Mexico enacts amendments to Federal Labor Law

Latin America Alert

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As one of his final acts in office, Mexico’s now former president, Felipe Calderón, signed a decree substantially modifying the country’s Federal Labor Law.

The reformed law, signed by Calderón on November 29, aims to promote business competitiveness and will significantly affect companies doing business in Mexico.

The Federal Labor Law dates back to the 1970s and, prior to the Reform, reflected the strong pro-employee environment of that era. From an economic perspective, experts had long indicated that the prior law impeded economic growth, did not promote employment and discouraged foreign investment.

The Reform seeks to modernize the Mexican labor law by (i) increasing flexibility in employment relationships, (ii) creating job opportunities, (iii) providing opportunities for young people to enter the workforce through training programs, (iv) promoting competitiveness and (v) achieving an appropriate balance between the rights of employees and employers.

Although the draft decree submitted by President Calderón was approved almost in its totality, its adoption followed more than a month of review and heated debate in the Mexican House of Representatives and Senate. Two articles related to collective bargaining governance matters were not approved and will be discussed in the 2013 session:  new rules for unions with respect to transparency and accountability; and a new process for the election of union leaders and the publication of collective bargaining agreements.

The most significant changes effected by the Reform are as follows:

1.  Principle of decent and dignified work

The Reform incorporates the modern principle of “decent and dignified work” advocated by the International Labor Organization (ILO) and international treaties that promote employees’ wellbeing.

Decent work has been defined by the ILO and endorsed by the international community as being productive work for women and men in conditions of freedom, equity, security and human dignity. Decent work involves opportunities for work that is productive and delivers a fair income; provides security in the workplace and social protection for workers and their families; offers better prospects for personal development and encourages social integration; gives people the freedom to express their concerns, to organize and to participate in decisions that affect their lives; and guarantees equal opportunities and equal treatment for all.

2.  Definition of “harassment” and “sexual harassment”

The Reform makes clear that harassment and sexual harassment, in particular, will constitute justified causes for an employee to terminate his or her employment relationship without liability and that, in such case, the employee will be entitled to file a claim before the labor authority demanding rescission of the employment agreement and full severance.

Harassment and sexual harassment are defined as follows:

a.  Harassment: The exercise of power in a relationship of actual subordination (between the victim and the aggressor) within the workplace, expressed through verbal and/or physical behaviors

b.  Sexual harassment: An act, not necessarily involving subordination between the victim and the aggressor, in which there is an excessive use of power that results in defenselessness and risk to the victim

3.  Regulation of outsourcing

The Reform provides a regulatory framework for “outsourcing,” which has been, until now, subject to civil and commercial laws, not labor laws.

Outsourcing is defined as a contract pursuant to which an employer (called “contractor” or “subcontractor”) performs work or renders services through employees under its control in favor of another entity or person who (i) benefits from the contracted services, (ii) determines the activities to be performed by such employees and (iii) supervises/monitors the carrying out of such services or the execution of the contracted work.

Under the Reform, companies are permitted to outsource only specific or ancillary and specialized tasks. The outsourced services shall not be the same or similar to the main services rendered by employees of the company doing the outsourcing. For example, a law firm may legally outsource cleaning services, private security or valet parking, but not legal services.

The Reform requires outsourcing agreements to be in writing and that the party benefitting from the services to be performed verify the contractor’s credit worthiness and its compliance with social security obligations. Failure to comply with these verification requirements can result in direct liability to the party outsourcing the services, which shall be deemed to be the employer, jointly liable with the contractor for damages to employees.

The Reform expressly prohibits the outsourcing of employees if the purpose of such outsourcing is to avoid labor obligations or to evade the payment of legal benefits (e.g., social security obligations and profit sharing). Any breach to this prohibition may result in monetary sanctions that may range from 250 to 5,000 times the applicable minimum wage at the time of the breach (today, US$1,189.50 – US$23,790.07). However, the Reform does not specify how  these sanctions will be implemented.

4.  Mexicans working abroad:  enhancement and protection

New requirements were established to provide more protection to Mexicans employed abroad.

Under the Reform, terms and conditions of employment must be provided in writing and must include the following:  (i) provisions for repatriation expenses to be paid by the employer; (ii) housing benefits to be provided by the employer (e.g., local housing allowances); (iii) medical assistance, if applicable; and (iv) consular information.

5.  New types of employment arrangements

The Reform provides for the following new types of employment arrangements:

a.  Employment probationary periods: The Reform includes this new contractual arrangement, not previously provided for under the Federal Labor Law, allowing an employer to determine if an employee has the necessary qualifications and knowledge to perform the assigned work.

This arrangement allows a probation period of up to 30 days, which can be extended by up to one 180 days if the employee is hired as an executive, manager or director or fills an administrative position.

b.  Training contracts: Pursuant to this new type of arrangement, an employee may render his services during a pre-determined period in order to obtain training and the knowledge required for the activity for which the employee is hired.

This type of contract may have a term of up to three months, which can only be extended (by up to an additional six-month period) if the employee is an executive, manager or director or fills an administrative position.

If an employee hired pursuant to a training contract or an employment probationary contract is not suitable for the job, then the employer may terminate the training agreement after considering the opinion of the Joint Commission on Productivity and Training (Comisión Mixta de Productividad, Capacitación y Adiestramiento) (a group of employee and employer representatives). Such termination will not be deemed to be a wrongful termination, so the employee may not file a claim for severance.

There are no limits on the number of employees who can be hired under the arrangements described above. Upon termination of an employee’s contract, the employee is entitled only to a pro-rata portion of accrued mandatory benefits (vacation, bonus vacation and Christmas bonus).

It is important to note that the Reform does not include any guidelines to determine if an employee complies with an employer’s requirements; therefore the termination of an employment relationship is at the discretion of the employer after consultation with the Joint Commission on Productivity and Training.

c.  Seasonal and discontinued contracts:  This type of arrangement refers to seasonal activities (e.g., summer vacation season in hotels) or discontinued services (e.g., a school that requires a math teacher only Mondays and Wednesdays), for specific or periodic tasks or when the required services are not needed during the entire week, month or year. Employees are entitled to pro-rated legal benefits based on the period of time worked.

6.  New grounds for termination without liability by an employer

The Reform provides for the following new grounds for termination without liability by the employer:

i.  The commission of immoral acts, harassment or sexual harassment by the employee against any person in the workplace

ii.  Inappropriate behavior of the employee with clients or suppliers, unless the employee is acting in self-defense or is provoked

iii.  The lack of licenses or accreditations required under applicable law and regulations for the provision of services (i.e., public accountants)

7.  New grounds for termination without liability by an employee

The Reform also provides for the following new grounds for termination by an employee without liability:

i.  The commission of immoral acts, harassment or sexual harassment by the employer against any employee or his or her family

ii.  The employer’s engagement in conduct undermining the dignity of the employee

8.  Termination notice to employees

Under the Reform, a termination notice must be sent to an employee (i) by the employer, (ii) through the Labor Board (Junta de Conciliación y Arbitraje) and (iii) through certified mail. Before the Reform, notices had to be given directly by the employer to the employee, and  the employer could only solicit help from the Labor Board in notifying the employee if the employee denied having received the notice after five days.

9.  Back pay limited to 12 months’ salary

Under the prior law, when an employee filed a claim against an employer for wrongful termination, the employee could claim entitlement to salary that he would have earned through the date the employer actually paid the employee following a judgment in the employee’s favor by the labor authority. On average, a labor proceeding lasts approximately four years.

The Reform limits payment of lost wages to one year, no matter how long the labor proceeding lasts. This will considerably reduce the labor contingencies for employers and will allow companies to calculate the risk of labor claims upfront and establish appropriate financial reserves.

10.  Hour-based salaries

The Reform allows employers and employees to calculate salary on an hourly rather than a per diem basis provided that the maximum daily working hours (eight per day) are not exceeded and the employees’ daily income is not less than the minimum daily wage. This modification makes labor relationships more flexible, allowing employees (mainly those that can only work for few hours, such as students) to work on an hourly basis; however, employers may not cause employees to work more than the maximum number of daily hours by law.

11.  National Fund for Workers’ Consumption Institute (Instituto del Fondo Nacional para el Consumo de los Trabajadores) (INFONACOT): employer registration

INFONACOT is a governmental entity that offers credits to employees to purchase goods and services to provide employees and their families an adequate standard of living. Upon INFONACOT’s notification to employer, employees’ purchases shall be partially deducted from their salaries on a biweekly or monthly basis (as agreed at the moment of the purchase) by the employer, who shall make payment directly to INFONACOT for such purchases.

All employers must register with the INFONACOT within a year from the date on which the Reform is effective. The registration is free and no contributions are required.

12.  Paternity leave

The Reform aims to promote gender equality by including a mandatory paternity leave of five days with full salary for male employees. This leave applies equally to adoptions or births.

13.  Women employees:  benefits and prohibitions

The Reform provides for the following mandatory benefits:

i.  Maternity leave:  under the current law, women have the right to a six weeks’ leave prior to the birth of a child and six weeks following the birth of a child. The Reform allows women to allocate up to four of the six weeks of the pre-birth leave to the post-birth leave period (i.e., a woman may take maternity leave as few as two weeks before the birth of a child and up to ten weeks after the birth of a child). Additionally, if a child is born with disabilities or requires medical attention, the post-birth leave may be extended for up to two additional weeks. In case of adoption, female employees are entitled to six weeks’ leave following receipt of the child.

ii.  While an employee is breastfeeding (up to a maximum six-month period), working hours are to be reduced by one hour in order to allow a mother to be with her newborn child.

iii.  In case of a health emergency, pregnant or breastfeeding women shall not be required to work and shall receive full salary and benefit payments.

The following practices are prohibited under the Reform:

i.  Harassment or sexual harassment

ii.  Requesting pregnancy tests as part of recruitment processes or as a condition to continued employment or obtaining a promotion

14.  Severance payment in case of death of the employee

The Reform provides for payment of an amount equal to 5,000 days at minimum wage (instead of the 730 days authorized under the former law) as severance payment in case of death of an employee, regardless of where the incident occurs.

If an employer has registered its employees with the Mexican Social Security Institute (IMSS), then IMSS will pay this amount.

15.  Social Security benefits: simplification of conflict resolution procedure

A new simplified procedure is established to accelerate the granting of certain social security benefits (e.g., the return of housing or retirement funds).

16.  Employer’s obligation to notify certain parties of employment terminations

Employers may be obliged through a judicial order to withhold a percentage of an employee’s salary and transfer such amount to specific individuals such as the employee’s ex-spouse or children.

The Reform obligates employers to notify these individuals and the relevant judicial authorities within five working days of a termination of the employee.

17.  Home office

The Reform regulates for the first time the concept of the “home office” and telecommuting as the work performed by an employee outside of the workplace using technology.

18.  Fines and sanctions

The Reform significantly increases the sanctions and fines applicable to those who violate the provisions of the Federal Labor Law. Although the process for implementing such fines has not been modified, the labor authority now has broad discretion to impose sanctions based on the willfulness of the conduct and the severity of the damages caused.

For further information please contact:

Luis Alvarez
Tatiana Escribano
Kelly Tubman Hardy