Understanding Severance Pay Regulations in Mexico

October 05, 2020

Hiring a satisfied, qualified labor force for your manufacturing operation in Mexico can have implications beyond your rate of productivity. It can also determine whether you’re paying for frequent turnover due to the high employee severance cost in Mexico. 

Ensuring your employees are a good fit for your operation is a critical first step in hiring and managing your labor costs. However, it’s also important that your HR department, or advisor, have sound knowledge of Mexico’s Federal Labor Law as it pertains to employee termination. By understanding when and why you may be liable for severance payments, you can protect your company from lawsuits and other expenses. 

How Shelter Companies Can Help Reduce Turnover in Mexico

An introduction to Mexico’s labor laws 

Mexico’s Federal Labor Law lays out stipulations around rightful termination and severance pay. When terminating an employee, the employer must provide written notice stating the cause of termination and corresponding dates of these actions. If the employee refuses to acknowledge receipt of this written statement, it must be filed with the local labor board within five days of termination. 

In September 2019, Mexico enacted legislation to reform its labor laws to better protect employees’ rights to unionize. The reform overhauls the enforcement process for Mexico’s existing labor laws. While the reform is focused on expanding employees’ awareness of their rights, it also offers some protection to employers. The updated law notes that the lack of a termination notice delivered to the employee creates the presumption that the termination was without just cause, whereas before, it voided a termination altogether. Having documentation on-hand that proves the termination was with reason will be critical for employers. 

If subject to legal action from the employee, employers cannot simply deny the dismissal and offer employment to the terminated employee a job, nor will doing this shift the burden of proof to the worker. 

Critical contract differences         

Severance pay is only extended in the event of terminating permanent employees. However, it is important to be aware of contract differences to ensure an employment agreement is not misclassified. There are two contract types: 

Temporary contracts. Contract employees are compensated for the full time of their employment, but are not entitled to termination benefits. However, there are stipulations on these contracts to consider. Legally, a temporary contract can be no longer than six months, whether that’s through a single contract or several shorter contracts. The moment a temporary contractor turns into a full-time employee, manufacturers are liable for severance benefits. 

Manufacturers are encouraged to hire contract employees as soon as they are deemed to be a good fit for their organization due to the competition for qualified employees. This contract phase can be a good time to ensure that the employee will prove a good fit, reducing your likelihood of ever paying a severance package. 

Permanent contracts.  Upon terminating a full-time employee, an employer must provide three months of wages, plus an additional 20 days’ wages for each year the employee worked equal to the most recent amount earned, as well as accrued benefits owed. The days between termination and the date when the severance is paid count as days worked and are owed as part of the severance package. 

The right to reinstatement 

Under Mexican Labor Law, permanent employees have the right to file for reinstatement and compensation within two months of termination if they feel they have been let go without legitimate cause. This is yet another reason it is essential to maintain documentation that supports the employer’s grounds for termination. 

If the terminated employee files for reinstatement and is, in fact, approved, the employer will be liable for paying the wages that the employee would have earned from the time of termination through the date of reinstatement. 

There are some restrictions on reinstatement. An employer is exempt from reinstating the employee if that employee was either a temporary worker or had been with the company less than a year, or in cases where an employment relationship is not possible because of the position held or nature of the work performed. 

Be certain of rightful termination

Unfortunately, there are plenty of reasons that an employee must be let go, from deception to delinquency to negligence. In the event that an employee breaks the law or clearly violates a workplace policy, the employer may not be responsible for severance pay. However, the employer must then carefully follow the regulated steps of this process, or be on the hook for severance—or legal repercussions. 

It is important to consult your HR team or advisors before making such a move. There are nuances to Mexico’s labor law that are best understood with the guidance of an experienced HR professional. 

Given the nuances of the federal labor law, and its regular updates, many organizations opt to work with a Shelter Service Provider or an HR Service Provider in Mexico. As part of its comprehensive payroll support services, Tetakawi takes responsibility for ensuring federal law compliance, processing employee terminations, and providing conflict resolution services for employee, legal, union, government and third-party issues. 

To learn how Tetakawi can support your HR needs, contact us today. 

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