprehensive coverage that includes medical care, surgeries, medications, and hospitalization. Employees are entitled to a maternity leave of 12 weeks, during which they receive a full salary subsidy. This insurance is essential for safeguarding employees’ health and wellbeing, ensuring they have access to necessary medical services and support during maternity.

Employer Contributions

Employers in Mexico are responsible for various contributions to social security and related benefits. A fixed fee of 20.40% of the Unidad de Medida y Actualización (UMA) is mandatory, along with a surplus fee of 1.10% that applies when an employee’s salary exceeds three times the UMA. These contributions play a significant role in funding the benefits that employees receive, including health care and maternity leave.

Worker Contributions

Workers also contribute to their social security benefits, including a surplus fee of 0.4% if their salary surpasses three times the UMA. This contribution model helps ensure that employees share in the funding of the benefits they receive, which include healthcare, maternity leave, and other essential services.

Disablement and Life Insurance

This type of insurance provides critical benefits for workers who suffer from work-related accidents leading to disability or death. It ensures that employees and their families receive financial support in case of unforeseen circumstances, contributing to a safer working environment and providing peace of mind for employees.

Retirement Benefits

Retirement benefits in Mexico include severance payments for advanced age and pensions for old age. Employers contribute 2% of the Base Listed Salary (BLS) for old-age pensions, and for advanced age severance, contributions vary from 3.15% to 11.88%, depending on the employee’s salary. Workers also contribute 1.125% of the BLS toward advanced age severance. This system helps employees prepare for their retirement, ensuring financial security in their later years.

Nursery and Social Benefits

Nursery and social benefits provide daycare services for employees’ children, facilitating a work-life balance for working parents. Employers contribute 1% of the Base Listed Salary (BLS) to fund these services, while workers do not have any additional contributions. This benefit is an important support mechanism for families, allowing parents to pursue their careers while ensuring their children are cared for during working hours.

INFONAVIT

The Instituto del Fondo Nacional de la Vivienda para los Trabajadores (INFONAVIT) requires employers to contribute 5% of the Base Listed Salary (BLS) toward housing assistance for employees. This contribution aids workers in securing affordable housing, thereby improving their quality of life and financial stability. INFONAVIT is a significant aspect of social security in Mexico, offering crucial support for workers seeking to purchase homes.

Payroll in Mexico

Minimum Wages in Mexico

On December 12, 2023, an announcement was made in the Federal Official Gazette (Diario Oficial de la Federación) regarding a significant increase in Mexico’s minimum wage. This decision, made by the National Commission of Minimum Wages (CONASAMI) on December 1, 2023, will take effect on January 1, 2024.

As of this date, the minimum wage will be adjusted as follows:

This change reflects the government’s ongoing efforts to enhance the standard of living for workers across the nation.

Payroll Cycle in Mexico

Mexico operates on a semi-monthly payroll cycle, where employees receive their pay on the 15th and the last day of each month.

Overtime Pay

In Mexico, employees earn overtime pay at a rate of 100% above their regular hourly wage for the first nine hours of overtime each week. For any overtime hours worked beyond that nine-hour threshold, the rate increases to 200% of their standard hourly wage.

Mercans’ payroll capabilities

• Payroll Cycle in Mexico: Ensure your team in Mexico is paid accurately and on time. Mercans’ payroll services allow you to process payments for employees and contractors seamlessly, in the local currency, helping you meet local expectations with ease.
• Payroll Setup, Processing, and Administration: From initial setup to ongoing management, Mercans handles every aspect of payroll with precision. Our team manages payroll processing and administration with a focus on accuracy and compliance, so you can keep your operations running smoothly.
• Statutory Filings and Payments: Stay compliant with Mexico’s statutory requirements effortlessly. Mercans takes care of all necessary filings and payments, ensuring your business meets local obligations on time, every time, providing peace of mind with every payroll cycle.

Personal Income Tax in Mexico

In Mexico, the personal income tax (PIT) system applies differently to residents and non-residents. Here’s a breakdown of the main elements:

Resident vs. Non-Resident Tax Obligations

• Residents in Mexico are taxed on their worldwide income, which includes earnings from both domestic and international sources.
• Non-residents, however, are taxed only on income sourced within Mexico. This includes foreign citizens and Mexican citizens who can establish that they are tax residents in another country.

Personal Income Tax Rates for Residents (2024)

For residents, tax rates vary progressively based on income brackets, with rates increasing as taxable income rises. Here’s the rate structure for 2024:

Personal Income Tax for Non-Residents

Non-resident tax rates differ and are generally lower for moderate earnings, with higher rates applied to larger income amounts. In 2024:

• Up to MXN 125,900 in annual income: Exempt.
• Between MXN 125,900 and MXN 1,000,000: 15%.
• Above MXN 1,000,000: 30%.

Non-residents are also subject to withholding tax on Mexican-source interest income, with rates ranging from 0% to 35% depending on the investment type and duration.

Mexico Employee Hiring Cost

When hiring employees in Mexico, employers must account for various mandatory contributions beyond the employee’s gross salary. These additional costs include social security, housing contributions, work risk insurance, and other legally required benefits. Together, these contributions can significantly increase the total annual cost of employing someone, especially when compared to the gross salary alone. For example, an employee earning a gross annual salary of MXN 100,000 will incur additional employer costs of MXN 44,660 to cover these statutory benefits, resulting in a total annual cost of MXN 144,660.

Here’s a detailed breakdown of how these costs add up for a typical employer in Mexico:

Employee Cost Breakdown for Mexico

Salary and Associated Employer Costs for a Gross Salary of MXN 100,000

Employee Benefits in Mexico

Mandatory Employee Benefits in Mexico

In Mexico, the law mandates a range of essential benefits that companies must provide to employees. These benefits ensure basic health, retirement security, and financial support for employees and their families.

• Health Insurance Employees in Mexico are required to register with the Mexican Institute for Social Security (IMSS). Through IMSS, employees receive comprehensive healthcare benefits that cover outpatient services, maternity care, disability support, and work-related injury treatment.
• Retirement Contributions Managed by the National Commission for the Pension System (CONSAR), the Mexican retirement system mandates contributions from employers, employees, and the government into individual retirement accounts. The legal retirement age is 65, with early retirement available from age 60.
• Life Insurance The IMSS also provides life insurance, which guarantees financial support to an employee’s beneficiaries if death occurs due to a work-related accident. In these cases, the IMSS or employer covers funeral expenses equivalent to two months of the employee’s salary.
• Disability Benefits Employees are protected under the IMSS with coverage for work-related and non-work-related disabilities, including temporary, permanent, partial, and total disability support.
• Paid Time Off (PTO) Mexican labor laws mandate paid vacation days, public holidays, maternity and paternity leave, and breastfeeding breaks for employees. Adoption leave is also recognized under PTO benefits.

Supplementary Employee Benefits in Mexico

While not legally required, many companies in Mexico offer additional benefits to support employee well-being and attract talent. Supplementary benefits may vary by company and industry.

• Life Insurance Plans For companies with 10 or more employees, group life insurance policies are often available. Coverage, terms, and premium rates can vary based on the company’s size and structure.
• Total and Permanent Disability Insurance Employees with a total and permanent disability may be eligible for a one-time, lump-sum payment in lieu of a monthly pension. This payment, calculated as a percentage of the base benefit, is designed to offer financial stability. Employers may also waive insurance premiums, allowing the employee to retain basic coverage without ongoing premium costs.
• Accidental Death and Dismemberment (AD&D) AD&D coverage is often included in life or personal accident insurance plans, providing added protection in cases of severe injury or accidental death.
• Funeral Expense Coverage Many companies include a funeral expense benefit within life insurance policies, typically covering costs between USD 2,000 and USD 7,000.
• Major Medical Insurance Major medical insurance is a popular benefit in Mexico, especially among multinational companies, with around 95% offering this to their employees. This insurance usually includes dental and vision care, either as part of the plan or through separate arrangements. Some policies also cover primary and imaging services through an insurer-managed network.
• Retirement Savings Plans Companies often encourage employees to save a percentage of their monthly salary in retirement plans, matching up to 13% of an employee’s contributions when they meet certain conditions. This benefit supplements the statutory retirement contributions to build additional retirement security.

Work Permit in Mexico

Mexico is an increasingly popular choice for companies looking to expand operations or outsource labor, but before hiring foreign employees, it’s essential to understand the work visa requirements. Navigating the proper visa processes ensures that your workforce remains compliant with Mexican law and can begin contributing effectively from day one.

Overview of Work Visa Options in Mexico

The National Institute of Migration (INM) governs immigration in Mexico and handles the issuance of work visas. Any non-resident seeking employment in Mexico must obtain the appropriate work authorization. Employees hired by a Mexican company require a residency visa with work permission. For international employees on short-term assignments (under six months), a visitor’s visa with authorization to perform paid activities is typically sufficient. This visitor’s visa is available for up to 180 days but requires a consular interview and approval from the INM.

Mexico offers three primary types of work visas:

• Business Visa: For individuals visiting Mexico for up to 180 days for business activities, such as meetings, professional consultations, and technical assistance. This visa does not permit paid employment.
• Temporary Resident Visa: Suitable for foreign nationals intending to live and work in Mexico for extended periods, typically over 180 days. This visa, which includes a work permit, allows professionals to reside in Mexico for up to four years.
• Permanent Resident Visa: Intended for individuals who plan to live and work in Mexico indefinitely, including those with family ties in Mexico or who meet long-term residency requirements.

Steps to Obtain a Work Visa

The temporary resident visa is the most common option for foreign professionals, as most will not meet the criteria for a permanent visa (e.g., close family ties, a qualifying income, or long-term residency in Mexico). Employers are often responsible for initiating the temporary visa application process through the INM, with the final application submitted by the worker at their home-country Mexican consulate.

General Document Requirements for a work visa include:

• Completed visa application
• Valid passport
• Migratory document copy (if applicable)
• Recent photo
• Invitation letter from a Mexican public or private institution
• Evidence of financial status, employment, education, or family relationships in Mexico

Upon approval, the worker must secure the visa from the Mexican consulate in their home country within a month. Once they arrive in Mexico, they have 30 days to register with the local immigration office and receive a temporary resident card, valid for up to four years. After this period, they may apply for permanent residency or leave Mexico.

Key Considerations for Foreign Nationals

While a temporary resident visa can be converted to permanent residency, those with visitor status cannot apply for work authorization directly. An individual seeking work in Mexico must leave the country to complete the necessary visa and residency paperwork at a Mexican consulate in their home country before beginning employment.

EOR Solutions in Mexico

• Employer of Record (EOR) for Established Candidates: Mercans provides reliable Employer of Record (EOR) solutions for companies that have already identified candidates they wish to hire in Mexico. Our services cover the entire employee lifecycle, ensuring full compliance with Mexico’s labor laws and regulations, including payroll, benefits, and tax management.
• EOR + Recruitment Services: For companies looking to source new talent, our combined EOR and recruitment offerings make expanding into Mexico straightforward and efficient. Leveraging our extensive network and expertise, we help you recruit, onboard, and retain top talent, simplifying your expansion into the Mexican market.
• Visa Sponsorship and Global Mobility Support: Mercans’ global mobility and visa sponsorship services help businesses manage the complexities of expatriate employment. We handle the immigration and compliance requirements associated with relocating employees to Mexico, ensuring smooth transitions and legal adherence.
• Assistance on Record (AOR) for Contractor Payments: Companies can rely on our Assistance on Record (AOR) services for compliant and streamlined contractor payments in Mexico. We handle all aspects of contractor payroll, from tax withholding to local labor compliance, allowing you to focus on your core business.
• Transitioning Freelancers to Full-Time Employees: Mercans facilitates the conversion of contractors or freelancers to full-time employees, ensuring a smooth process that adheres to Mexican labor laws. This solution supports businesses looking to formalize their relationships with skilled workers in Mexico.
• HCM System Integration: With Mercans’ EOR services, you can seamlessly integrate into your existing Human Capital Management (HCM) system for real-time data exchange and enhanced compliance. Our approach supports unified and efficient workforce management, payroll operations, and legal compliance, helping to optimize your HR processes in Mexico.

Best Employer of Record Mexico

Why Mercans is the Leading Employer of Record (EOR) in Mexico

• Compliance with Regulatory Authorities: Mercans strictly adheres to the regulations set by the Ministry of Labour and Social Welfare (STPS), as well as local and federal labor boards. This commitment ensures that all employment practices comply with Mexican labor laws.
• Independent Operations: Operating as an independent entity, Mercans provides tailored employment services without relying on third-party providers, ensuring reliability and responsiveness to client needs.
• Comprehensive Employment Solutions: Mercans effectively manages various employment types, including full-time employees, freelancers, contractors, and expatriates, offering flexible solutions to meet the diverse requirements of businesses.
• Scalable Services for Enterprises: Designed to cater to large enterprises, Mercans offers scalable and sophisticated employment services that accommodate complex organizational structures.
• Multi-Currency Payroll Management: Mercans facilitates payroll processing in multiple currencies, enabling smooth financial operations for global companies operating in Mexico.
• Expertise in Multi-Country Payroll: With a robust global network, Mercans excels in managing multi-country payroll, ensuring seamless operations for businesses with international teams.
• Commitment to Data Security: Mercans adheres to stringent data protection standards, ensuring compliance with GDPR regulations and maintaining high security through SOC 1 and SOC 2 certifications.
• Certified Quality Management Systems: Holding ISO 20000 and ISO 27001 certifications, Mercans showcases its commitment to delivering high-quality IT service management and information security.
• Robust Application Security: Mercans meets the OWASP ASVS 3.0 standards, ensuring strong security practices in its application development and management processes.
• Compliance with the Mexican Social Security Institute (IMSS): Mercans is well-acquainted with the requirements of the Mexican Social Security Institute (IMSS), ensuring that all employee benefits and contributions comply with local social security regulations.