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September 23, 2008
Basham, Ringe y Correa
Expatriates in Mexico
• Employees rendering services in Mexico are protected by the Mexican Federal Labor Law, regardless of their nationality, the place where the employment contract was executed or where the salary is paid.
• Notwithstanding any provision in employment contracts whereby foreign law is chosen, the Mexican Federal Labor Law will apply and the Expatriate will enjoy all the benefits and rights therein established.
Mexican Legal Background
•Some U.S. federal anti-discrimination laws may continue to protect the Expatriate even while working in Mexico.
• The three anti-discrimination laws –•Title VII of the Civil Rights Act of 1964 (race, national origin, creed, sex, pregnancy and religion) (“Title VII”);•Age Discrimination in Employment Act of 1964 (“ADEA”) ; and•Americans with Disabilities Act of 1990 (“ADA”).
• These law apply extraterritorially if •U.S. citizen•Works outside U.S. (in Mexico)•For American company or a company controlled by an American company
•Result, Expatriate may have dual legal protection
U.S. Legal Background
Legal Background
• In addition to the Expatriate’s base salary, in Mexico there are certain mandatory benefits, which cannot be waived or contract out.
• Employers are not allowed to modify on a unilateral basis any labor condition, therefore in case of a change, the employer requires the Expatriate’s written consent to the modification, in order to avoid labor liabilities.
•Mexican income tax and social security dues must be withheld by the employer and remitted to local authorities.
Mandatory fringe benefits provided by the FLL:• Annual vacation – 6 days minimum
• Vacation premium of 25% over base salary paid to Expatriate while on vacation
• Year-end bonus (Christmas Bonus) equivalent to 15 days salary
• Profit-sharing (10% employer’s pre-tax earnings to be distributed among all employees, except General Managers)
• Social security benefits
Mexican Legal Background
•U.S. corporate office wants to keep Expatriate on U.S. payroll; any exceptions to the Mexican legal rules?
•Expatriate frequently wants to maintain post-retirement benefits (401k or pension)in U.S. May require a split payment of salary.
•IRS Publication 54 – If Expatriate works for an American company in Mexico, U.S. home office may have to withhold income taxes in the U.S. too.
• No bilateral International Totalization Agreement between Mexico/U.S. Result, no legal way out of paying social security contributions in Mexico
U.S. Legal Background
Dual Employment Relationships
• Presumption that the employee is working for both the parent and the Mexican Companies.
• Entails tax implications - permanent establishment for the parent Company.
Dual Employment Relationships
• Expatriates often file a claim, upon dismissal, arguing a dual employment relationship and consequent entitlement to all FLL rights.
• If a dual employment is determined by the labor authority, both companies shall jointly comply with FLL mandatory provisions.
• Severance Payment in case of an unjustified dismissal 3 months + 20 days per year of services (over aggregate salary) + seniority premium (12 days per year capped at twice the minimum wage) + pending fringe benefits.
Possible Alternatives
1.- Secondment Agreement
• Expatriates are sent on a temporary international assignment.
• Foreign Co. retains control of employees.
• Foreign Co. accrued seniority will be transferred to the Mex. subsidiary.
• Mexican Co. shall execute employment agreement with the Expatriate and register
him/her to Social Security (IMSS, INFONAVIT)
Foreign Co.
Mex. Co.
Foreign Co.
Mex. Co.
Labor relationship“SecondmentAgreement”
Services rendered
Pays compensation
2.- Split Contract (three separate contracts)
• Disruption agreement (Foreign and Mex. Co.)• Sleeping contract (Expatriate and Foreign Co.)• Employment agreement (Expatriate and Mex. Co.)
Possible Alternatives
Partial payment of salary $
Payment of “fringe
benefits” $
Foreign Co.
Mex. Co.
“sleeping” employment agreement
“effective” labor relationship
Pays Expat. Income
3.- Mirror Payroll
• Employee enters an employment agreement with Mex. Co. • Foreign employment agreement will be “sleeping”.• Mex. Co. shall comply with all Mexican fringe benefits including Social Security dues.
Possible Alternatives
Foreign Co.
Deposits $100% total income of the Expat.
Mex. Co.
Records 100% income of the
Expat. Withholds tax and
Social Security dues
• In Mexico there is no employment at-will, therefore when an Expatriate is terminated without legal cause, he/she shall receive a severance payment.
• It is advisable to refrain from delivering termination notices, unless they comply with the Mexican Federal Labor Law, as in Mexico employers have the burden of proof.
Termination of the Labor Relationship
• There is no notice period - terminations can have immediate effect.
• It is always advisable to execute termination agreements and general releases, which must then be ratified with the Labor Board, as well as to give notice about the employment termination to immigration authorities.
Termination of the Labor Relationship
• Considering the risks involved for the parent and subsidiary Companies we recommend analyzing the specific case of an Expatriate being under an international assignment, in order to avoid labor and social security liabilities.
• Be sure to address immigration issues as Expatriates require work visa and hiring date shall be consistent with date of entry to Mexico.
• Carry out terminations in strict compliance with the applicable law in order to avoid future labor liabilities.
Conclusions
Oscar de la Vega Partner, Basham Ringe & Correa, S.C.Paseo de los Tamarindos No. 400A-9th floor, Bosque de las Lomas 05120 Mexico, City
Tel: (5255) 5261 0442E-mail: [email protected]: www.basham.com.mx
E. Johan LubbePartnerJackson Lewis LLPOne North Broadway, 15th FloorWhite Plains, NY 10601-2329
Direct: (914) 514-6114Fax: (914) 328-1882E-mail: [email protected]: www.jacksonlewis.com
