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How to Calculate Severance Pay in Mexico

Severance pay for terminated employees is one way to compensate workers who may have been let go without a sufficient reason.  Some countries require employers to pay severance for any type of termination, but in Mexico, it is only paid for terminations without fair cause.

International employers hiring in Mexico will want to know the rules for post-termination severance.  This includes the criteria for employees to qualify, calculation, and how unused, accrued vacation leave is handled.  This guide will explain the basics, but to be safe you may want expert, in-country assistance.

Who is entitled to severance pay?

Any employee in Mexico who is terminated is entitled to severance unless it is a voluntary resignation or termination for cause.  However, the entitlement only applies to ‘permanent workers.’  Permanent/temporary workers are defined as:

Permanent Employees: Employed for six months or longer, and the worker receives full severance benefits for termination without cause.  Mexican labor policy favors long-term permanent employment over shorter, repeat contracts.

Temporary Employees: Less than six months of employment, as a ‘contract’ employee.  Temporary contracts are renewable, but only if it is for a different position.  There are no benefits owed, but the worker gets full compensation even if the contract is not completed due to the employer’s choice, so it is a guarantee of sorts against unforeseen termination.

Is there a probationary period for eligibility of severance pay?

No there is not a probationary period for eligibility, and as soon as the permanent worker status is attained at six months, then severance benefits will apply.

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How is severance pay calculated in Mexico?

The calculation of severance in Mexico has several different components, which all add up to a total payment of almost four months of salary.

For a Termination Without Fair Cause:

  • 90 days salary + benefit amount; and,
  • 20 days of salary + benefit amount for each year of service; and,
  • 12 days of salary only for each year of service (capped at 2x minimum wage); and,
  • Accrued leave benefits and unpaid salary (up to one year) since dismissal, while the case is being heard.

Given these generous severance amounts, it is advised to have a justifiable reason for termination, listed under the labor code, or at the very least reach a mutual agreement with the employee to avoid the filing of a complaint.  The Mexican authorities tend to favor the employee in these cases, so the employer should not hope to prevail and avoid payment.

For a Termination with Fair Cause

  • No severance is owed, but documentation of the reason should be kept by the employer.
  • Accrued leave and unpaid salary are still owed.

Justifiable reasons for termination with ‘fair cause’ include workplace misbehavior and harassment, security compromises, working under the influence, revealing trade secrets, etc.

Client Case: Accrued Vacation Leave Payout

Context:  Another form of severance is the payment of accrued vacation leave, and our client with employees in Mexico wanted to know if they would need to pay this for terminated employees.

Solution:  We informed them that the unused, accrued vacation and prima leave would have to be paid out, regardless of whether the employee resigns or is terminated for fair cause.  Also, if the employee has ‘negative leave days’, those would be deducted from the final payslip.

Do you need more information about Mexico?

If severance rules like this are new to you, there might be other questions such as:

If there is a mutually agreed termination, can severance be negotiated by the employee?

 Is the daily salary amount for severance an average over the entire span of service, or the most recent daily salary plus benefits?

Can an employee be terminated for fair cause immediately and without notice?

Facing the complexity of foreign employment rules, our clients turn to us for compliant solutions to their challenges in offering benefits, running payroll and meeting all labor laws.  We make international employment simple.

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Looking to hire an employee in Mexico? Get in touch.

The information in this article is subject to changes in local legislation.

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