In Mexico, three amendments to labour law have been enacted in the last twelve months, as follows.
In addition to the above, to have a clear picture of the present and future of labour legislation in Mexico, we must take into account the execution of the new Agreement between Mexico, the United States and Canada (T-MEC or USMCA), which will result in various adjustments and modifications to Mexican labour provisions in the near future. This treaty entered into force on July 1, 2021.
No temporary legislative measures in employment matters were adopted due to the COVID-19 pandemic.
The most significant legislative action on labour issues apparently taken to cope, in part, with the pandemic caused by COVID-19 was the publication in the Official Federal Gazette on January 11, 2021, of the decree by virtue of which Article 311 was amended and Chapter XII Bis was added to the Federal Labour Law on teleworking.
By virtue of this reform, the definition of teleworking was added to include the work that is usually performed for an employer, in the employee's home or in a place freely chosen by the employee, without immediate supervision or direction of the person providing the work, using primarily information and communication technologies, for the contact and control between the employee under the teleworking modality and the employer.
The provisions added to the Federal Labour Law regarding teleworking by virtue of the reform apply to labour relations that are developed more than 40% in the domicile of the employee under the modality of teleworking, or in the domicile chosen by the employee, not being possible to consider as teleworking that which is performed occasionally or sporadically. Please note that if the work at home is consequence of an act of God or force majeure (as in the COVID-19 crisis), such work at home is occasional so is not considered as teleworking.
Although, of course, in practice there is a difference between blue-collar and white-collar employees, this difference does not derive from the law. The Federal Labour Law provides for several types of employees, namely the following.
In Mexico, employment relationships may be: (i) for a specific task (obra determinada) that may only be stipulated when its nature so requires; (ii) on a fixed term (por tiempo determinado) only when required by the nature of the work to be performed, when its purpose is to temporarily replace another employee; and in the other cases provided by the Federal Labour Law (for example, labour relationships for the exploitation of mines lacking affordable minerals or for the restoration of abandoned or paralysed mines, which, in express terms, the law allows them to be for a fixed term); (iii) seasonal (por temporada); and (iv) for an indefinite term (por tiempo indeterminado). The latter, in turn, may be subject to a qualification period (prueba) or initial training (capacitación inicial).
In the absence of express stipulations, the employment relationship is understood to be for an indefinite term.
In terms of the Federal Labour Law, working conditions must be in writing when there are no applicable collective bargaining agreements and shall be executed in at least two copies, one of which shall remain in the possession of each party. This document must contain the following minimum requirements:
The existence of the labour relationship does not depend on the existence of the aforementioned document, the existence of which is considered as the employer's obligation.
Although the employer and the employee may agree on the duration of the working day, in no case may it exceed the legal maximums.
The legal limits are: (i) for the day shift, ie, that between 6am and 8pm, of eight hours per day; (ii) for the night shift, ie, that between 8pm and 6am, of seven hours per day; and (iii) for the mixed shift, ie, that which comprises periods of time of the day and night shifts, provided that the night period is less than three and a half hours, seven and a half hours per day.
Additionally, during the continuous working day, the employee must be granted a rest of at least half an hour, and if the employee cannot leave the place where he/she renders his/her services during rest or meal hours, the corresponding time will be computed as effective time of the working day.
With respect to overtime, the law sets forth that the workday may be extended for extraordinary circumstances, but may never exceed three hours per day and three times in a week. These hours of extraordinary work must be paid at 100% more than the salary corresponding to the hours of the workday and, in the event that the extraordinary work exceeds nine hours per week, the employer must pay it at 200% more than the salary corresponding to the hours of the workday, without prejudice to the applicable penalties.
Although there is no particular regulation for part-time contracts, in terms of the provisions of the law, the employees and the employer may divide the working hours freely. The only guideline that the law contains in this regard is the preference to allow employees, to the extent possible, to rest on Saturday afternoon or any equivalent modality.
In Mexico, the minimum wage is the lowest amount that an employee must receive in cash for services rendered in a workday.
The minimum wages in Mexico are set forth by the National Minimum Wage Commission (Comisión Nacional de los Salarios Mínimos) (composed of representatives of the employees, employers and the government), whose last resolution was issued on December 16, 2020 and published in the Official Federal Gazette on December 23, 2020. This resolution contains the general minimum wages (which apply to all employees in the geographic area or areas of application to be determined, regardless of the branches of economic activity, professions, trades or special jobs) and professional minimum wages (which apply to all employees in the branches of economic activity, professions, trades or special jobs to be determined within one or more geographic areas of application) in force in two geographic areas into which, for purposes of the application of such wages, the country has been divided: (i) Northern Border Free Zone (Zona Libre de la Frontera Norte), ie, the 25 km strip south of the US border; and (ii) the rest of the country. The general minimum wage in effect for 2021 in the Northern Border Free Zone is MXN213.39 and in the rest of the country it is MXN141.70.
The annual fixing of minimum wages, or the revision thereof, in terms of the law, may never be below the inflation observed during the period of its validity.
Wages, in general terms, are protected by the government through labour legislation, which includes several wage protection rules that prohibit, for example, that the minimum wage be subject to compensation, discount or reduction, except in certain cases, that the salary in cash must be paid precisely in legal tender, not being allowed to do so in merchandise, vouchers, tokens or any other representative sign that is intended to substitute the currency, etc.
What is usually recognised as thirteenth month is the Christmas bonus which, in terms of the Federal Labour Law, must be paid before December 20th to employees who have completed one year of service and which will be equivalent to at least 15 days of salary. Those who have not completed the year of service are entitled to be paid the proportional part of the bonus.
Additional incentive programmes, such as bonuses, are not mandatory or regulated by law and are usually included in employment contracts with employees.
Employees who have rendered their services for more than one year are entitled to an annual period of paid vacation, which in no case may be less than six working days, and which will increase by two working days, until reaching 12, for each subsequent year of service. After the fourth year, the vacation period will increase by two days for every five years of service.
The labour law is clear in stating that vacation cannot be compensated with remuneration.
Employees are entitled to a bonus of not less than 25% of the wages due to them during the vacation period.
In terms of the Federal Labour Law, women are entitled to the following leaves.
For men, the law only sets forth that the employer must grant paternity permit of five working days with pay to male employees for the birth of their children and likewise in the case of the adoption of an infant.
With respect to absences due to illness, Mexican labour law distinguishes between non-work related illnesses, which are generally covered by the Mexican Social Security Institute (Instituto Mexicano del Seguro Social), and those derived from an occupational risk or illness, which are covered by the employer. In the chapter of the Federal Labour Law called “Occupational Risks” (Riesgos de Trabajo) it is clearly set forth what is to be understood by risk and occupational illness, namely, occupational accident or risk is any organic injury or functional disturbance, immediate or subsequent, death or disappearance derived from a delinquent act, suddenly produced in the course of or in connection with work, whatever the place and time in which the work is performed (including accidents that occur when the employee moves directly from his home to the place of work and from the latter to the former), and by occupational illness any pathological condition resulting from the continuous action of a cause that has its origin or motive in the work or in the environment in which the employee is obliged to render his services.
Confidentiality and Non-disparagement Requirements
Although the Federal Labour Law does not regulate expressly the confidentiality obligations that the employee must comply with before his or her employer, these are usually included in the labour agreements entered into between the parties. In this type of agreements, it is usually stated that the confidentiality obligation of the employees will last for a certain period of time after the termination of their employment relationship with the employer.
Additionally, the employee's obligation of confidentiality with respect to the employer could be interpreted as included in Article 47 of the Federal Labour Law, which provides the possibility to terminate the employment relationship, without liability for the employer, among others, for the employee's incurrence, during his or her work, of any breach of probity or honesty against the employer, his or her relatives or the management or administrative personnel of the company or establishment, or against the employer's customers and suppliers, as well as the employee revealing trade secrets or disclosing matters of a confidential nature, to the detriment of the company, and similar conducts.
In addition, the Federal Law for the Protection of Industrial Property (Ley Federal de Protección a la Propiedad Industrial) regulates industrial secrets as any information of industrial or commercial application kept confidential by the person exercising its legal control, which means obtaining or maintaining a competitive or economic advantage over third parties in the performance of economic activities and with respect to which it has adopted sufficient means or systems to preserve its confidentiality and restricted access thereto. This law could be applied to employees who misappropriate any industrial secret of their employer, that is, the acquisition, use or disclosure of an industrial secret in a manner contrary to good customs and practices in industry, commerce and services involving unfair competition, including the acquisition, use or disclosure of an industrial secret by a third party who knew, or had reasonable grounds to know, that the industrial secret was acquired in a manner contrary to such customs and practices.
Non-compete clauses, ie, those clauses included in a contract by which a person assumes the obligation not to compete in a certain market or activity with another person, are not provided for in Mexican law; however, they are usually agreed between the parties in employment agreements or additional non-compete agreements.
The ordinary consequence of breaching a non-compete obligation is to compensate or indemnify the affected party with the amount of damages caused to it; amount to be determined by the corresponding jurisdictional authority. Regarding non-compete obligations, it will be important to keep in mind that in Mexico the protection of damages is very limited, contrary to what happens in other countries. In Mexico, it is not common to successfully prove liability derived from a non-compete violation and to prove the specific damages derived from this violation. Even when the violation and damages are proved, the courts usually do not impose exemplary penalties or remedies like in other jurisdictions.
Given the difficulty of evidencing before the jurisdictional authority the causal relationship between the conduct performed, ie, the breach of a non-compete obligation, and the damages suffered by the affected party, it is normal to find in the non-compete agreements stipulations containing a contractual penalty that obliges the breaching party to pay a certain amount in the event of breach, ie, pre-quantified damages. In this regard, several court decisions have ruled that in no case may the contractual penalty be greater in amount than the principal obligation.
The enforceability of this type of non-compete obligations is usually approached from two aspects.
Non-solicitation clauses are not provided for in Mexican law; however, they are usually agreed between the parties in employment agreements or additional non-compete and non-solicitation agreements.
The ordinary consequence of breaching a non-solicitation obligation is to compensate or indemnify the affected party with the amount of damages caused to it; amount to be determined by the corresponding jurisdictional authority. Regarding non-solicitation obligations, it will be important to keep in mind that in Mexico the protection of damages is very limited, contrary to what happens in other countries. In Mexico, it is difficult to prove liability derived from a non-solicitation violation and to prove the specific damages derived from this violation. Even when the violation and damages are proved, the courts usually do not impose exemplary penalties or remedies like in other jurisdictions.
Given the difficulty of evidencing before the jurisdictional authority the causal relationship between the conduct performed, ie, the breach of a non-solicitation obligation, and the damages suffered by the affected party, it is normal to find in the non-solicitation agreements stipulations containing a contractual penalty that obliges the breaching party to pay a certain amount in the event of breach, ie, pre-quantified damages. In this regard, several court decisions have ruled that in no case may the contractual penalty be greater in amount than the principal obligation.
The enforceability of this type of non-solicitation obligations, as well as non-compete obligations, is constantly challenged for their unconstitutionality, since they violate Article 5 of the Mexican Constitution, which provides “freedom of work”.
In Mexico there are different personal data protection laws whose application depends on the regulated subject; however, the private sector is regulated by the Federal Law for the Protection of Personal Data in Possession of Private Parties (Ley Federal de Protección de Datos Personales en Posesión de Particulares).
By virtue of the aforementioned law, individuals have the obligation to protect the personal data they process, to respect the principles set forth in the law: legality, consent, information, quality, purpose, loyalty, proportionality, and to respect the right of employees to informational self-determination, as well as to guarantee the exercise of their rights of access, rectification, cancellation and opposition to the processing of their personal data.
It is important to point out that in addition to the employer's obligations towards employees with respect to the protection of their personal data, the former has an obligation to protect personal data with respect to other data subjects, such as candidates, clients, suppliers, partners or shareholders, etc.
In terms of Mexican labour law, except for directors, administrators and general managers:
In any case, the employer and the foreign employees will have the joint obligation to train Mexican employees in the relevant specialty.
In Mexico, in order to hire foreign employees, it is necessary for the employer to obtain, before the office of the National Immigration Institute (Instituto Nacional de Migración) where its establishment is located, an employer's registration certificate (constancia de inscripción del empleador) that allows individuals and legal entities to carry out procedures to issue job offers to foreigners.
In addition to the above, each of the foreigners who render services on behalf of a Mexican employer must have an immigration document evidencing their legal stay in the country. This procedure is usually carried out by the employer with the intervention of the foreigner.
The ordinary status under which these foreigners usually remain in the country is that of temporary resident (residente temporal), which authorises them to remain in the country for a period of no more than four years, with the possibility of obtaining a permit to work in exchange for remuneration in the country, subject to an offer of employment with the right to enter and leave the national territory as many times as they wish and with the right to preserve the family unit.
Labour unions in Mexico are understood as an association of employees or employers, constituted for the study, improvement and defence of their respective interests. Both have the right, without any distinction and without prior authorisation, to form the organisations they deem convenient, as well as to join them, with the sole condition of observing their relevant by-laws.
In legal terms, both unions enjoy adequate protection against any act of interference by one with respect to the other, whether carried out directly or through their representatives in their incorporation, operation or administration, with acts of interference being understood as actions or measures tending to promote the constitution of employees' organisations dominated by an employer or an organisation of employers, or to support in any way employees' organisations with the purpose of placing them under their control.
It should be noted that, in 2018, Mexico ratified Convention C098 (Right to Organise and Collective Bargaining Convention) of the International Labour Organization (Organización Internacional del Trabajo) concerning the application of the principles of the right to organise and collective bargaining. Derived from the foregoing, an important constitutional reform on labour matters entered into force in Mexico, which, in addition to setting forth new bases for labour justice, modified several provisions on labour union matters, including aspects related to freedom of association and effective representation, particularly regarding employer protection unions, which are used by several companies in the country. This constitutional reform led to additional secondary reforms of labour provisions in 2019.
These reforms cause that the union structures that have been used throughout time in Mexico need to be modified or revised in order to guarantee and protect the freedom of association of employees. The relevant reforms seek, among other issues, for employees to have a much more active union life.
The role of employees' unions is to study, improve and defend the interests of their members. Their incorporation must be made before one of two authorities.
Unions, as well as collective bargaining agreements and the agreements and regulations entered into between employers and employees must be registered with the Federal Centre for Labour Conciliation and Registration (Centro Federal de Conciliación y Registro Laboral (CFCRL)). Unions may register by submitting several documents such as a copy of the minutes of the incorporation meeting, a list with the number, names, CURP and addresses of its members, an authorised copy of the bylaws and an authorised copy of the meeting minute in which the board of directors was elected.
Although local authorities previously had this type of authority, since the labour reform regarding union life, only local Conciliation Centres are authorised to carry out labour conciliations.
Pursuant to the Federal Labour Law, a collective bargaining agreement is an agreement entered into between one or more labour unions and one or more employers, or one or more labour unions of employers, to set forth the conditions under which work is to be performed in one or more companies or establishments.
If the employer refuses to sign the agreement, the employees may exercise their right to strike.
In order for a labour union to enter into a collective bargaining agreement with an employer, the labour union must first have “Evidence of Representation” (Constancia de Representatividad) issued by the competent labour authority.
Once the above is complied with, the collective bargaining agreement must be approved by the employees.
Once the employees approve the clauses of the collective bargaining agreement, it must be executed in writing, under penalty of nullity, in triplicate, and one copy must be delivered to each of the parties and the other copy must be deposited with the Federal Centre for Labour Conciliation and Registration (Centro Federal de Conciliación y Registro Laboral).
Collective bargaining agreements are effective from the date and time of presentation of the document, unless the parties have agreed on a different date.
It should be noted that for the registration of an initial collective bargaining agreement or a revision agreement, the Federal Centre for Labour Conciliation and Registration verifies that its content is approved by the majority of the employees covered by it through a personal, free and secret vote. In this sense, one of the relevant effects of the reforms referred to in 6.1 Status/Role of Unions of 2019 is that employees are authorised to join a union, federation or confederation and be consulted through personal, free, secret and direct vote to, among other things, sign initial collective bargaining agreements and ratify negotiated agreements on the collective bargaining agreement or review agreement, as well as to legitimise existing collective bargaining agreements.
Grounds for Termination
In terms of the Federal Labour Law, there are three main categories of termination causes of the labour relationships.
With respect to the collective termination of employment relationships, Article 434 of the Federal Labour Law provides that the causes for termination of these employment relationships are causes such as force majeure or acts of God not attributable to the employer, or its physical or mental incapacity or death, which produce as a necessary, immediate and direct consequence, the termination of the work, the notorious and manifest unaffordability of the exploitation, the exhaustion of the material object of an extractive industry, or the legally declared insolvency or bankruptcy, if the competent authority or the creditors resolve the definitive closing of the company or the definitive reduction of its work and some additional specific assumptions for certain industries.
In most of the aforementioned cases, notice must be given or authorisation must be obtained from the labour authority to proceed with the termination.
Notices and Formalities
As said in 7.1 Grounds for Termination, the employer who dismisses an employee based on any of the causes mentioned in Article 47 of the Federal Labour Law must give written notice clearly stating the conduct or conducts that motivate the termination and the date or dates on which they were committed, delivering the notice personally to the employee at the very moment of the dismissal or, alternatively, communicating it to the competent court, within five working days, in which case the employer must provide the employee's last registered address so that the authority may notify the employee.
In case of termination by the employee derived from the causes mentioned in Article 51 of the Federal Labour Law, the employee may separate from work within 30 days following the date on which any of the causes occurs.
In the case of employees who freely terminate their employment relationship or those who are terminated with grounds for dismissal, only a settlement payment comprising the proportional amounts to which they are entitled for the work rendered in favour of the employer (eg salary up to the date of termination, vacations not taken, vacation bonus, proportional Christmas box, etc.) shall be paid in their favour, without being entitled to severance payment.
In all other cases, employees will be entitled to a severance payment consisting of the constitutional indemnity which is integrated with the amount of three months of integrated salary, as well as the seniority premium consisting of 12 days of salary for each year of service rendered. Certain maximum limits provided by law must be considered for the calculation of these amounts.
Finally, it should be noted that in the event of dismissal of an employee, he or she will be entitled to sue before the local or federal labour authority for reinstatement to his or her job under the same terms and conditions under which he or she had been working, as well as the payment of wages due for a maximum period of 12 months and, if applicable, interest. Failure or impossibility to comply with the above will also result in the payment of additional severance.
It is recommended, in any case, to obtain external professional advice in order to determine whether any of the causes for termination of the labour relationship have occurred, the possibility or ease with which such update may be evidenced before an eventual labour proceeding initiated by the employee, as well as for the calculation of the amounts to be paid in his or her favour due to the termination and, finally, to determine the manner in which it is advisable to document the relevant labour relationship termination.
In Mexico, there are no special or different procedures for summary dismissals or dismissals for serious cause. All types of terminations are processed in terms of the provisions of 7.1 Grounds for Termination and 7.2 Notice Periods/Severance.
In terms of the Federal Labour Law, one of the grounds for termination provided by law (Article 53 of the Federal Labour Law) is the mutual consent of the parties, therefore, in Mexico, termination agreements signed by both parties, employer and employee, are authorised and common.
Although there are no specific formalities or requirements with which these agreements must comply, the common practice is that they include releases of liability for the parties and that the competent labour authority is involved in the execution of such agreements.
In Mexico, there are no specific categories of people or employees that cannot be dismissed; however, it is important to be careful in certain cases, for example, in the case of pregnant or breastfeeding women.
In the event that the employer does not prove any of the assumptions of termination of the labour relationship, the employee will have the right to demand before the competent labour authority, according to the activity developed by the company, the reinstatement to his or her employment (or, as the case may be, the respective severance payment), the payment of wages due for up to a maximum period of 12 months, plus the corresponding interest, if applicable, the payment of seniority premium, vacations not enjoyed by the employee, vacation premium, Christmas bonus and the constitutional indemnity.
In terms of the provisions of the Federal Labour Law, as well as other Mexican laws on discrimination, no conditions may be set forth that imply discrimination among employees based on ethnic or national origin, gender, age, disability, social status, health conditions, religion, immigration status, opinions, sexual preferences, marital status or any other condition that violates human dignity. Therefore, neither employers nor their representatives may refuse to accept employees on the basis of the above-mentioned grounds for discrimination
On the other hand, other laws contain other types of obligations to prevent and eradicate discrimination in the workplace, namely, the Federal Law to Prevent and Eliminate Discrimination (Ley Federal Para Prevenir y Eliminar La Discriminación), which states that it is considered discriminatory to set forth differences in remuneration, benefits and working conditions for equal jobs.
In case of violation of the above, the corresponding authority may impose a fine ranging from 250 to 5,000 times the general minimum wage, ie, between USD1,800.00 and USD37,000.00.
It should be noted that, for the imposition of the relevant sanctions, the authority must consider several elements, such as the seriousness of the discriminatory conduct or social practice, the concurrence of two or more motives or forms of discrimination, recidivism, understood as when the same person incurs in the same, similar or new violation of the non-discrimination right, whether to the detriment of the same or a different aggrieved party, the effect produced by the discriminatory conduct or social practice, etc.
Mexico has had specialized labour courts since 2017, when a constitutional reform was published that ordered the creation of labour courts at the federal and state levels. This reform was complemented in 2019 with the reform to the Federal Labour Law that sets forth the parameters for the creation of labour courts and granted a maximum term of three years in local matters and four years in federal matters for their creation and entry into operation.
Prior to these reforms, labour disputes were heard before the Federal or Local Conciliation and Arbitration Boards which, although they exercised judicial functions in labour matters, belonged structurally to the executive branch.
Regarding class actions in labour matters, in Mexico the concept of class actions is exclusive to civil matters to protect conflicts in matters of consumer relations of goods or services, public or private, and the environment. Notwithstanding the foregoing, the Federal Labour Law contemplates the existence of Collective Labour Disputes, in which the legitimate entity is usually the union of employees holding collective bargaining agreements and/or the majority of the employees of a company or establishment.
In Mexico, employees who have a labour dispute must, in most cases, before going to the labour courts, attend a conciliation proceeding. The conciliation procedure will be carried out by federal or local conciliation centres.
In the event that a conciliation agreement is executed, it will have the status of res judicata and the quality of a title to initiate executive actions through the mechanisms for the enforcement of judgments provided for in the Federal Labour Law.
Although Article 944 of the Federal Labour Law sets forth that “The expenses incurred in the enforcement of the award shall be borne by the party that fails to comply”, the Mexican federal courts have agreed that this only refers to the costs of enforcement itself and does not extend to the concept of attorneys' fees involved in the lawsuit.
The last two years have been especially dynamic on labour and employment matters in Mexico and enactment of new national and international legislation. Employers in Mexico have faced important changes in the long-standing model of collective labour matters, including novel procedures to solve conflicts of this nature under the United States – Mexico – Canada Agreement (USMCA), a whole new judiciary system on labour and employment matters, emerging regulation to fight the COVID-19 pandemic and a new stringent regulation to the current outsourcing regime. The impact on the Mexican labour market, competitiveness and increase in operational costs has also been part of a new vision by Mexico’s first socialist-type government, which has been actively promoting the creation of new unions and encouraging workers to affiliate to the so-called “independent labour movement”, represented by unions with radical ideology. While these are challenging times for businesses in the country, being aware of the new rules and trends and how to better adapt to them will allow companies to maintain and even expand their activity as a competitive edge before other competitors.
In March 2020 the Ministry of Health published in the Official Gazette a sanitary emergency decree, which, based on force majeure created by the COVID-19 virus, established important restrictions on economic, political and social activity in the country. All non-essential activities had to suspend operations with the obligation to continue paying salaries, benefits and social security contributions. The Mexican Government refrained from issuing a decree with a sanitary “contingency”, which would allow companies to pay their employees up to one month of the applicable minimum wage during the suspension period. Rather, authorities requested employers to continue with all their employment obligations, but without rendering of services.
The emergency decree established that “vulnerable groups” (ie, 60 years old, hypertension, diabetes, heart or lung diseases, pregnant employees, etc) must remain at their homes, even if they were working for an essential-activity company, and employers must continue paying salaries, benefits and social security contributions, for an indefinite term.
Many companies had to negotiate with their employees on granting vacations during the emergency period, advancing vacations, taking leaves of absence with a portion of their salary, temporary salary/benefit reductions, among others. Unfortunately, due to non-existent aid from the Federal Government to businesses in Mexico, thousands of employees were let go, some with severance pay, some others without any payment at all. Negotiations with unions for flexible rules established in collective bargaining agreements were required in almost every industrialised facility.
The Ministry of Labour established a guide for all work sites in Mexico in order to fight and control transmission of the COVID-19 virus, including washing hands frequently, use of anti-bacterial gel, using face-masks, avoiding shaking hands, frequent cleaning of all office space and improved ventilation in every close space. Additionally, the authority established a safe distance of 1.5 metres and adapting work spaces by including physical separations between work stations. In case there is an employee who can be argued to have become positive at the work site, immediately close the office for two weeks and monitor employees that had contact with the infected employee. Another obligation was to appoint an individual to become responsible for informing all employees in a work site about the instructions by health authorities. The individual should inform the authority about communication to other employees and show evidence of training on preventive measures.
The Health Ministry also established an epidemiological “traffic sign” for every state in the country, and together with local health authorities, each state has established specific requirements and guidelines. Accordingly, during the time where the authorities decide that there is a “red light”, all activities will continue suspended, but with the obligation to continue paying salaries, benefits and social security contributions to employees. During an “orange light” period, schools will continue suspended but some activities will be allowed to gradually resume activities, with a limited percentage of occupancy. During a “yellow light” period, business will be allowed to increase their activity and occupancy. Finally, once the authorities determine that there are conditions for a “green light”, all activities will operate without restrictions. The epidemiological traffic sign is issued every week by federal and state authorities and communicated through mass media.
Amendment to Mexico’s Federal Labour Law
As a consequence of the negotiations between Mexico, the United States and Canada to relaunch the free trade agreement in the region, Mexico was required to substantially modify its national legislation. Accordingly, the Mexican Federal Labour Law (FLL) was amended on 1 May 2020, including important changes and requiring companies to adapt their current model of human resources management and their collective labour structure.
The FLL is now establishing an easier and faster procedure to incorporate and register new unions, in a clear public policy of endorsing an increase in union membership. However, there are positive changes requiring unions to become transparent before their affiliates. Unions are now prohibited to participate in simulated acts to avoid fulfilment of employment obligations related to their affiliates; they cannot extort employers in order to receive money or benefits; the term for their executive committee and its leaders can no longer be indefinite; workers can refuse to pay union dues without retaliation from the employer; and unions are now obliged to present a full report of their activities, including a detailed administration of assets, monies and union contributions.
One of the main purposes of this amendment is avoiding a long-standing practice in Mexico of having collective bargaining agreements with “sweetheart” unions, where there was not a truthful representation of workers and the agreement has as its main objective avoiding union extortion with the threat of a strike. To this end, the FLL now requires that every other year, when according to the law the union can bargain for better salaries and benefits, the negotiation reached between the union and the employer is confirmed by an election where workers will cast a personal, secret, direct and free vote. This latter obligation poses an important burden on companies because at least every two years, there will be an election at the work site, in order to endorse (or not) the negotiations reached by the union. The FLL provides that in case there is not a majority (50% +1) of workers approving the union negotiation, the parties must continue negotiating and then hold a subsequent election until the majority of workers are comfortable with what has been negotiated between the parties.
A similar, but completely independent obligation in the FLL is the process to “legitimise” a collective bargaining agreement. Every company being part of a collective bargaining agreement will be part of a process where the union will conduct an election, organised by the Federal Centre of Conciliation and Labour Registry, in order to legitimise the agreement. Union workers will cast a personal, secret, direct and free vote, confirming the decision to be part of the union and their consent to the content of the collective bargaining agreement. If a union does not commence such process by 1 May 2023 or if during the election there is not a majority (50% +1) agreeing to such representation and the content of the agreement, it shall be automatically terminated. As mentioned before, this election process is independent from the election process to renew the collective bargaining agreement every two years.
The USMCA and Its Labour Obligations
The USMCA became effective on 1 July 2020, including for the first time in 25 years specific labour obligations for the three countries, as part of the international treaty. The predecessor North American Free Trade Agreement had a parallel agreement for labour matters and another for environmental matters, but without commercial impact arising from its execution and enforcement.
In the USMCA, Chapter 23 includes obligations that can be enforced through the mechanisms established in Chapter 31 of the agreement, with potential commercial sanctions. Among the obligations in Chapter 23 are (i) promotion of freedom of association and effective collective bargaining; (ii) elimination of all kinds of forced labour; (iii) effective prohibition of forced child labour and additional protection for minors; (iv) elimination of any type of labour and occupational discrimination; (v) acceptable labour conditions in minimum wages, hours of work and health and safety; (vi) elimination of investment in the country, through the weakening or reduction of labour standards; and (vii) promotion of compliance with the law through inspections.
In addition to the above, Annex 23-A to the USMCA establishes obligations that are exclusively for Mexico, being: (i) enact legislation to achieve freedom of association and effective collective bargaining; (ii) enact legislation to achieve the elimination of forced child labour and any type of work discrimination; (iii) guarantee protection of labour rights to migrant workers; (iv) guarantee strict compliance of labour law through an increase in inspection visits; (v) create an autonomous agency in charge of the national registry of unions and collective bargaining agreements; (vi) promote the election of union leadership through the personal, direct, secret and free vote of its affiliates; (vii) renew collective bargaining agreements at least once during a four-year period; and (viii) make publicly available all collective bargaining agreements in the country.
Employers must include within their internal compliance programmes both the obligations established in the amendments to the FLL, and the general and specific labour obligations imposed on Mexico in terms of the USMCA. This has required that many companies undergo a deep analysis of their current individual and collective labour structures and a well-planned strategy to maintain a balance between complying with Mexican national and international law, and the continuity of operations trying to avoid conflicts or disruption generated by more aggressive union activity in the country, sponsored by federal authorities.
The Rapid Response Labour Mechanism
A complete novelty is the Rapid Response Labour Mechanism (RRLM), which was included in the USMCA as part of Chapter 31. Annexes 31-A and 31-B were inserted to include this mechanism as an alternative dispute resolution of collective labour matters between the United States and Mexico and Canada and Mexico, respectively. Its purpose is to find whether a “covered facility” has incurred a “denial of rights” under the treaty, limiting its scope to freedom of association and effective collective bargaining. The RRLM is also intended to be a very compressed arbitration in which either of these situations can be promptly addressed and resolved.
One of the interesting features of the RRLM is the fact that the defendant will be a “covered facility” and not one of the signatory countries to the USMCA. For the first time in any multilateral agreement, a dispute resolution mechanism can hold responsible a private party for the violation of a collective labour obligation. Although there is a 45-day consultation period in which the parties will try to reach a settlement and a “remediation plan”, if this is not satisfactory to the plaintiff, then a panel will be called upon with representatives from each country, and in a period of four months must resolve whether the defendant is liable for a denial of rights, related to freedom of association or effective collective bargaining.
The potential contingencies that companies can face as a consequence of the RRLM are (i) losing the preferential export tariff under the USMCA for the exportation of goods or services to the North American region; (ii) sanctions to be imposed by the country where the claim initiated on products and services; (iii) the total prohibition to export goods or services to the plaintiff country. It is important identifying that a “covered facility” is not only a company trading products and services within the region covered by the USMCA, but also any company whose products and services compete with similar products and services in the other countries.
Based on the potential adverse effects of an arbitration under the RRLM, many companies have started a deep analysis of their current compliance standard with collective labour matters, that may relate to the principles of freedom of association and effective collective bargaining. A new model on labour relations is required to have better and more efficient manners of operation in a union environment or in a potential union environment, which is the ultimate goal of Mexico’s current administration.
New Home Office Legislation
As a consequence of the pandemic generated by the COVID-19 virus, Mexico passed on January 2021 an amendment to the FLL, including a chapter regulating home office or “teleworking”. The FLL provides that employees who spend 40% of their time or more working at home will be considered to be “teleworkers” and therefore entitled to the rights and benefits under the new regulation. It shall not be understood as teleworking if the work performed in a remote place is occasional or sporadic.
Employers in Mexico must agree teleworking in terms of the employment contract executed with their personnel, or addenda to it. The employer must also provide the necessary equipment to employees that will allow them to work remotely. Teleworking must also be agreed in terms of the applicable collective bargaining agreement and agreed with the union as to the mechanism to communicate with union workers and how they can effectively exercise their right of freedom of association and collective bargaining while working at home.
The most controversial obligation under this new regulation is the employer obligation to provide teleworkers with an ergonomic chair, “among other” equipment. Additionally, employers must pay to each employee working from home the cost of internet and a proportional part of electricity. Without further guidance on these items, it has been interpreted in different ways how companies can comply with this obligation and the amount payable to teleworkers. Other effects arising from these concepts, such as its impact on taxes, social security contributions and severance in case of a termination without cause, will eventually be interpreted by courts.
Proper document support and a comprehensive analysis of the impact of home office legislation will allow companies to anticipate potential contingencies arising from inspection visits from the Ministry of Labour, or claims from employees to enforce teleworking obligations.
New Outsourcing Regulation
In April 2021 there were published in Mexico’s Official Gazette substantial changes to outsourcing or subcontracting regulation, and to labour, social security and tax legislation. In general, the new legal provisions are intended to have important limitations on outsourcing services and an express prohibition on outsourcing employees. All labour, social security and tax effects will come into force as of 1 September 2021.
New legislation provides an express prohibition to subcontract personnel services. While contractors may still be able to provide recruitment, selection and training services, they will not be considered employers. Companies will be allowed to subcontract specialised services or projects, provided they are not part of the beneficiary’s corporate purpose and main economic activity, and the service provider secures registration with the Ministry of Labour. The tax concept “main economic activity” refers to the activity for which a company invoices and receives the majority of its revenues.
Among authorised specialised services will be inter-company services, provided such services are not part of the beneficiary’s corporate purpose and main economic activity, and the provider secures registration with the Ministry of Labour.
The hiring and execution of specialised services or projects must be formalised in terms of a written contract and the beneficiary shall be jointly liable with the service provider for any unfulfilled obligation before the latter’s employees engaged in the specialised services.
Every service provider performing specialised services or projects must obtain registration with the Ministry of Labour which shall be renewed every three years. In order to determine which contractors must obtain registration, regulation provides that it will only be applicable to those providers whose personnel will be at the disposal of the beneficiary.
Because all companies will now be required to perform their main economic activity through directly hired personnel, every company in Mexico will be liable for paying profit sharing as a mandatory benefit (10% of the employer’s annual taxable income). The amendment to the FLL includes a cap for profit sharing of up to three months of the employee’s salary, but if the employee has been receiving more than three months of salary, then he or she shall be entitled to the average of the profit sharing paid in the prior three years.
A company rendering or receiving services for outsourced personnel will be subject to a penalty ranging from USD8,000 to USD220,000, per sanction, per affected employee.
Social security aspects
Outsourcing regulation on social security matters provides that there will exist a joint liability between the service provider and the beneficiary of the services, with respect to social security obligations arising from the personnel that will perform specialised services. Specialised service providers must inform the Mexican Social Security Institute (IMSS) in January, May and September of each year of the services contracts entered into with their clients, their purpose, term and list of employees performing services. Additionally, the service provider must file the registration obtained from the Ministry of Labour.
Failing to file on time the above-described information and documents before the IMSS will trigger a penalty from USS2,200 to USD9,000.
Similarly, specialised service providers must inform the Federal Housing Agency (Infonavit by its acronym in Spanish) in January, May and September of each year of the service contracts entered into with their clients, the amount that employees paid for housing credits, their salaries and a copy of the registration with the Ministry of Labour. Both the service provider and its clients will be jointly liable with respect to housing obligations arising from the personnel that will perform the specialised services.
Changes to tax legislation provides that taxpayers will not be able to deduct the payment of services for outsourced personnel and will not be able to credit for the value added tax. However, taxpayers will be able to deduct payment of specialised services and credit for the value added tax, whenever (i) such services are not part of the corporate purpose, nor the main economic activity of the beneficiary, and (ii) the service provider secures registration with the Ministry of Labour. Additionally, there will be a joint liability between specialised service providers and their clients with respect to tax obligations related to the personnel performing the services.
Finally, tax law establishes that taxpayers that do not comply with tax obligations with respect to subcontracting services shall be liable for a penalty ranging from USD7,500 to USD15,000, as well as the possibility of being prosecuted for fraud, if tax authorities interpret the performance of services as a simulated scheme.
From April to the end of August 2021, most companies have undertaken a complex restructure of their operations, which includes the re-engineering of corporate groups operating in Mexico and their whole supply chain. Comprehensive advice on labour, social security, tax, corporate and regulatory matters has been critical to companies. Changing corporate purposes, services and distribution contracts, merging companies and liquidating other legal entities, among other actions, have become a major change to businesses and their future operation.