Hiring contractors or employees in Mexico can help your company access new markets and experience substantial productivity increases. Mexico has a strong and stable economy, making it a good choice for businesses that want to grow.
However, businesses may face key challenges when they want to onboard local hires or pay independent contractors in Mexico. For instance, employers must understand how Mexican Federal Labor Law classifies employees versus contractors. They will also need to know the obligations they must meet for both types of workers.
Having in-depth knowledge of Mexico’s laws relating to independent contractors will ensure your compliance as you expand your operations and understand how to pay independent contractors in Mexico.
When you hire Mexican contractors or employees, it can be difficult to understand the differences, especially for organizations that aren’t familiar with Mexican independent contractor laws. This article will guide you through the nuances so you can hire contractors or employees in Mexico worry-free.
What Is an Independent Contractor?
An independent contractor is a worker that companies engage to complete a specific project or work for a determined amount of time. Contractors do not have a subordinate relationship with their clients or employers, meaning the worker has greater control over when, where, and how they finish work. Contractors also have greater autonomy than regular employees and can generally refuse to take on work from a client.
In contrast to employees, independent international contractors own the necessary tools or equipment to complete the task. Mexico’s independent contractor laws do not consider contractors as employees, meaning they can take on work from other clients or companies simultaneously.
In addition to work arrangements, paying independent contractors is also different. For example, contractors are not entitled to some statutory benefits.
Businesses and individuals often hire independent contractors in professions such as:
- Electrical workers
- Writers
- Actors or musicians
- Software designers
- Automobile mechanics
Independent contractors also operate as their own legal entity and are self-employed. Contractors will have certain responsibilities regarding taxation and monitoring income to comply with Mexico independent contractor law, which is an important distinction when considering employees or contractors in Mexico.
What Is an Employee?
Employees hired in Mexico are a different classification of workers. Companies that choose to hire workers as employees will need to keep some important responsibilities in mind to avoid potential legal trouble or financial penalties.
Employees hired in Mexico are generally considered individuals who perform services exclusively for a single company in exchange for remuneration. In this case, the worker has a subordinate relationship with the employer, meaning the employer has greater control over the terms of work and employment practices.
Additionally, the employer has more influence over the onboarding and training process, and the employee can be subject to disciplinary action if policies aren’t met.
In contrast to independent contractors, Mexican employees are legally entitled to various statutory benefits, such as bonuses, time off, and more. Employers are also responsible for additional employment-related obligations, including payroll administration and tax deductions.
What Benefits Is an Independent Contractor Entitled To?
In most cases, Mexico’s independent contractor laws do not stipulate that employers or clients must provide contractors with benefits. Independent contractors also receive less job protection, as employers do not need to follow termination procedures to end a working agreement.
However, independent contractors receive greater freedom and autonomy over their working conditions. Contractors can work from where they want and set their own availability.
What Benefits Is an Employee Entitled To
Employment law in Mexico requires employers to provide employees with certain statutory benefits to comply with labor laws. Certain regulations must be considered for different employment relationships in various industries and other hiring costs. Mexican independent contractor laws provide different guidelines when engaging a contractor.
Wages
Employees in Mexico are entitled to a certain minimum wage. As of 2023, the minimum wage in Mexico is MXN $207.44 per day. However, employers considering whether to hire skilled employees vs independent contractors in Mexico will likely end up paying more for sought-after professions.
The average salary for a Mexican worker is approximately MXN 29,200 per month, so employers tend to pay well above minimum wage to effectively recruit top talent to their workforce.
Overtime Pay
In most cases, employment law in Mexico stipulates that employees can work up to 48 hours per week. Mexican employees who work overtime for your company are entitled to 200% of their hourly wage for the first eight hours worked and 300% for all working hours after that.
Overtime pay is one of the important costs you’ll need to consider when choosing to hire an employee vs an independent contractor in Mexico.
Termination
In contrast to Mexico’s independent contractor laws, employees are entitled to a certain level of job protection and have some rights regarding dismissals. After an employment agreement ends with an independent contractor, an employer is not responsible for paying all the required costs for severance pay.
An employee in Mexico, however, has different rights. In Mexico, at-will employment is not practiced unless the worker chooses to mutually terminate the employment agreement. This means Mexican employers cannot fire or terminate an employee without just cause.
Reasons for justified dismissal can include gross employee misconduct, including theft, fraud, or insubordination; economic reasons, such as an economic downturn or business closure; or an employee’s incapacity, such as death or a serious illness.
In most cases, the probationary period in Mexico lasts for 30 days to a maximum of 180 days for the highest-ranking positions. The employer must also provide proof to comply with the rules and regulations about termination in Mexico.
Employers that dismiss an employee in Mexico, under Mexican employment law, are required to provide severance payment. Employees who end the employment agreement are also entitled to severance pay. Employees terminated without cause can claim:
- 90 days of compensation, including benefits
- 20 days of compensation worked for each year of service
- A premium of 12 days’ compensation, which includes vacation, bonuses, and any benefits owed
If a termination occurs without a valid reason, the employee may be able to get their previous position back instead of severance pay.
Bonuses
Employees hired in Mexico are entitled to a 13th-month bonus, which must be paid before December 20th of each year. The bonus must equal 15 working days based on the employee’s annual salary or wages.
Profit Sharing
Mexican employees are legally entitled to share in the employer's profits for their work. In Mexico, employers must share 10% of their annual profits with each employee on payroll. This is typically done when an employer files their yearly tax return. Mexican independent contractor laws do not stipulate that a contractor is entitled to these bonuses.
Time Off
Employees hired in Mexico also receive various leave entitlements throughout the year. Mexican employees can take up to six days off after a year of consecutive employment, two additional days for every year following, and up to 14 days off after five years of working.
New mothers considered employees can also take up to 12 weeks of maternity leave, typically partially paid for by the employer. New fathers can receive up to five days of paid paternity leave per child after the child’s birth. In contrast, Mexico’s independent contractor laws do not state that a contractor is entitled to paid time off or parental leave.
Mexico currently celebrates seven national holidays, four bank-only holidays, and one traditional holiday, though certain regions or jurisdictions may have additional holidays that are observed.
Benefits
Employers that hire in Mexico must withhold the correct amount from each employee’s paycheck to contribute to social welfare programs. Mexican employees get basic healthcare coverage through these contributions, along with social security coverage for retirement, illness, employment insurance, and more.
Companies may also choose to offer supplementary benefits to effectively recruit top Mexican talent.
Differences Between Independent Contractors and Employees
While the two terms are similar in some cases, there are several key differences that employers will need to know to accurately follow all rules and regulations. Failure to follow all relevant local labor legislation and Mexico’s independent contractor laws can lead to noncompliance penalties, reputational damage, or additional sanctions. Knowing the difference when deciding between an employee or contractor in Mexico is vital.
Tax Responsibilities
Companies that opt to hire Mexican employees or engage contractors will need to know the tax responsibilities for both classifications.
Mexico’s independent contractor laws dictate that employers are not required to withhold tax for contractors. The independent contractor is responsible for filing their taxes, monitoring their income, and contributing to social security programs, such as unemployment insurance. However, independent contractors may be able to access additional tax breaks or deductions.
Employers that hire employees in Mexico are responsible for administering payroll and providing employees with paychecks during Mexico’s payroll cycle. Companies will also be required to remit income tax from each employee’s paycheck every pay period, along with other social security contributions or necessary tax withholdings.
Payment Method
Employees will generally receive a paycheck within a specific payroll cycle. Employers will consistently provide paychecks to employees for any services rendered and must set up a payroll system.
Companies may be wondering how to pay contractors in Mexico. In contrast to regular employees, an independent contractor will generally provide a quote or submit an invoice to receive payment instead of being a part of the organization’s payroll.
In both cases, companies will need to provide payment in Mexican pesos.
Job Protections
Mexican employees are entitled to greater job security and more robust protections against termination than other worker classifications.
Independent contractors are not entitled to these protections and can be let go without a required notice period. Additionally, contractors are not entitled to severance pay when the employment agreement ends.
Important Considerations for Mexican Labor Laws
Understanding the difference between employees and independent contractors can help you comply with Mexico’s labor laws. There are several considerations companies will need to consider when hiring or engaging workers to obey Mexican independent contractor laws.
Risk of Misclassification
Companies that want to engage independent contractors may face the risk of misclassifying workers. Misclassification occurs when an employer considers a permanent employee as an independent contractor. This can be done accidentally or knowingly to avoid paying some of the required costs of hiring an employee in Mexico. However, in both cases, the employer may face serious consequences for each instance of misclassification.
Mexico has relatively strict misclassification and independent contractor laws compared to other countries. Employers that don’t obey Mexico’s independent contractor laws regarding misclassification may be subject to heavy financial penalties, including back pay for wages or statutory benefits, unpaid taxes, and severance pay. They may also risk improperly reporting their permanent establishment status or face significant reputational damage, limiting an employer’s ability to recruit top talent.
Companies can also be liable for damages from employees who pursue legal action. In severe cases, employers may also be subject to criminal charges for noncompliance with labor laws. Additionally, companies in certain industries or sectors may face other sanctions or limitations for engaging independent contractors in the future.
Employers that misclassify employees may face additional risks or obligations. For example, non-compliant companies can lose ownership over important or sensitive intellectual property produced by the worker.
Employment Contracts
Companies wondering whether to hire in Mexico or engage an independent contractor should understand the regulations for employment contracts. In Mexico, employers are legally required to provide a written contract for each employment agreement.
Legally valid employment contracts should include certain information and terms of employment, including:
- Basic information about the worker and employer, such as their names, nationality, age, sex, marital status, etc.
- A description of the job’s responsibilities and what services will be provided
- The location of employment (if applicable)
- Working hours and schedules
- Wages or salaries and any benefits or fringe benefits
- The amount of paid time off or rest days a worker will receive
- Duration of employment
- Details regarding the training process for the worker
- The payroll cycle
- Details regarding the probationary period
Various types of contracts can be used for certain situations to hire in Mexico:
- Indefinite contracts: These are used to hire employees permanently. After the probation period, employees are entitled to benefits and protections against termination.
- Fixed-term contracts: These are used to hire employees for a specified period. The length of the employment relationship must be clearly stated.
- Trial-period contracts: These are used to determine if a worker can adequately perform the job’s functions. Contracts can be as little as 30 days and as long as 100 days in certain industries.
- Training contracts: These contracts allow individuals with little or no work experience to gain valuable professional skills. Training agreements can last up to three months in most cases, though management training can last up to six months.
Labor Unions
Mexico has a relatively strong union presence throughout the workforce. Employers need to know that employees can form labor unions, negotiate collective bargaining agreements, and strike whenever necessary.
Any relevant collective bargaining agreement terms should be clearly defined in every employment contract and must be followed by employers who hire in Mexico. These terms must be approved by workers for an agreement to be binding.
Hiring an Employee
Companies that hire Mexican employees can benefit in a few ways. These working arrangements are permanent, and employees may feel greater loyalty to the company over time. Employers also gain greater control over how work gets completed and can avoid any risks of losing sensitive intellectual property. Employers can also dictate the training and onboarding to help workers understand important company standards.
However, there are also drawbacks to hiring employees. Companies will be responsible for covering all the necessary hiring costs, which can be resource-intensive. They must also ensure all administrative requirements are handled to avoid noncompliance penalties.
Engaging Independent Contractors
While employers will need to consider Mexico’s independent contractor laws to avoid potential punishments, engaging independent contractors can also be beneficial.
Having independent contractors in your workforce can give an organization greater flexibility at every level. Companies can choose only to engage contractors when needed for certain tasks, meaning employers can save money by not being responsible for providing benefits or long-term investments. This can also allow companies to recruit individuals with highly specialized knowledge that may be needed for specific projects.
On the other hand, employers give up a significant amount of control over the working arrangement. Contractors set their hours and can determine how they complete the project as long as all applicable standards or deadlines are met. Employers that rely on independent contractors may also experience high turnover rates, making it difficult to consistently meet productivity goals.
What Can an Employer of Record (EOR) Do For You?
An Employer of Record will be your local entity in Mexico and enable you to legally hire employees or engage contractors. Your company will not need to set up an entity in the country, which can be time-consuming and expensive.
Employers of record can help you navigate Mexico’s independent contractor laws and provide expert guidance on paying contractors in Mexico. EORs also offer expertise in the country you wish to hire in and all the rules and regulations that must be followed. Your EOR can also ensure that all employees and independent contractors are properly classified.
How Can Borderless Help?
Borderless is an employer of record that offers a comprehensive suite of services, such as payroll management and employee onboarding. Our all-in-one platform can help you quickly and efficiently hire workers from over 170 countries worldwide. Speak with our team today to see how we can help you grow.
Disclaimer: Borderless does not provide legal services or legal advice to anyone. This includes customers, contractors, employees, partners, and the general public. We are not lawyers or paralegals. Please read our full disclaimer here.
