New Labor Law in Mexico

Positive changes -- and potential pitfalls for U.S. multinationals -- are part of a new labor law in Mexico, which was 42 years in the making but, experts say, was much needed.

Thursday, January 3, 2013
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They have been 42 years in the making, but American employers that either have facilities in Mexico or outsource work there should benefit from recent changes in the country's antiquated labor laws. Not everything in the new law may help, however, according to employment lawyers with extensive international experience.

On the positive side, changes passed by the Mexican Congress (and that went into effect on Dec. 1) will help lower the cost of hiring and firing workers in areas such as back wages and the ability to hire and fire employees with much less red tape.

Oscar De la Vega, managing shareholder in the Mexico City office of Littler Mendelson, says from a strictly financial standpoint, the law imposes a new one-year limit on any back wages employers must pay a worker who eventually wins a lawsuit over a wrongful dismissal. Under the old law, which existed since 1970, lawsuits dragged on for years and employers were liable for full back pay if they eventually lost - no matter how long the case went on. key changes affecting American companies with employees or outsourced workers in Mexico revolve around temporary training contracts and probationary periods, outsourcing regulations, and discrimination and harassment, among others.

"On balance the new law is a good thing, although there are some issues that are not very clear and could generate some potential liability," he says.

San Francisco-based Darren Gardner, chair of Seyfarth Shaw's international employment practice, says the Mexican labor law reflects what's happening in many Latin America countries regarding harassment and discrimination. U.S companies, and most western companies, he says, are "way down the path" in how they treat their workforces.

"The new law won't change how U.S. companies operate, because they generally keep the same philosophy across boundaries, often at a competitive disadvantage," he says, explaining that local competitors may not follow the same rules and ethnical philosophies. "This brings Mexico in step with the expectations the Western companies had by adopting the moral approach and ethical values they uphold.

"Most of all, it creates consistency across workforces, which is the good news piece," he says.

Apart from back wages, areas of immediate concern for U.S. companies operating in Mexico include:

Employment Relationship

According to De la Vega, the bill adds seasonal employment agreements and initial training agreements as new types of employment contracts, in addition to those already permitted under the statute (i.e., employment contracts for specific work and for a definite or indefinite period).   The initial training employment agreements must establish a time period of three months, as a general rule, and six months for executive/"white collar" positions. Additionally, a probationary period of 30 days generally and 180 days, for executive/white collar positions will apply to employment agreements for an indefinite term.  If employers establish a good reason, they can terminate employment with workers after those time periods.

The new law also heightens the regulations on outsourcing/subcontracting with potentially severe implications to many employers, according to De la Vega. Mainly, he says that the wording of these regulations is ambiguous at best. For example, while there are three "conditions" that are in the law regarding outsourcing scenarios, it's not clear whether all three must be met in order for the company using outsourcing not to be deemed an employer, or would one condition suffice?

"Many of these conditions are difficult to determine and impractical in their application," De la Vega says. "Agreeing on concepts in the law will likely generate many conflicts and litigation."

In practice, he adds, the proposed outsourcing regulations will substantially impact employers in several important ways. For example, at risk are many companies that do not necessarily require direct manpower, but whose corporate structures depend on service companies to provide specialized functions in Mexico.

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The original labor law offered by Felipe Calderon, the outgoing president, proposed imposing joint liability on companies that unlawfully use services providers to circumvent the labor law. Instead, the new law would appear to impose liability only on the company benefiting from the services and is silent on whether the local contractor would be jointly liable, thereby creating a legal loophole on the local contractor's responsibility.

"Imposing joint liability, as originally proposed by the President, would have been the most simple and practical solution," De la Vega says.

Seyfarth's Gardner says the new outsourcing regulations, being not clearly defined, pose a serious potential risk for American-based employers looking to use Mexican workers via an outsourcing arrangement.

"There is a real question about how the employment structures are put in place as they relate to outsourcing," he says, noting that there is potential for outsourced workforces to be deemed employees, which could have economic impact due to profit sharing and other considerations.

"Companies want to take a careful look at these arrangements," he says. "As someone who does a lot of work for companies with a global presence, I am always looking to see where the 'icebergs' might be lurking. It may not turn out to be an issue, but the outsourcing aspect of the new law deserves close attention."

De La Vega says that although the Mexican Congress did not approve some of the most positive reforms presented in Calderon's original bill, the new law does represent a milestone towards the establishment of a more modern and competitive labor framework in Mexico. 

"The new law has some very broad implications for employers with operations in Mexico, issues that have yet to be clarified. It also has some positive things," he says. "To be safe, employers and HR executives should work with their employment counsel to ensure that their practices and policies will be in compliance."


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