López, Martínez Kawarabata, S.C.

One of Mexico ’s key factors for the attraction of foreign investment is the country’s hard-working, available and inexpensive labor force. The average labor cost of approximately U.S. Dollar 2.0 per man-hour worked is well below other comparable production places.

The purpose of this memorandum is to give current and prospective foreign investors an overview on Mexican labor law – labor matters are regulated for the entire country by federal laws and regulations - along with some practical recommendations from a Mexican legal standpoint.

Under Mexican law, an employment agreement is deemed established as soon as a person provides personal, subordinated services to another person or entity. As a result, no written employment agreement is required by the law.

It is, however, recommended that an employer enter into written employment agreements with his employees. Such employment agreement must be entered into for an undetermined period of time, unless a determined period of time is justified by the specific nature of the work to be provided. Also, because Mexican labor law does not provide for a trial period, the employment agreement should establish the employer’s right to dismiss the employee within the first 30 days if it turns out that the employee does not have the qualities required for his job, or those he/she claimed to have.

Also, it is usually recommended to enter into a collective employment agreement with a labor union although this is not mandatory by law.

The Mexican law sets forth that a mixed commission representing both the employer and the employees shall establish the written internal workshop rules for the organization of the employer/employee relationship, such as working hours, day and place of salary payments, disciplinary measures, etc. Such internal rules must be authorized by the local work council and should be constantly updated and adapted to modern forms of work and salary payments.

By law, daily working hours are limited to 8 hours for a day shift, 7 hours for a night shift and 7.5 hours for a mixed shift. These shifts can only be extended under extraordinary circumstances. The workers are entitled to a break of at least half an hour during their shifts. Per each six days of work the employee is entitled to one day of rest, usually the Sunday. Employees who work on Sundays are entitled to 25% additional salary payment. Usually, workers work between 40 and 48 hours a week.

The Mexican Labor law establishes seven mandatory federal holidays (January 1, February 5, March 21, May 1, September 16, November 20, December 1 of every six years when the new government is sworn in, and December 25). An employee who has to work on a mandatory federal holiday is entitled to an additional double salary for that day.

After their first year of employment employees are entitled to a minimum of six days paid vacation. For every additional year of services the employee is entitled to two additional days of paid vacation until 12 days are reached. After the forth year of employment, the vacation period to which the employee is entitled increases by two days per every five years of services. During their paid vacation, the employees are entitled to a premium in the amount of 25% in addition to their normal salary.

Every worker is entitled to receive continuing training and education from his/her employer pursuant to the program established by the mixed Continuing Training and Education Commission. The purpose of such training is to improve job safety, prevent accidents and, in general, to enhance the employee’s knowledge about his job and increase his productivity.

Depending on the substances used by the employees and the nature of the work, the employer may be obligated by the authorities to comply with specific safety measures to protect its personnel from exposure to dangerous substances.

In Mexico, employers pay an additional roughly 32% of the total salaries for mandatory health insurance to the Federal Social Security Institute (IMSS), the mandatory retirement fund (S.A.R.) and to the National Housing Fund (INFONAVIT). The purpose of the housing fund is to provide affordable homes to the workers who qualify for this program.

The Mexican labor law establishes minimum salaries to be paid depending on the geographic area where the work is provided and the employee’s qualification. These minimal salaries are adjusted to inflation on a yearly basis. As of January 1, 2005 the daily minimum salaries in force for unskilled workers vary from $45.50 to $47.00 Mexican Pesos depending on the geographical area where the work is provided.

Employees – except directors, administrators and general managers – are entitled to participate in a certain percentage of their employer’s taxable profits. The applicable percentage is determined and periodically revised by the National Commission for Worker Participation and is currently 10%. Pursuant to Mexican labor law, an internal commission for the supervision of the distribution must be established and registered with the Labor Authorities.

Under certain conditions established by the law, employers are exempt from the obligation to distribute profits. This applies for example to new companies during their first year of operation, companies developing new products during their first years of operation and for companies whose capital is below a certain threshold established by the Federal Labor Ministry. Also, the law puts caps to the amount employees are entitled to receive under the title of mandatory profit sharing.

Employees are entitled to a Christmas Bonus (“aguinaldo”) in the amount of at least 15 daily salaries, to be paid before December 20 of each year.

Plant workers are entitled to a seniority premium in the amount of twelve daily salaries for each year of service. Such premium accumulates and is only paid out in the case of the worker’s death while employed and in case of voluntary termination of the employment agreement upon the worker’s request, provided the employment lasted 15 years or longer. In addition, this premium is paid to workers who are laid off or who resign for justified cause.

Among the usual but not mandatory benefits that help to improve the work atmosphere and to prevent excessive rotation of personnel are invitations for Christmas Dinners and Barbecues, a symbolic birthday present and bonuses for punctuality and seniority.

Both the employer and the employee are entitled to terminate their relationship any time during the employment for justified cause. If no justified cause existed for the termination, the employee is entitled to a severance payment in the amount of three months’ salary and 20 days’ salary for each year of service in addition to the accrued salaries until payment of this severance payment. In theory, the employee can in some cases also claim to be reinstalled at his/her work place.

In exception to the above, employees whose employment is based on a special relationship of trust can be laid off without remuneration if the employer can establish reasonable grounds for the termination of the trust relationship. Although not required by the law, employees should be terminated in writing and such writing should contain the date of the end of the employment relationship and the cause for the termination.

The Mexican labor law also regulates in detail the procedure of labor litigation. The labor procedural rules contain a number of provisions favoring the employee. In particular, with respect to the most important and frequent disputes (such as existence and contents of the employment agreement, cause for termination and salary payments), the law places the burden of proof on the employer. Accordingly, it is crucial for the employer to bear this in mind at the beginning and during each labor relationship.

For additional information, please contact Luis Humberto Lopez or Eduardo Martinez at lhlopez@lmklaw.com and emartinez@lmklaw.com or at (++52664) 686.1006 extension 104 or 107 or (++52664) 686-1036 (fax) at our Tijuana offices or at (619) 595-3173 or (619) 595-3176 (fax) at our San Diego office.