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What U.S. Investors Need to Know About Mexican Labor Law

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In the late 19th Century, Mexican dictator Porfirio Diaz described Mexico’s relations with its northern neighbor with the now famous quote of “Pobre de México tan lejos de Dios y tan cerca de Estados Unidos.” [Poor Mexico, so far from God, but so close to the United States.] While one might expect Mexico’s President to share Mr. Diaz’s sentiments, especially given some of the public announcements that his U.S. counterpart has made about Mexican immigrants and the wall that he intends Mexico to build, the left-leaning Mr. Lopez Obrador has diplomatically ignored the tweets and gone out of his way to encourage ongoing U.S. investment in Mexico. U.S. business investors, in turn, are cautiously optimistic about the future possibilities of investing in Mexico, notwithstanding some concerns about a possible trade war, which Mexico has made clear it wants to avoid.

If you are a human resources manager or an in-house labor lawyer for a U.S. company that is doing business or contemplating doing business in Mexico, you do need to be aware of key differences between U.S. and Mexican labor laws. First, and foremost, there is a presumption under Mexican law that all employment contracts are permanent and employees can only be terminated for just cause. An employee who is discharged without cause is entitled to three months’ salary, back wages, plus 20 days’ pay for each year of service, and any accrued salary and bonuses. Employees are also entitled to severance payments equal to 12 days’ salary for each year of service. The 2012 reforms to Mexico’s labor laws, however, did introduce additional hiring options for employers, such as trial employment periods and initial training periods. These reforms have added some flexibility for employers, especially foreign investors who sometimes need to hire large numbers of employees in a short amount of time.

U.S. investors also need to be careful about using employees of contractors. Under the Mexican Labor Code, outsourced employees of a service provider (1) may not perform all activities carried out in the contracting party’s workplace; (2) must perform a specialized type of service; and (3) may not perform tasks equal or similar to those being carried out by the rest of the contracting party’s employees.

As for dealing with Mexican labor unions, investors need to understand that Mexican labor law is currently undergoing a dramatic transformation. While historically, unions were often co-opted by either the governing political party or Mexico’s business class, under Mexico’s new labor law, employees are supposed to have real collective bargaining rights and a bargaining representative of their choice. In fact, earlier this week, Lopez Obrador met with a delegation of Democrats from the United States House of Representatives and vowed to enforce the new labor laws. There have been some concerns that the new law could create scenarios —at least initially—where multiple unions compete (hopefully peacefully) to represent employees in the same workplace.

Notwithstanding the challenges of dealing with a labor law that is quite distinct from U.S. labor law, Mexico offers many opportunities for U.S. investors as long as they do their homework and get good legal advice from a labor lawyer with expertise in Mexican law.

This information is provided by Vinson & Elkins LLP for educational and informational purposes only and is not intended, nor should it be construed, as legal advice.