MEXICO - Kilpatrick Stockton LLP

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					Reprinted with permission from the publication referenced below.



A Primer for Foreign Investors in MexicoHiring, Firing & and Mandated Benefits
by Joycelyn L. Fleming and Charles M. Rice
In 1917, Mexico became the first country in the world to include specific protections for workers in its constitution. These constitutional provisions, supplemented by labor statutes, were designed to prevent potential abuses of a relatively powerless work force by powerful employers, and the constitutional and statutory framework of labor regulations in Mexico remains highly protective of workers today. This is due in part to the significant role that labor unions play in the Mexican political process. Recent social, political, and economic developments, including the adoption of the North American Free Trade Agreement (NAFRA) and the anticipated change of leadership in Mexico's most powerful association of unions, suggest, however, that Mexican employment law may soon begin a gradual period of change that will make the labor climate more appealing to foreign investors and multinational corporations. This article summarizes some of the major provisions of current Mexican employment law relevant to foreign businesses interested in operating in that country. Hiring Like many other Latin American countries, Mexico imposes specific requirements on the creation of employment contracts. Written contracts are required for all employees, and these contracts must set forth the terms of employment. This requirement may be satisfied by either an individual agreement for each worker or a collective bargaining agreement covering all workers, although each employee is entitled to a copy of the contract. The contract must include the period of employment, services to be rendered, the length of the work day, the employee's salary, training programs the employee will receive, a list of holidays, and an explanation of the vacation policy and the benefits to be provided. As a practical matter, a written employment contract establishes the terms of the employment relationship if any aspect of the employment is ever litigated in court. In the absence of a written contract, the employer would have the difficult burden of proving that the terms of employment were different from those alleged by the employee. A contract is presumed to be for an indefinite period, but the contract may specify that the employment relationship is for a limited duration. A limited-duration contract is permitted only when work conditions so require or when an employer must hire a replacement for a temporarily absent employee. If the underlying reason for temporary employment continues beyond the term fixed in the contract, the contract is deemed to continue until that reason is no longer present.

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Wages and Working Hours The National Minimum Wage Committee sets the minimum wage by region. The minimum wage is adjusted at least once per year, and sometimes more often because of extraordinarily high inflation rates. As of June 1997, the minimum daily wage for Mexico City and most northern regions along the U.S. border was 26.45 pesos (currently approximately $3.31), and the minimum daily wage in most southern cities and rural areas was about 22.5 pesos (approximately $2.82). For a number of skilled jobs and office jobs, the National Minimum Wage Committee, working through local committees, has set professional rainimum wage rates that differ from the minimum wage for unskilled employees. Almost all employers pay more than minimum wage, however. In addition to the minimum wage requirement, employers are legally obligated to give employees an annual Christmas bonus equal to fifteen days pay. The Christmas bonus must be paid before December 20. An unusual facet of Mexican labor law is that employers are legally required to engage in profitsharing with employees. Most businesses must distribute ten percent of gross profit to employees. Some businesses are exempt from the profit-sharing requirement, including newly established businesses (exempt during the first year), mining businesses (exempt during the exploration period), public and private welfare institutions, and businesses that do not meet minimum capital and gross income figures (essentially those that do not have a profit). In nonexempt businesses, all employees, except the director general, participate in the profitsharing. Even temporary employees are entitled to participate, as long as they work at least sixty days during the year. The distribution must be made by the employer before May 30 each year, and employees are entitled to a copy of the employer's corporate tax return for verification. The formula for an employee's share is generally based on the employee's salary and the number of days the employee worked during the year. Special rules, however, apply to the calculation of the profit-sharing amount for confidential employees (that is, employees in positions of trust, including those who have management, supervisory, inspection, or auditing responsibilities). The profit-sharing amount for a confidential employee may not exceed the amount allocated to the highest paid non-confidential employee. Mexican law provides for a maximum regular work week of forty-eight hours. The regular dayshift work week is six eight-hour days, and the regular night-shift work week is six seven-hour days with a forty-two hour weekly maximum. Employees are legally entitled to at least one "rest day" every six days, and this usually falls on Sunday. But, in practice, many employers negotiate a longer work day during the week so employees may also take Saturdays off and still receive compensation. Employees are also entitled to at least one half-hour "rest period" each shift. Hours worked in excess of forty-eight hours per week constitute overtime. Mexican law permits employees to work up to, but not in excess of, eighteen overtime hours per week. The first nine hours of overtime per week must be paid at a rate equal to double the regular hourly rate for the

Reprinted with permission from the publication referenced below.

employee. The next nine overtime hours (hours ten through eighteen) are paid at a rate equal to triple the regular hourly rate for the employee. Sunday work must be paid at a 25 percent premium even if the employee has an alternate day off during the same week, and employees who work on a rest day are entitled to double pay in addition to the regular salary for that day. Finally, holiday work is compensated at a rate equal to triple the regular hourly rate. There are seven legal holidays each year, and in relevant years, additional holidays are required for election and inauguration days. The seven holidays are New Year's Day January), the anniversary of the Mexican Constitution of 1917 (February 5), Juarez's birthday (March 21), Labor Day (May 1), Independence Day (September 16), the anniversary of the Revolution (November 20), and Christmas Day (December 25). Mexican law requires employers to provide employees with paid vacation days based on the number of years of service with the employer. The employee receives six days after the first year of employment, and two additional days for each of the next three years. After the fourth year of employment, the employee receives two additional days for each additional five years. These are, however, legally required minimums, and many employers provide additional vacation days as inducements to recruit and retain employees. In addition to the employee's regular salary, the employer must pay a bonus of 25 percent of the employee's salary for the time he is on vacation. Benefits All employers must register their employees with the Mexican Social Security Institute ("IMSS"). IMSS provides worker's compensation, health insurance, daycare, disability benefits, and death benefits to the survivors of a deceased worker. The ceiling for the qualifying compensation upon which IMSS taxes for these benefits is calculated is twenty-five times the minimum wage. Like American workers' compensation benefit programs, IMSS provides medical care and disability benefits for work-related illness, injury, or disease. Short-term workers' compensation benefits include payment to the employee of 100 percent of the employee's weekly contributory earnings (up to twenty-five times the minimum monthly wage) until the employee returns to work or is disabled permanently. The permanent workers' compensation benefit is 70 to 80 percent of covered earnings, depending on the employee's wage class, with proportionate amounts for partial disability. Widows receive a pension of 50 percent of the deceased employee's disability benefits, and surviving children receive 20 percent. Full orphans receive 30 percent. A lump sum funeral grant is provided that is twice the monthly covered salary. The employer's premium depends on the category of the employer's activity and its safety record. Premiums range from .34 percent to ten percent of the employee's qualifying compensation. With respect to sickness and maternity insurance, the premiums are shared between the employer and the employee. The employer pays 8.75 percent, and the employee pays 3.125 percent of qualifying compensation. In addition to these insurance benefits, IMSS provides daycare for employees' children. The premium is paid by the employer entirely and is calculated at one percent of the employee's qualifying compensation.

Reprinted with permission from the publication referenced below.

IMSS also provides somewhat limited retirement, general disability, and death insurance. The premium for these benefits is shared by the employer and the employee, with the employer paying 5.67 percent of qualifying compensation and the employee paying 2.025 percent of qualifying compensation. Under a new program that went into effect on July 1, 1997, part of the premium is deposited into an individual account in the employee's name. These individual accounts will be managed by private companies rather than by IMSS, and employees can choose to increase the percentage of their qualifying compensation that is paid into their individual account. Benefits from an employee's individual account are available upon retirement or for use in connection with housing expenses. Pensions Mexico has increased the amount of government provided pension benefits in recent years. The normal retirement age is sixty-five, but early retirement at age sixty is permitted with a reduction in benefits. To be eligible for benefits, an employee must have paid at least 500 weekly contributions (approximately ten years). The amount of benefits, however, is minimal. The benefit is a percentage of the average monthly salary over the final five years of employment plus a small percentage of the average monthly salary for each year of contribution over the minimum 500 weeks. There is no cost-of-living adjustment for these benefits, and the limit on the contributions and benefits is ten times the monthly minimum wage at the date of retirement. In the case of death benefits, limited survivors' pensions are provided to widows and orphans if the employee paid 150 weekly contributions. Widows receive 50 percent of the employee's corresponding general disability benefit, and orphans receive 20 percent of that same disability benefit. IMSS also provides a lump-sum funeral grant equal to double the monthly minimum wage. Disability In the case of general short-term disability benefits, there is a three-day waiting period. After that, IMSS pays 60 percent of the covered salary for up to fifty-two weeks. Employers generally make up the difference so that the employee receives his or her entire salary, but this is not legally required. To be eligible for short-term disability benefits, an employee must have made at least six weekly contributions. Employees receive general long-term disability benefits if the employee has at least a 50 percent reduction in earning capacity and has made 150 weekly contributions. In addition to the IMSS contributions, there are two mandatory benefits programs in Mexico. Beyond regular employer contributions to IMSS pensions, employers must make additional contributions to the Mandatory Retirement Savings System (SAR). Social Security retirement payments were deemed insufficient, so in 1992 the government began to require employers to pay two percent of each employee's salary into a specific bank account in the employee's name, although there is a limit on the total contribution (it cannot exceed twenty-five times the minimum wage). The contributions are tax deductible to the employer and are not taxed to the employee when paid. The employee can withdraw funds only in case of retirement, unemployment, or disability.

Reprinted with permission from the publication referenced below.

Employers are also required to contribute to the Workers Housing Fund. The employer pays five percent of an employee's wages, up to ten times the minimum wage, into an account in the employee's name. Administratively, it is very similar to the SAR. INFONAVIT, a government agency, develops housing. Employees can use funds for buying building, repairing or renovating a house, and unused money can be withdrawn at retirement. Employers may choose to provide additional benefits and set them forth in individual or collective bargaining contracts. Any benefit that is voluntarily provided by an employer, however, becomes mandatory if it is provided for two years. Various combinations of benefits are typically provided for different categories of employees, with executives, managers, and other highly qualified employees receiving very generous benefits and other perquisites. Some optional benefits commonly provided include employee savings plans with employer contributions, medical insurance, educational reimbursements, meal tickets and transportation subsidies, death and funeral benefits, and extra vacation. Contributions are usually tax deductible to the employer and tax-free to the employee. Discrimination The Mexican Constitution states that no discrimination may occur among workers because of race, sex, religious beliefs, political doctrine, or social condition. Additional rights and protections are afforded women during pregnancy and in the period immediately following childbirth. Pregnant or nursing women may not carry out dangerous or unhealthy work, industrial work during a night shift, or overtime. During nursing, women are entitled to two extra half-hour rest periods during the day to feed their children in a clean, private area at the workplace. In addition, female employees are entitled to twelve weeks paid maternity leave (six weeks before delivery and six weeks after). Leave is possible beyond the twelve weeks, although the rate of compensation is reduced to 50 percent of the regular salary for the first sixty days of extension and after sixty days, any leave is unpaid. Job security is guaranteed throughout an employee's pregnancy, and the employer must hold the position open for one year after the child's birth. Termination Mexican law establishes stringent job security protections that significantly limit the circumstances in which an employee may be terminated and create financial disincentives to dismissals that do not satisfy the few legal grounds for termination. Also, discharged employees are generally entitled to receive severance benefits, either from the employer or from the government, regardless of the reason for termination. In Mexico, an employment contract may terminate for any of the following reasons unrelated to the employee's conduct. The amount of severance pay depends on the reason for the termination, as indicated in parentheses below:

Reprinted with permission from the publication referenced below.

• • • • • • • •

death of the employee (severance benefits go to the employee's survivors); mutual agreement (payments are negotiated); expiration of the agreed term of employment (accrued, unused vacation pay and Christmas bonus); completion of the work project for which the contract was made (accrued, unused vacation pay and Christmas bonus); physical or mental disability that prevents the worker from performing the job (social security payments, as discussed above); force majeur-an unforeseeable and uncontrollable event that interferes with the performance of work (severance pay, vacation, and Christmas bonus); Manifest cost-inefficiency of the operation (severance pay, vacation, and Christmas bonus); and bankruptcy of the employer declared by a competent authority (severance pay). Employees are preferred creditors of a bankrupt employer.

The Reasons for Termination In addition to the grounds for termination of an employment contract listed above, the Mexican Labor Law identifies fourteen circumstances constituting due cause for the unilateral termination of an employee by an employer. These circumstances are as follows: • • • • • • • • • • • • • • the employee obtains his or her position through false documents or by misrepresenting his or her credentials; the employee engages in acts of dishonesty or disruptive or violent behavior on the job; the employee engages in similar acts outside the workplace if such acts are serious enough to render the employment relationship an impossible one; the employee intentionally damages the workplace; the employee negligently causes serious damage to the workplace; the employee's behavior constitutes a safety risk; the employee commits immoral acts at the workplace; the employee reveals manufacturing secrets or confidential matters to the detriment of the employer; the employee is absent more than three times in a period of thirty days, without permission of the employer or without justified cause; the employee disobeys work-related orders without justified cause; the employee refuses to follow the prescribed health and safety procedures; the employee comes to work drunk or under the influence of any narcotics or nonprescribed drugs; the employee is unable to perform his or her duties because he or she has been sentenced to jail; or causes similar to those described above if they are of a sufficiently serious nature.

An employer relying on one of these grounds for unilateral termination must discharge the employee within one month after the offense justifying the termination.

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Written notice of the date and reasons for termination are required by law. The reasons for termination must set forth the factual information describing the events constituting due cause. Failure to notify the employee is enough to render the dismissal unjustified and trigger significant severance payments. Employees do not receive severance pay if they resign, but often employers negotiate a severance "bonus" with unsatisfactory employees in exchange for a voluntary resignation. “Such termination agreements must be ratified by the local Arbitration and Conciliation Board. Severance pay is required by law if the termination is without cause, if the employee dies, if an employee with more than fifteen years of service voluntarily retires (such an employee also receives a seniority premium), or if the employee quits because the employer failed to live up to its obligations. Severance pay is not required for justified dismissals (i.e., for cause), but in reality, payment of at least some part of the statutory amount is almost always negotiated. For most employees, the amount of statutory severance pay is calculated based on twenty days salary per year of service plus vacation due, vacation bonus, Christmas bonus, and profit sharing. Confidential employees, however, are legally entitled to three months salary plus twenty days wages for each year of service, accrued but unused vacation pay, and a Christmas bonus. In addition to severance pay, Mexican law requires payment of a seniority premium in certain circumstances. Employees with over fifteen years of service are entitled to a seniority prentium based on twelve days salary for each year of service. Dismissing an employee with fifteen years of service can be done only for very serious reasons and is very expensive given the severance payment and the seniority premium. In the case of the death of an employee with fifteen years of service, the seniority pay must be paid to the employee's legal beneficiaries. Because severance and seniority premiums can be costly to employers, most employers establish methods of financing these benefits. Employers often obtain insurance or prefund through trust funds or reserves set aside for this purpose. Terminations for cause are almost always appealed by the employee to the Arbitration and Conciliation Board, and 95 percent of them are resolved in the employee's favor, primarily because the burden of proof is on the employer and the Board begins with a presumption that the employee was wrongfully terminated. When a termination for cause is upheld on appeal, the amounts payable are accrued, unused vacation pay; vacation bonus; Christmas bonus; profitsharing; and if the employee has over fifteen years of service, seniority pay. Conclusion This article has not attempted to discuss all of the areas in which Mexican law affects the employment relationship. Instead, it has focused on some of the major aspects of individual employment contracts in Mexico. Employers considering doing business in that country must become familiar with these and other applicable employment laws and structure their personnel policies and compensation packages accordingly. As is true in most Latin American countries, Mexico's dispute-resolution system is very pro-employee, and employers are wise to comply with all applicable employment laws to avoid costly and prolonged litigation.

Reprinted with permission from the publication referenced below.

Employee Rights and Employer Obligations In addition to establishing standards for wages, hours, and benefits, Mexican law grants certain rights to employees and imposes certain obligations on employers. The parties to an employment contract may agree to additional rights and obligations, but they must comply with the statutory obligations, even of those obligations are not expressly set forth in the contract. Employers are legally required to establish health and security committees that are made up of members of management and non-management employees. The purpose of these committees is to investigate the causes of work-related injury or illness and to develop safety procedures for employees. The committees are also required to communicate these procedures effectively to all employees. In addition to the committees, Mexican law establishes minimum work standards, and labor authorities have the right to perform inspections of the workplace to ensure compliance. Earlier this year, the Mexican government adopted revised workplace safety regulations that streamlined existing safety rules and added some new requirements. Mexican law requires joint management-labor training committees to arrange for training to upgrade employee skills, prepare employees for higher positions, improve productivity, and minimize work accidents. The training need not be directly provided by the employer, as outside institutions are often brought in to perform the mandatory training. The employer receives a tax deduction for expenses incurred in training employees. Both the training committees and the health and security committees discussed above must be registered with the government labor authorities.

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