Employers who terminate permanent employees in Mexico can be faced with expensive severance costs. Mexican labor law requires companies to compensate laid off or fired workers unless the employee voluntarily resigns, or the company can prove that there was just cause – in Mexico the bar is set high for just cause.
So how do companies minimize termination costs? Here are 6 tips for reducing or avoiding severance:
1. Hire Cautiously and Fire Promptly
There is a common Mexican adage which roughly translates as “hire carefully and terminate quickly”. Careful hiring and vetting, especially of senior employees, pays off by avoiding mistakes that cost money to correct. Once you hire though, the longer you wait to terminate the more it costs. Mexican managers typically react quickly to poor performance or infractions, especially early in the employee’s tenure because it minimizes long term cost.
2. Modify Your Planning Tools
Temporary layoff is not an option in Mexico because a layoff is considered a termination. Once an employee is permanently hired they are entitled to severance. If you’re planning makes use of temporary layoff to adjust manpower to volume you may find yourself with high costs in Mexico. You should adjust planning to use attrition and temporary contracts to modify resources.
3. Use Temporary Contracts
Employers can hire employees for up to six months on one or a series of temporary contracts. When a contract ends there is no severance due and no obligation to renew. Use them to accommodate surges or seasonality. They can also provide a probationary period for assessing new employees. There are typically many employees in transition who readily accept contract positions, particularly for unskilled positions. There are also workers who are not seeking permanent work in most fields. The exception is a candidate who is currently employed elsewhere and must resign a permanent position to move. In these cases a contract may not be possible.
4. Maintain a Limited Overtime Schedule
Overtime is expensive in Mexico. The first three hours per day (to a maximum of nine hours per week) is double time. Sundays and holidays are triple time. However, planning for a minimal level of overtime that can be reduced or eliminated as needed can buffer volume fluctuations and avoid the costly route of hiring and terminating. Overtime can be adjusted without notice so scheduling a small amount to cover your maximum volume condition can be a useful tool in your manpower plan.
5. Negotiate Banked Hours
Employees may be willing to bank hours in peak periods in order to have paid time off during holidays such as Christmas when volume may be low. The union needs to be a part of putting a plan together and they are often cooperative and helpful. They are also an essential part of getting the employees’ support and participation.
6. Offer Voluntary Leave with Partial Compensation
Another way the Union can be helpful is to negotiate an option for employees to voluntarily accept partial pay in return for time off. This option can help reduce costs and retain valued employees. Given the economic situation of most Mexican workers, this option is usually only effective for short periods of time but it can be beneficial to both parties.
These tools can help contain severance costs and still provide manpower flexibility. Most employers manage the cost of termination to less than 5% of payroll, some to less than 1%. Perhaps the most important tool for avoiding severance costs is to hire carefully and terminate quickly – good advice anywhere in the world.
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