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5 Things to Look Out For When Employing in Mexico

Global mobility professionals that are responsible for sending employees on assignment or employing local nationals will need to understand the numerous rules and regulations that are unique to Mexico.  Because compliance is a high priority when doing business abroad, a thorough understanding of Mexican employment, payroll and tax laws is essential for employing in Mexico.

Our clients often come to us not knowing where or how to start navigating the complex and often overwhelming regulations in some countries. We have put together a guide that can help you gain a better understanding of the process, based on our extensive experience with employing foreign nationals in Mexico.  While many of the rules are complex, it is possible to employ both foreign nationals and Mexican citizens with the aid of local experts or employment outsourcing firms.

1. Work Permits in Mexico

The first thing to know is the immigration policies and work permit rules in Mexico.  Previously, it was easy to send employees there on assignment, by first entering on a tourist visa and then applying for a work permit from within the country.  Now that has all changed, and the steps involved are different.

Unrestricted

Unrestricted foreigners include those citizens of the US, Canada and most EU countries. These citizens can visit Mexico without requiring a visa but if they intend to work in Mexico they will need to get the appropriate visa.

Restricted

Restricted foreign nationals are those citizens of China, Russia, India and other Latin American countries.

Work Permit Process when Employing in Mexico

It is important to note that individuals cannot work in Mexico without some form of work permit, irrespective of their nationality. There are no nationals who have work authorization exemptions with Mexico.

The work permit process briefly outlined:

    • The employer obtains an Employer Registration Certificate (which must be included with any immigration application)
    • A temporary resident visa is obtained for the employee
    • Work authorization is applied for to give the employee the right to work in Mexico

If you’re employing in Mexico, you might find our guide on the process for obtaining a work permit in Mexico useful.

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2. Employee Termination in Mexico

Employee termination is one of the most complex areas of employing in Mexico. Unlike the US and some other pro-business countries, in Mexico any employee that works for a month or more is presumed to be a permanent employee.  What this means is that any termination must be for some justifiable cause, and will have to follow Mexican labor laws on termination and severance pay.

Severance Pay

The employer has the obligation to pay 3 months of salary according to Mexican labor laws plus 20 days of salary per each year worked (seniority) and 12 days per each year worked.

A company should take this into consideration when employing in Mexico.

3. Structuring Employment Contracts when Employing in Mexico

As in most countries, the employee must have an employment contract that complies with Mexican labor and employment laws (in addition to any contract the employee may have in the home country).  The contract will detail all of the terms of employment, salary, services, holidays and expected work hours and days.

It is helpful to have a third party well versed in Mexican labor laws to draft or review the contract to make sure that it contains all required items, including:

    • Information of the employee (Nationality, gender, age, marital status)
    • Terms of the employment
    • Work Days and Hours: The work week in Mexico requires at least one rest day, preferably Sunday. Work hours are no more than 8 hours for day shifts, and 7.5 hours for night shifts.
    • Overtime in Mexico: A 25% bonus must be paid if an employee works on Sunday.  An employee who works more than 8 hours on any given day, will receive double salary for the additional hours.
    • Services rendered by employee: position description, skills and responsibilities
    • Location where the services will take place: City and region, office or remote
    • Salary amount, terms and payment dates
    • Training references
    • Holiday entitlement
    • Paid vacation: After one year of work, an employee is entitled to six days paid vacation. Two days are added each year up to the fourth year of employment.  After that, another two days added for every additional five years of work.
    • Holidays: There are seven required paid national holidays each year for all employees.
    • Other working conditions: Bonuses, commissions, benefits in kind and pensions

4. Paying Employees in Mexico

There are some specific rules for running payroll in Mexico, whether with a DIY method or using a third-party employer of record to do it for you.  Many companies just entering Mexico or with a minimal commitment to the country will opt to outsource payroll to simplify and speed the process.

Payroll Rules

New Mexican Tax Revenue regulations require that net pay for all employees be received in official Mexican banks, and paid in Mexican pesos.  Net pay for the purposes of meeting the new law will include salary, cash benefits in kind and hardship allowances.  401k contributions and medical insurance do not have to be included in the Mexican payroll.

Starting January 1, 2017 employees must have accounts set up in Mexican banks nominated by the government, so if they don’t have one now they will have to set one up. You can find more information about these rules and how to follow them in this article. 

Payslips

The process of issuing payslips also has to comply with Mexican law, and they first must be approved and released by the SAT (Mexican Tax Authorities) before the employee receives an official copy.  As mentioned, all compensation must be made in Mexican pesos, but it can then be converted to another currency.

In order to issue the payslips, they are electronically stamped after the SAT match up the amount of money sent from the employer’s bank account to the employee’s bank account.  Only then can an official payslip be issued.

5. Tax Filing in Mexico

Tax filing is another area of complexity when employing in Mexico, and many multinationals in Mexico will seek third party assistance to make sure it is done correctly.

Here are a few of the key requirements:

  • Form 37, the Annual Constancy of Wages and Salaries must be provided to the employee by the local employer or record or subsidiary by the end of February.
  • The employee verifies the amounts in a PDF sent electronically that must be signed.
  • The employee can then fill out their personal tax return using the information on Form 37, and must meet the filing date in April.

You can find more detail about tax filing in Mexico in this article.

Summary

As can be seen by this quick guide, there are a number of administrative and compliance challenges presented when employing workers in Mexico.  Like many countries, Mexico is becoming more strict about immigration policies, overuse of business visas, adherence to labor protections and financial requirements.

Because of this, more companies are turning to third parties to assist with some or all of the Mexican employment and payroll guidelines, and in many cases will use an end to end employment solution such as a GEO employer of record (EOR).  The EOR is the legal employer in Mexico, taking responsibility for every aspect of immigration, payroll and tax withholding.  This can be a real asset for companies that prefer to use their resources to oversee business activity and growth, rather than setting up a local corporation and attempting to meet complex Mexican regulations with a DIY employment approach.

If you're feeling overwhelmed by the administrative burden and want us to help with employing in Mexico, please get in touch.

Read our other articles on Employment in Mexico here:

Employee Tax Filing in Mexico
What are the New Payroll Rules in Mexico in 2017? 

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