Guide to becoming an Employer in Mexico

Think of places in Latin America to expand into and the chances are that Mexico is close to the top of the list. Its population of around 130 million people is second only to the USA and Brazil in the Americas, and it gives many incoming businesses the ideal combination they’re looking for: a service-dominated economy (more than 60%) and relatively low levels of wages and GDP.

Mexico stands as a link between two very different parts of the business world: its Spanish-speaking status helps its trade with South American countries, while its geographical proximity to the United States enables strong trade with the US, and by extension with other Western economies. Nonetheless, Mexico doesn’t quite have the same stability as other economies, and so while there are advantages to doing business there, there is a certain level of risk, too.

In this guide, we’ll explore business in Mexico from a payroll perspective, and highlight the key facts around getting up and running.

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Establishing your business in Mexico

There are three major processes to undertake in order to set up and register a business in Mexico, starting with drawing up a Deed of Incorporation (the owners of the business must be present in-person to enable this). Once this is complete registrations can be made with the National Registry of Foreign Investment, and with the Federal Taxpayers Registry to obtain a tax identification card.

The tax ID is essential for setting up and using a Mexican bank account, which is obligatory in order to do business in the country. It’s likely that business owners will also have to be present physically to open the bank account.

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Employment Law in Mexico

Mexico has rules in place to protect the rights of local workers over foreign labour. There is a limit on the number of foreigners that companies in Mexico can employ, standing at 10% of the total workforce, excluding senior managers. Additionally, companies employing technical staff can only employ a foreigner if the work cannot be done by a Mexican.

The maximum working week in Mexico is 48 hours over six days, although many companies overlook this. Additionally, some companies run a five-day week, condensing the 48 hours so that employees can have a full weekend off. Overtime rates are double normal pay for the first nine hours each week and triple the normal rate thereafter.

Many Mexicans are relatively poor and don’t necessarily have a bank account, therefore it isn’t uncommon for employees to be paid in cash, or by using payroll cards. All businesses should consider the operational implications of running this kind of payroll when they start.

Probationary periods of 30 days are commonplace for employment contracts longer than six months in duration. Notice periods are not enshrined in law, but there are stringent requirements regarding severance pay (see below).

What is the Minimum Wage in Mexico?

While wages in Mexico have been relatively low in the past, the national minimum wage is being raised by large amounts each year at present. By 2022, the rate has increased by 22% compared to the previous year and now stands at 260.34 pesos per day in areas close to the American border, and 172.87 pesos per day elsewhere in Mexico. Companies should be advised that minimum hourly wage rates in Mexico are expected to climb over the coming years to align with other developing and developed countries on the continent.

Employees are generally paid weekly, every two weeks or monthly. They generally receive a ‘13th-month’ bonus of an extra month’s salary just before Christmas, and many also receive a profit-share bonus, where companies share out 10% of their profits among the workforce.

Severance pay largely depends on whether the employee disagrees that there was a ‘justified cause’ for their termination. In such a situation, they should be paid three months’ salary, 20 days per year of service, 12 days per year of service beyond 15 years, plus any bonus, profit-share and holiday pay they are entitled to.

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What are the Social Taxes in Mexico?

As is the case in most countries, employers must withhold tax and social security contributions from employee pay, and remit them to the relevant authorities. These payments should be made monthly.

Mexico’s income tax rates are progressive, running through 11 different bands, from 1.92% up to 35%. Non-resident income tax rates are at 15%, and then 30% for high earners, although the first 125,900 pesos a year are exempt.

Social security contributions are 9.66% of an employee’s salary as paid by the employer, and 2.38% by the employee themselves. The corporate income tax rate in Mexico is 30%, and the VAT rate is 16%.

Maternity Leave in Mexico

Maternity leave entitlement is 12 weeks, divided equally on either side of the birth. Social security covers 60% of salary during this period, but employers have to cover the remaining 40%. Paid paternity leave entitlement is five days.

Mexican National Holidays & Annual Leave

Officially, Mexico has seven days of public holiday but also has six further unofficial days that are widely observed. Together, these days are:

  • New Year’s Day
  • Constitution Day (5 February)
  • Benito Juarez Day (a Monday in mid-March)
  • Holy Thursday
  • Good Friday
  • Labor Day (1 May)
  • Anniversary of the Battle of Puebla (5 May)
  • Independence Day (16 September)
  • Day of the Race (12 October)
  • All Souls’ Day (2 November)
  • Revolution Day (a Monday in mid-November)
  • Lady of Guadalupe Day (12 December)
  • Christmas Day

Paid leave entitlement starts at six working days per year after one year of service, increasing by two days per year for the following three years. After this, employees gain two extra days after four more years of service. As well as receiving full pay, employees are also entitled to a 25% ‘holiday premium’ during these days.

Sick pay is covered by social security (as long as the employee has made the requisite payments). It starts on the fourth day of absence and runs at 60% of salary, although employees receive 100% of salary if they are absent due to an issue at work or while commuting.

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Why become an Employer in Mexico

Like any rapidly developing country, Mexico is not without its challenges. In particular, constant and significant rises in the minimum wage rate means companies have to be proactive in keeping an eye on regulations and ensuring they stay compliant; but while labour remains at a competitive rate compared to other more established economic countries, it is a market that cannot be ignored if you are operating a labour-heavy business such as manufacturing or service provision.

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