Organizations looking to expand into the Nearshore region often come up against labor law regulation that is entirely different from their home country. Without specialist, country-specific knowledge, companies run the risk of making errors during the recruitment or dismissal of employees that can become costly and time consuming to resolve.
Nearshore Americas spoke to three labor law specialists in Mexico to hear the most important aspects of hiring and firing in the country.
Hiring Talent and Beginning the Labor Relationship
Starting the labor relationship properly in Mexico is essential for the health of the employment contract between employee and employer, as well as for the security of the employer further down the line, explained Fernando Lopez, Labor & Employment Associate at Pizá Abogados in Mexico City.
“Employers must always have an adequate hiring scheme in place so that the employment relationship is healthy from the very beginning, and that there are preventative measures or mitigation action in place so that the employer is protected should it need to terminate its relationship with an employee,” said Lopez.
Changes made in Mexico’s Labor Law Reform of 2019 attempted to tighten protection for employees who were not always guaranteed their rights during employment disagreements. But understanding the changes, and the different types of employment contracts, are paramount for companies entering the country for the first time.
“Foreign companies are most at risk of getting the labor law process wrong because it’s completely different from, for example, labor law in the US. There is no at-will employment contract in Mexico, so if employers contract workers on the wrong type of contract, they set themselves up for problems later,” said Ernesto Sánchez, Labor Lawyer at Kroy Abogados.
Under Mexican law, employers can contract workers under several individual employment contract types. Each is intended to give the employer the flexibility to hire talent to meet its needs, while ensuring that individuals are themselves protected from abuse. These contracts are:
Indefinite Contract: An ongoing contract for which there is no end date. This is the most common contract form. Cause and proof must be shown by the employer if it decides to terminate an employee’s contract. A severance package is paid if proof is not adequate.
Fixed-term (or Specified) Contract: Generally used when a company needs to hire an employee to temporarily replace another. The employment ends at the conclusion of the fixed-term.
Specific Project Contract: For situations where a company has a specific project to be completed and will not require the services of an employee afterwards. Employment ends with the conclusion of the project.
Initial Training Contract: A three-month contract in which an employee is expected to acquire knowledge and skills necessary for their hired role. Employment can be ended before the conclusion of the contract if the employer does not believe the employee is learning.
Terminating Contracts: Points to Consider
Companies sometimes need to end their employment relationship with employees. In Mexico, if companies want to terminate an employee’s contract without mutual consent or just cause, such as gross misconduct, sexual harassment or unjustified absences, they are required to pay a severance package equal to 90 days of the employee’s total daily compensation, plus 20 days of compensation per year worked at the company, a ‘Seniority Premium’ equivalent to 12 days’s daily salary per year of service (with a limit of twice the country’s minimum wage), plus any left over benefits like unused vacations or overtime.
Employees have the right to contest their firing and can file a case against the company that will begin a process to a local labor board which will eventually submit a ruling for one party. During this process, companies must offer undeniable proof of the misconduct that the employee committed.
“The Federal Labor Law (FLL) protects the employee; it’s a social right that we as employees have. The burden of the proof for terminating a contract is placed entirely on the employer. Without providing any proof of termination will be extremely difficult,” explained Rodrigo Espiritu, Labor & Employment Practice Senior Associate at Creel, Garcia-Cuéllar, Aiza y Enríquez law firm.
“When beginning the termination process, companies need to be ready with proof of their accusation against the employee. There must also be an interview with a notary public, evidence of any correspondence with the employee as well as their contract details. After that, a termination letter describing reasons for the termination must be presented,” Lopez said.
Companies may go into the process with the intention of paying a part of the severance package, but the employee has the right to refuse this and seek the full amount.
Unlike the US, Mexico does not have labor courts. For now, it has labor boards, though they are in the process of being fazed out in favor of courts. Labor disputes can therefore take years.
“At the moment, disputes can take two years to be resolved. If an employee files an appeal against a ruling, the dispute can take up to four years,” said Lopez.
The financial and time cost of these processes is heavy for both parties. This is why getting the hiring process right from the beginning is so important.
“At the moment, disputes can take two years to be resolved. If an employee files an appeal against a ruling, the dispute can take up to four years.” — Fernando Lopez
“Organizations must be aware of the types of labor contracts and make use of the ones that are most appropriate for the job and type of employee they need. If they have doubts about an employee’s ability, they have the option to use an initial training contract in place of an indefinite contract,” said Espiritu.
But companies must also be aware of the conditions of each contract. For example, if an employee on an initial training contract stays beyond the date of the original time period, they automatically receive the full protection of labor law for indefinitely-contracted employees.
“The initial training contract offers a three-month (6 months in special cases) period where the employee can try to learn the skills required. If they don’t, the employer can terminate the contract at any time without having to pay any form of severance. But if the contract goes one day over the established period of time, it becomes an indefinite term contract and terminating it means paying the full severance package required,” explained Lopez.
Other Employment Considerations
Aside from the hiring and firing processes, companies are obliged to provide certain benefits and compensations to their employees.
The recent teleworking amendment to the FLL is particularly relevant to Nearshore companies in the remote work era. For any teleworkers – defined as employees who spend more than 40% of their time working remotely – the employer has to provide, install and maintain equipment for work, pay associated costs for electricity and internet or phone services, and respect the ‘right to disconnect’. ‘Hiring anywhere‘ is a benefit to companies, but they must understand the full gamut of their obligations.
Another Mexico-specific regulation is NOM 035, which requires employers to identify any psychosocial risks for employers. This we enacted after the International Labor Organization noted climbing rates of mental health problems.
Nearshore companies should also note the country’s ban on outsourcing for all services that are related to a company’s core business or corporate intentions.
Regulations like these mean country-specific knowledge of the legal landscape is paramount.
“This can’t be stressed enough,” said Sánchez. “Organizations must speak to a specialist law firm before embarking on recruitment or termination of contracts.”