Nearshore Americas
With Mexico’s Vacation Reform, Expect a Bump in EOR Pricing

With Mexico’s Vacations Reform, Expect a Bump in EOR Pricing

A recent reform in Mexico’s labor law granted employees a considerable increase in their guaranteed paid vacation time, providing a much needed victory for workers’ rights in the country. For employers, unfortunately, that triumph will most probably increase their labor costs.

After a heated back and forth between federal authorities and private enterprise lobbying groups, Mexico’s Congress passed a bill which increases mandatory paid vacation time to 12 days from the get go. Before the changes, Mexican labor law granted workers only six days of paid vacation time, putting Mexico’s employees among the least benefited in Latin America. Argentine law grants 14 days; Chilean and Colombian law grant 15; Brazil grants 30 overall. 

Those 12 days shall be enjoyed uninterruptedly by the worker, unless he/she chooses otherwise. Mandatory vacation time will increase by two days with every year of seniority. After the fourth year, the two-day increase will be granted every five years. 

The reform was published days before the close of 2022, under President Andrés Manuel López Obrador’s signature in the country’s federal gazette. It entered into effect officially on January 1 of 2023.

A Bump in Pricing

The impact in labor costs will be felt beyond local companies. Providers of employer of record (EOR) services expect their overall pricing in Mexico to go up due to how vacation bonuses are tallied according to Mexican law.  

Pricing of EOR services tends to account for two different costs: the actual costs of employment plus what is referred to as a “management fee”. Deel, for example, charges a per employee management fee of US$599 for services in Mexico. To that, one must add the salaries, which include cost of employment –tax obligations and benefits guaranteed by law–. In Mexico, the latter amounts to about 26% of each salary, according to Dee’ls hiring guide for the country.

“Any person working legally in Mexico as an employee will be bound to local law, no matter the location of its actual employer”—Natalia Jiménez, Deel’s Regional Head for Spanish-Speaking LATAM

When asked about the effects that the vacations reform will have in their Mexican operations, Deel recognized that the company won’t be exempt from whatever such effects would be, without specifying increases in overall pricing.

“Companies who hire employees in Mexico externally shall adapt to what the law establishes […] Deel won’t be the exception”, said Natalia Jiménez, Deel’s Regional Head for Spanish-Speaking LATAM, in a written statement to NSAM. 

“We will adapt promptly to these new changes […] Any person working legally in Mexico as an employee will be bound to local law, no matter the location of its actual employer”, she added.

NSAM reached out to Deel for a second time, asking about potential impacts of the reform on their pricing. They have yet to respond at the time of this publication.

Remote –also a provider of EOR services–, did make specific mention of a potential impact on their overall pricing, underlining that the increases might come from costs of employment, not their management fees.

“Remote charges a flat fee per month for each employee that is employed through its EOR service. That fee is on top of the total cost of employment which includes salary, social contributions required by the local government, benefits and other costs. The new legislation in Mexico may impact the overall cost of employment, but Remote’s pricing does not change,” the company explained in a statement.

A Legal Explanation

Several law firms in Mexico had already warned clients about the potential impact of the vacations reform in their financials. 

“[The reform] will have an important effect for employers as increasing vacation days will have an impact on payroll costs, since the vacation premium and the salary integration for social security contributions will be affected,” commented law firm Monsalvo Duclaud in mid-December, before bill had passed.

Days later, lawyers from legal firm Santamarina & Steta emitted an alert of their own, forecasting “an increase in the payment of the local vacation bonus, which is calculated based on the number of vacation days granted.”

Mexican labor law establishes that employees have a right to a yearly vacation bonus that amounts to at least 25% of the salaries corresponding to the paid vacation days granted. This bonus, of course, is additional to the salary itself and other employment benefits.

“[We might see] an increase in the payment of the local vacation bonus, which is calculated based on the number of vacation days granted”—Santamarina & Steta SC

With guaranteed vacation days effectively doubling, the amount paid for vacation bonuses will increase considerably. And as vacation days rack up with each passing year of seniority, so will the costs of employment. 

Though foreign companies will resent the hit of cost increases, there’s little possibility of EOR services falling out of favor, particularly for hiring Mexican talent.

EOR services have grown popular among tech companies abroad. The tech talent crunch gives little signs of yield, and businesses are looking for ways to cut costs without sacrificing the scale of their operations and the quality of their workforce.

In that context, EOR services have become a convenient workaround which allows for speedy hiring without the hassle of opening subsidiaries in each country, providing access to a truly global job market.

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Also, Mexico remains one of the more popular markets for hiring IT talent. The country is growing popular among US firms searching for tech workers at a lower cost. A recent report published by NSAM shows that Mexico graduates around 130,000 computer science students every year. To the volume available one can add cultural affinity, serviceable English skills and time zone alignment.

In spite of the possible cost increases brought by the reform, don’t expect to see the EOR market and tech hirings in Mexico to decrease significantly.

Cesar Cantu

Cesar is the Managing Editor of Nearshore Americas. He's a journalist based in Mexico City, with experience covering foreign trade policy, agribusiness and the food industry in Mexico and Latin America.

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