Understanding How Severance Pay Works in Mexico


The labor force is one of the greatest advantages of nearshoring to Mexico. With a diverse range of skill sets at a cost-effective rate, it’s one of the main reasons why manufacturers decide to expand operations in the region. Hiring and retaining quality employees requires following many of the same methods as what’s common in the U.S., such as offering competitive pay, benefits, and a favorable working environment. This helps to recruit well-qualified workers and maintain high retention rates.


Understanding How Severance Pay Works in MexicoHowever, hiring an HR representative with the knowledge and experience of working with Mexico’s Federal Labor Law is important, as there are also quite a few differences when compared to the U.S., particularly when it comes to severance pay. Part of the benefits Mexico shelter services provides is you can work with a shelter company that already has this role in place. They can provide the support you need to make the right hires, stay competitive within the workforce, and navigate the complex nature of Mexico’s labor laws, including what to do when it comes to terminating an employee. 

Without complying with all rules and regulations, you may incur liability for severance payments and/or lawsuits, which could inhibit production and become quite costly. 


Summary of Mexico Severance Pay Labor Laws


When terminating an employee, the employer must provide a written notice stating the cause of termination and date of the action. An employee has the option to refuse receipt of this statement, which then must be filed with the labor board within a five-day period from termination, at which time the labor board formally serves the termination to the employee’s home. 


It’s essential for employers to keep termination documentation on hand at all times because if there’s a failure to deliver or file the termination notice, it’s automatically deemed unjustified and the employer is then obligated to reinstate the employee’s position or be held liable for severance pay, per Mexico’s labor reform legislation enacted on May 1, 2019.

Read more: Fast Facts about Mexican Manufacturing Costs.


Severance Pay Contractual Obligations   


In addition to notice requirements, it’s important to understand contractual obligations for temporary versus full-time employees. Severance pay only comes into play when terminating permanent employees, which makes it crucial when classifying an employee correctly on a contract. A person with a temporary contract is compensated throughout the duration of their employment but is not entitled to severance pay benefits under the law. It should be noted that: 

  • A temporary contract cannot exceed six months, regardless of if it’s a single contract or broken down over several shorter ones.
  • Once a worker becomes a full-time employee, the employer is responsible for severance benefits.
  • Severance pay for a full-time employee equals three months’ worth of wages, in addition to 20 days’ worth of wages for each year the employee worked. This amount must be equal to the most recent salary earned and include accrued benefits as well.
  • The time between termination and the date severance is paid counts toward days worked and must be included as part of the severance payout.

Additionally, permanent employees have the right to file for reinstatement and compensation under Mexican Labor Law. They must do so within two months of termination if they feel they’ve not been terminated for just cause. If approved, the employer is liable for paying any and all wages the employee would’ve earned during the termination period up to the date of reinstatement. Exemptions apply if the employee was temporary or had only been with the company less than a year. 

Read more: How to optimize your employee retention when manufacturing in Mexico.


Importance of HR Documentation and Oversight

There are nuances to the law that favor the employee and must be followed in order to protect the employer. Proof of documentation plays a significant part when it pertains to what a company is or is not responsible for and must abide by.

Among the many roles necessary to maintain a successful operation is an HR representative with experience handling employees in Mexico and who understands contractual obligations as required by law. Violations in any manner, including severance pay, can result in additional expenses and legal repercussions. Working with a shelter services company gives you the advantage of having a built-in HR team that is already well-versed in Mexico’s labor laws and follows legislation as it’s changed. 


In addition to providing an HR resource, contact IVEMSA today to learn more about how our Mexico shelter services can benefit your company. 





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