Global Payroll and Benefits — 6 min
Do you need to hire an employee in Mexico or send a current employee to live in Mexico? How do you make that transition easier while keeping your business compliant with all applicable laws?
As an employer of record, Remote can help you employ workers in Mexico legally and completely without requiring you to establish a local legal entity in the country. Our employer of record service saves companies thousands of dollars in setup fees, guarantees compliance with all local labor laws, protects your investments, and provides a first-class experience for your employees in Mexico.
Maintaining compliance across international borders can be tricky. Mexico in particular has a few unusual rules that can catch inexperienced employers by surprise. To stay compliant with Mexican laws while providing the best possible experience for your employees, start with this helpful guide.
Related: What are labor laws like in Mexico?
Labor laws in Mexico generally favor employees more than they do in the United States. Certain types of benefits, requirements for termination, and methods of dispute resolution present a different balance of power than employers in the U.S. may be used to.
That is not to say that labor laws in Mexico are unfriendly to employers. Mexico plays host to several thriving industries, and the global democratization of talent has opened doors for many people within the country to compete for remote positions. Employers who look to Mexico to source talent or who send their own talent to find Mexico will generally find the situation to be a fair one.
Mexican law restricts the hours employers can ask employees to work before overtime rates apply: no more than eight hours per day, no more than 48 hours per week. Workers with night shifts begin earning overtime after seven hours in a day or 42 hours in a week, while workers whose shifts cover both day and night start earning overtime after 7.5 hours and 45 hours.
Workers are guaranteed at least one day off per week. Overtime rates in Mexico are set at 200% of pay for the first nine hours worked after 48 hours in a week and for the first three hours worked after the first eight hours in a day. After an employee works 57 hours in a week or 11 hours in a day, all hours worked after that point are paid at 300% of the normal pay rate.
All work contracts in Mexico are assumed to be indefinite arrangements (entitling workers to benefits) unless a contract exists specifying otherwise. Employers who wish to set a specific timeline for an employment contract must do so in writing before the employment begins. If an employee begins working before a contract goes into effect, the employee’s term may be treated as indefinite by default.
To guarantee compliance with labor laws, companies in Mexico must register with the Mexican government’s online compliance tool. Using this tool, employers can report the status of their compliance in three distinct areas and receive feedback on any required improvements and timelines for changes. Every company using the system receives a compliance rating of 0 to 100. Employers can also use the system to receive certifications and recognitions in Mexican labor law compliance and standards.
Mexico and the U.S. (along with Canada) formerly operated under the rules of NAFTA. That agreement ended when the USMCA went into effect in July 2020.
Under the USMCA, labor organizations in Mexico can bring complaints against companies, while the former rules forced the same organizations to lodge their complaints with the government. This change could potentially expose employers in Mexico to new risks if they do not prepare accordingly. Other changes went into effect as well, including a new Rapid Response Labor Mechanism to investigate potential employment problems quickly and efficiently.
Mexico also enacted internal labor law reforms within the last few years — some because of internal politics, others to comply with outside pressures. These forces helped create a shift in the relationships between businesses and employees throughout Mexico. Today, labor organizations in Mexico are more powerful than they were in the past and have a healthy amount of political support. Unions also have the power to act on behalf of a worker even when that worker does not wish for the union to act.
Related: How to pay remote workers in Mexico
To employ and pay workers in Mexico, companies must either establish a local legal entity within the country or work with an employer of record, such as Remote. An employer of record takes on the duties of payroll, benefits, taxes, and local compliance, protecting businesses from the consequences of operating illegally in a foreign country. Learn more about employers of record by visiting our educational resource center on the subject.
Mexican laws mandate that all employers of workers in Mexico pay employees in pesos at accounts with Mexican banks. Acceptable banks are designated by the government, so companies must be careful not to choose the wrong one. The Mexican tax administration service (known as SAT) must approve pay stubs before employers can provide employees with official documentation of their pay.
Any person who wishes to work in Mexico must acquire a visa to do so, regardless of country of origin. Consulates can provide visa services, as can the National Institute of Immigration.
Mexico offers a variety of different visas. Most employees working in Mexico who are not Mexican citizens must get a permanent resident visa. Foreign citizens who wish to live in Mexico but do not expect to stay permanently can get a temporary resident visa if they plan to stay in Mexico for more than 180 days in a year.
Mexico also offers tourist visas, which are good for up to 180 days. However, people visiting Mexico on a tourist visa are not allowed to perform any work in the country. Visitors cannot convert tourist visas to work visas.
Employees have 30 days after entering the country to secure the visa they need. To receive the appropriate visa, the employer must apply at the Mexican Institute of Immigration. If all goes well with that process, the employee can then apply for the appropriate visa at a consulate or at the National Institute of Immigration.
In Mexico, workers are entitled to several statutory benefits with a few unusual additions. Because the law mandates a robust catalogue of benefits for all workers, many companies do not offer much more than the minimum.
Companies in Mexico are required by law to distribute 10% of taxable profits to workers in a profit-sharing model. This profit-sharing distribution must be delivered in May each year. Profits considered “taxable” are determined by Meican tax law. Distributions are divided into two parts: first, an equal distribution for all workers based on number of days worked, and second, a distribution made in proportion to the amount of wages earned that year.
New companies are exempt for the first year they are established in Mexico. Director-level employees and above do not receive shares.
Employers must also provide a yearly bonus to employees of at least 15 days’ worth of salary, although most companies provide at least four weeks’ worth. This bonus, called “Aguinaldo,” is usually considered a Christmas bonus and is paid out in mid-December.
Managers and other senior-level employees enjoy substantially better benefits than contributor-level employees. These employees receive many types of bonuses and extra compensation that others do not, as is common in other countries, including the U.S. It is not uncommon for high-ranking employees in Mexico to take multiple hours for lunch breaks, for example, while lower-level employees take the standard one hour.
After an employee works for an employer for one full year, that employee is entitled to a minimum of six days paid time off. Employees earn extra days of federally guaranteed PTO depending on the number of years they have worked with the same company. Foreign companies hiring workers in Mexico and companies with more senior-level employees usually offer more PTO than the minimum.
Employers may grant sick days in addition to PTO, but they are not required to, as Mexico’s social security programs pay for sick leave in most cases. Employees rendered incapable of working can provide medical documentation to receive 60% of their salaries. If they are suffering from an illness they received directly because of their work environment, they can receive the full amount of their salary in sick pay.
Parental leave in Mexico is different for fathers and mothers. Mothers receive six weeks before and six weeks after childbirth as paid leave. Fathers only receive a guaranteed five days of parental leave after the birth of the child. Employers are not responsible for these payments, however — Mexico’s social security program picks up the tab.
Public health insurance in Mexico has considerable gaps. Many employers attract top talent by offering additional health coverage for employees and their families. Private insurance remains uncommon in Mexico but tends to provide access to better coverage, facilities, and forms of treatment. Some employers purchase healthcare plans for employees outright, while others provide stipends to let employees pick their own plans.
Though not required by law, employers frequently provide food vouchers to employees in Mexico. These vouchers are good for food and other basic essentials at a variety of stores, allowing employees to keep their paychecks for purposes outside groceries.
Depending on whether employees must travel for work, some companies offer compensation to help employees pay for gas or public transportation. For senior employees, companies often provide company vehicles. Senior employees sometimes opt to purchase their company vehicles at special pricing if they desire.
Companies can retain a monthly percentage of their employees’ salaries to put into a savings fund while contributing an equal percentage. These savings funds cannot exceed 13% of a worker’s pay. Workers usually receive their full distributions of these funds in a one-time annual payment.
Any worker who works in Mexico for more than half of the year (183 days) is personally responsible for registering with the proper authorities and making the appropriate tax payments. This only applies to people working for non-resident employers, though. Those working for resident employers are responsible for taxes even if they live in Mexico less than half the year.
Failure to comply with this requirement can result in fines. The tax year in Mexico is the same as the calendar year, January 1st to December 31st.
Workers in Mexico must file taxes by April 30th. Unlike the U.S., Mexico does not allow extensions. Workers must submit payment for tax balances at the same time they file. In certain cases for non-residents and residents employed by companies outside the country, workers must file taxes every month on the 17th. Employers are required to provide workers with Form 37, the standard annual tax document, by the last week in February.
Interestingly, couples in Mexico cannot file joint returns. In many cases, however, couples can choose to report all income under the name of the spouse with the higher income, although there are exceptions and caveats to this rule (and doing so usually does not result in tax savings). Anyone unfamiliar with local tax laws should consult their employer of record, employing business, or a local tax professional.
Mexico follows a progressive tax system similar to the one in the U.S. Rates range from under 2% to 35% depending on income. People who are living in Mexico on a work visa who do not have a permanent residence within the country pay rates ranging from 15% to 30%. U.S. citizens in Mexico must remember to file their U.S. taxes as well, even if they do not earn any income in the U.S. for the year.
If things don’t work out, you can fire an employee in Mexico with or without cause. Any person who works for a company in Mexico for at least one month is presumed to be an indefinite employee of that company in the eyes of the law unless otherwise stated in an employment contract. Once that deadline passes, the company must provide a severance package.
Employees with longer employment relationships earn larger mandated severance packages. Depending on the nature of the departure (voluntary resignation by the employee, termination with cause, or termination without cause), the size of the mandatory severance package changes.
Disputes regarding termination go through the expected channels and often involve union representation and government agencies. Employees who want to protest their termination have a right to a speedy and transparent process, so businesses should be prepared with documentation for their reasoning behind any termination. As difficult as firing an employee in Mexico can be, however, employers are not required to give advance notice for terminations.
Employers are allowed to use one-month probationary periods to evaluate employees, but these periods do not always protect employers in full. Companies should avoid relying too heavily on probationary periods to avoid becoming entangled in costly lawsuits.
Severance packages in Mexico change based on the length of time the employee worked for the company and the nature of the departure.
Employees who voluntarily resign are still entitled to severance packages in Mexico, although these severance packages are smaller than those received by employees who are fired with or without cause. When an employee resigns, the employer must pay for any days worked but not paid in the month; a proportional part of the employee’s Christmas bonus; a proportional part of vacation time, valued at the employee’s salary rate; and parts of other benefits outlined in the employment agreement, including bonuses and profit-sharing.
When a company terminates an employee with cause, the company must pay everything that would be paid to an employee who voluntarily resigns. In addition, the employing company must pay the terminated employee 12 days’ worth of salary per year worked at the company.
Employees terminated without cause receive substantial compensation. Employers must pay at least three months’ salary to start. On top of that, employees fired without cause receive a seniority bonus, 12 days’ pay per year worked after the employee has worked for 15 or more years, capped at double the daily salary of the area. Employees terminated without cause may also receive expired wages, 20 days of salary per year worked in certain cases, and proportional parts of other benefits.
Employers must register with the IMSS, which handles social security administration in Mexico, within five days of hiring a new employee in the country. Employers are required to withhold a certain percentage of salary for social programs.
Employees typically see a little less than 3% of their pay withheld for social obligations. Employers pay substantially more, usually between 15-31% of the employee’s salary. This amount can change based on the company’s “risk status” as defined by the Mexican government.
Contributions are capped at 25 UMAs, a standard of monetary measurement used by Mexican authorities. In 2020, the monthly UMA was set to $2,641.15 Mexican pesos.
When employing workers in Mexico, businesses have two choices: treat them as employees or treat them as contractors. This choice remains relevant regardless of whether the worker has lived in Mexico since birth or only moved there recently. This is true in countries all over the world, not just in Mexico.
In the last 10 years, Mexico has introduced new penalties to crack down on employers who attempt to skirt the laws regarding employee classification. Rather than treat all employees as contractors and hope for the best, companies should take care to go through proper channels or risk getting involved in costly legal trouble.
Foreign businesses are legally permitted to work with Mexican contractors. Companies who wish to use contractors should ask those contractors to register with local tax authorities as such. Further, companies with Mexican contractors must be careful about exclusivity deals, non-competes, explicit instructions on how and when to work, and other factors that could indicate an “employment relationship” to Mexican authorities. These agreements can also come into play when considering permanent establishment risk.
Regarding taxes, independent contractors in Mexico are responsible for their own. Companies pay independent contractors as vendors for a service, relinquishing control over the worker in exchange for freedom from certain responsibilities. Again, though, employers must be careful to avoid misclassification, which can lead to substantial financial penalties and legal headaches.
Whether you want to work with independent contractors, hire a single employee, or onboard an entire team in Mexico, Remote is here to help. We empower businesses of all sizes to work with talent all over the world. Our unique employer of record solution allows us to create the best experience for employees in Mexico while providing the highest standards of compliance and protection for international employers. Contact us today to learn more.
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