An Employer of Record (EOR) in Mexico is a game-changing solution for companies looking to streamline employment, payroll and compliance while entering one of the world's fastest-growing nearshoring markets. With its strategic location, skilled workforce, and competitive operating costs, Mexico offers unparalleled opportunities for businesses seeking to expand efficiently and effectively.
What is an Employer of Record (EOR)?
An EOR is a third-party organization that acts as the legal employer for your workforce. While you manage day-to-day operations and your employees' tasks, the EOR handles compliance with local labor laws.
Who uses an EOR in Mexico?
An Employer of Record service in Mexico is used by a variety of companies and industries, including:
- Multinational Companies - testing the waters of a new market before investing
- Small & Medium Enterprises - control of administrative overhead
- Startups - to focus on their core business and minimize distractions
- Nearshoring Companies - to benefit from proximity and trade agreements
- Global Service Firms - for cost-beneficial talent, many trained on U.S. systems
By leveraging a local EOR in Mexico, these organizations gain flexibility, reduce risks and streamline their operations while maintaining compliance with Mexican laws.
Benefits of using an EOR
There are a variety of benefits to companies that utilize a local EOR partner in Mexico, including:
- Simplified Market Entry - saving time and resources
- Compliance Assurance - partnering with a local compliance expert
- Efficient Payroll Management - utilizing an established and reputable employer
- Cost Savings - scalable support reduces overhead burden
- Risk Transfer - mitigation of many tax and employer impacts
These and many other benefits have driven a growth in Mexico's EOR providers.
Challenges to EOR in Mexico
There are also a number of challenges associated with the Employer of Record employment model, including:
- Hands-on Support - many EOR service providers are virtual and global, with no on-site presence
- Lack of Flexibility - some EOR software lacks flexibility and customization
- Compliance - with new regulations in Mexico, labor outsourcing has increased scrutiny and risk, and requires a special permit
Challenges like limited control and long-term scalability may also be challenges for certain business plans. Selecting a reputable and experienced EOR provider can help mitigate risks and ensure a seamless experience for supporting business operations in Mexico.
Understanding Employment Laws in Mexico
Mexico's labor laws are among the most comprehensive in Latin America. In fact, in the last 5 years, Mexico Federal Labor Law (LFT) has undergone the most comprehensive overhaul in recent history.
Download the free Mexico's Employment Law e-book for additional information
Key Provisions of the Federal Labor Law in Mexico
Mexico's labor framework is set forth in the Constitution and the Federal Labor Law (LFT). Mexico was the first country in the world to recognize and make provisions for labor rights in its constitution in 1917. The country's labor laws have inspired progressive reforms in other Latin American countries. Balancing worker protections with economic growth, the LFT strives for fair wages, safe workplaces and social justice in a dynamic globalized environment.
Employee Rights and Protections in Mexico
Employees are entitled to fundamental rights in Mexico, including:
- A standard 48-hour workweek and applicable overtime pay
- Annual vacation and a holiday bonus
- Social benefits including social security, housing funds and retirement savings
- Strict anti-discrimination laws and protections against unjust terminations
- Among others
En Employer of Record (EOR) service can help navigate these complexities, ensuring full compliance with labor laws while maintaining smooth operations.
Mandatory Employee Benefits
Competitive compensation depends on the industry, location and skill set. Minimum wage in Mexico is not sufficient to attract and retain workers in most industries. There are certain minimum benefits required by law, and additional benefits are required to be competitive across many industries.
Required benefits by law in Mexico include:
- Christmas Bonus - 15 days of base salary paid as a bonus in early December
- Paid Vacation - employees earn 12 days of PTO during their first year of work, increasing with seniority in the company
- Vacation Bonus - 25% of daily salary during vacation days paid as a bonus
- Profit-Sharing - a company disperses 10% of their profits among the workforce
- Sunday Bonus - for work performed on Sundays, employees earn a 25% premium
Managing Payroll and Benefits
Managing payroll and benefits in Mexico requires a deep understanding of local laws and regulations. Through an EOR, payroll is streamlined, ensuring accurate calculations.
Overview of Payroll Structure in Mexico
Both employers and employees have responsibilities on a Mexican payroll. The most common concepts included on a Mexican payroll include:
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Base Salary - negotiated in pesos per month in the labor contract, payments are calculated with a daily wage
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Payroll Tax - state tax rate between 2 and 3%
- Benefits-by-Law - the required benefits package, some include monthly concepts while others are only paid once per year
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Fringe Benefits - these vary according to industry, location and employee level. They can encompass cash benefits that are included in the payroll, or company benefits and different service perks that employees can enjoy.
- Social Charge - several concepts make up the social charge, in turn providing support and benefits for workers and their families in Mexico
Mexico's Social Safety Net
Mexico's Social Security (IMSS) acts as a safety net, funded by both employer and employee. Expenditures or medical services in Mexico are primarily consolidated in a public health system called IMSS. It includes:
- Medical and surgical care, pharmaceutical and hospital needs for the employee and family
- Work risk insurance to protect against accidents and disease for which they are exposed in relation to their labor
- Disability and life insurance for the employee that protects against the risks of death and disability
- Retirement insurance, unemployment insurance and retirement pensions
- Social and childcare services as well as paid maternity and paternity leave
In addition to IMSS, employers are required to contribute to the INFONAVIT housing fund, which supports workers in obtaining affordable housing loads in Mexico, as well as a retirement savings (SAR) account.
Best Practices for Payroll Management via EOR
An Employer of Record (EOR) in Mexico will typically include in the monthly invoice:
- Monthly salary, benefits, social charge and other taxes calculated on an average month. Employees are often paid biweekly, so the dates do not often align with the month.
- Other benefits such as private medical insurance, a car allowance or food coupons may be added since these benefits are often coordinated with private companies.
- The proportional annual benefits like Christmas bonus or vacation bonus, to stabilize monthly payments and avoid a large variable at the end of the year.
- Some EOR providers may include some concepts for severance or profit-sharing, depending on the specific provider or business case. In other cases these may be additional costs that need to be contemplated.
- Service fee, depending on the scope of the service provided.
Communication and trust are crucial to effectively managing employee compensation in Mexico. Seeking transparency and clarification of payroll concepts is your right as a client of an EOR service provider.
Tax Compliance for Employers in Mexico
Employers in Mexico face multiple tax obligations including income tax and payroll taxes. An EOR takes charge of tax filings and payments, ensuring compliance with deadlines and avoiding penalties. Their expertise ensures accurate reporting and adherence to ever-changing tax laws.
Payroll-Related Taxes in Mexico
There are multiple payroll-related taxes in Mexico, including:
- Income Tax Withholding - while income tax is deducted from employees' wages, employers are responsible for calculating, withholding, and remitting the amounts to the Mexican tax authority (SAT)
- Payroll Tax - a state tax between 2 and 3%
- Value-Added Tax - paid on the purchase of goods and services, some additional benefits or perks on the payroll may have applicable VAT to pay
Although not exactly a tax, other obligations include the social charge (IMSS, INFONAVIT, SAR) and profit-sharing requirements.
Understanding Fiscal Responsibilities
The fiscal and tax obligations of a company are as follows:
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Register with the Federal Taxpayer Registry (RFC).
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Responsibly maintain their own accounting records.
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Issue electronic invoices and avoid improper billing practices.
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Keep their information updated with the RFC.
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Submit monthly and annual tax returns as applicable.
An Employer of Record (EOR) provider in Mexico adds value by eliminating these compliance requirements and absorbing the risk and responsibility for correct payments.
Managing Employees in Mexico
There are no specific laws or rules applicable to recruiting employees in Mexico, but the Federal Labor Law as well as the USMCA stipulate certain standards for non-discrimination. There are a variety of pre-employment screening options that are common in the manufacturing industry. Promotion systems must be summarized in the collective bargaining agreement (if applicable) or in the internal work rules; promotions must take into consideration internal employees first, and be based on standard criteria, applicable to all. Employers are required to provide training and instruction for their employees, and ones with 50+ employees will need an official committee for that.
Employment Practices in Mexico
Employees are hired under strict employment contracts, either by a defined time and project (such as covering a maternity leave), or as a permanent employee after a defined "trial period". Employees are entitled to severance payments for unjust terminations.
Download the free e-book for more details and calculations for severance.
Employee Vacations and Holidays
Employees enjoy 7 statutory holidays in Mexico, plus Election Day every 6 years. If employers require their employees to work on these holidays, they must pay them a 200% premium.
Labor Relations in Mexico
In Mexico, unions typically represent hourly employees. Strictly speaking, no one is forced to join a union, but if workers wish to do so, the company would be required to sign a Collective Bargaining Agreement following a labor procedure. There are many types of unions, and their dues typically include some combination of annual fee from the company plus employee quota deductions. Additionally, with the incorporation of the Annex 23-A into the USMCA, the Mexican government assumes obligations aligned with the freedom of association of workers and the Rapid Response Mechanism for reporting instances of non-compliance.
Employee Health & Safety
There are +40 official Mexican NOMs in health & safety material that companies must adhere to in the workplace. These surround topics like:
- EHS Personnel and Safety Procedures
- Workplace Health Studies
- Emergency Response Systems
- Hygiene in Food Systems
- Psychosocial Risk Factors
- Safety Conditions in the Workplace
Each employer must create a Health & Safety Commission and large facilities with 100+ employees must have on-site EHS personnel and medical attention.
Employee Expense Reimbursements
In Mexico, managing reimbursements for expenses incurred by employees on behalf of the company requires meticulous documentation and adherence to fiscal regulations to ensure compliance and maintain tax deductibility.
Here are the best practices for handling these reimbursements:
- Reimbursable Expenses - business expenses are tax deductible in Mexico, encompassing things like: accommodation, meals, transportation and necessary tools for job completion. An expense policy is key to managing effective timelines and compliance with employee expenses.
- Reimbursement Methods - expenses can be reimbursed via the payroll, or through a compliant payment service, such as Edenred. When processed by payroll, its crucial to itemize reimbursements separately to distinguish them from taxable income, which could greatly affect the employee.
- International Expenses - expenses incurred outside of Mexico are not tax-deductible. They will incur taxes at a cost to the company. Employees must obtain a receipt and/or payment voucher in the foreign country. Its crucial to educate employees on the importance of managing international expenses in the most appropriate way for the company.
- Obtain Proper Invoices - each business expense must be accompanied by an official invoice, issued in the company's name. The employee should also save the payment voucher that signals payment method.
These best practices ensure deductibility of applicable expenses as well as compliance with fiscal regulations and anti-corruption laws in Mexico.
Operating Structures for Service Companies in Mexico
Foreign companies launching new operations in Mexico often consider different business structures as part of their business plan. While entities like SRLs (limited liability companies) or SAs (stock companies) are common, setting them up involves time and resources.
Service Operators in Mexico
There are strategies and incentives that foreign service companies can leverage in Mexico, depending on their business plan and type of incorporation.
Professional Service Providers (REPSE)
Any company that outsources services or provides labor that involves outsourcing staff to other entities will require a REPSE certification.
Visit the REPSE website for additional details.
Service Exporters
Mexico is an attractive place for companies exporting services such as IT, customer support, engineering and even certain value-added services to manufacturing. The IMMEX regime contemplates an export-oriented service company, and provides tax benefits for service exporters. Consult Shelter Services and Other Types of IMMEX for additional details.
Registering a Mexican Company
After choosing an operating structure, the new entity will need to be registered and incorporated with a deed in front of a notary public. This will include bylaws, shareholder structure, and business objectives. Lastly, the newly-incorporated entity will need to register with public authorities such as the Registry of Commerce, the Tax Administration Service (SAT) as well as comply with labor obligations and set up their employer profile.
Consult Forming a Mexican Entity for more information.
How to Import Equipment to Mexico
Importing equipment into Mexico involves several critical steps to ensure compliance with the country's customs regulations and facilitate a smooth import process.
Customs Regulations for Equipment Imports
Before initiating imports, your company must register with Mexico's Official Register of Importers. This registration is managed by the Tax Administration Service (SAT). The necessary documentation covers content details and compliance with regulations. Certain equipment may need to meet specific Mexican standards, known as NOMs. Applicable taxes, such as the Value-Added Tax (VAT) and any customs duties may apply, and certain goods may qualify for preferential tariff treatment. Consult a licensed customs broker.
An Importer of Record service could be another option. Read more in the e-commerce blog.
The Role of IMMEX in Simplifying Customs Processes
If importing equipment for a limited time, explore programs like the Manufacturing, Maquila, and Export Service Industry (IMMEX), which allows for duty-free temporary imports under specific conditions.
Mexico permits travelers to bring one laptop or similar portable computing device duty-free as part of their personal belongings. However, shipping a personal computer may be subject to import duties and taxes, and must be accompanied by the original equipment invoice.
Advantages of Partnering with an EOR in Mexico
Partnering with an Employer of Record in Mexico can facilitate a smooth and compliant market entry, allowing your business to capitalize on growth opportunities while minimizing administrative burdens and legal risks.
Benefits of a Local Partner
A local partner ensures compliance in Mexico and alleviates the burden of navigating foreign regulations. They provide risk mitigation and experience-driven advice that can help you understand different opportunities and pitfalls with your business plan.
Additionally, a local partner should provide a reputable and trustworthy hiring entity for your potential candidates. If they have offices in different cities, a local partner could provide on-site management and flexibility in building different types of teams such as on-site, hybrid or completely remote. This flexibility adds value to your labor opportunity.
Software solution to hiring in Mexico are great options, but they often lack flexibility, and the personalized support on-site personnel can provide to your employees.
Mindfacturing® : Hire in Mexico, Pay in the United States
The most flexible EOR in Mexico, Mindfacturing® provides a local payroll and employee administration solution with hands-on leadership. Leveraging multiple trade programs and incentives, Mindfacturing® is a binational solution, hired in the United States with a service agreement. All cross-border and compliance risks are left to our professionals, and without a Permanent Establishment abroad, no need to worry about fiscal compliance like audits. For export or domestic services, Mindfacturing® solutions work with multiple business plans and stages of growth.
Benefits of Mindfacturing®
An EOR structure is best for companies seeking risk mitigation or rapid market entry in Mexico. Some of the ways in which Mindfacturing® is supporting foreign clients in Mexico:
- An alternative to incorporating a Mexican entity and managing the fiscal relationship with the corporation
- Alongside a maquiladora (IMMEX) operation to separate the manufacturing workforce from non-related functions (ex: global purchasing)
- To formalize a group of independent contractors into one cost center
- To provide professional services in Mexico under full compliance
- To build a global service center with on-site compliance management from a local partner
Success Cases: Utilizing EOR in Mexico
With nearly 40 years of supporting foreign clients to operate manufacturing plants in Mexico, our team has supported a number of service companies establish or nearshore operations to the country as well.
Catalyzing Software Growth with an EOR in Mexico
Formalizing a team and creating an environment that retained top talent, utilizing Mindfacturing® to hire a team fast, increasing both their capacity and company value with an international team.
Read More
Nearshoring Success with an EOR in Mexico
Get in Touch with Us
Let's talk about your project and see if Mindfacturing® could provide value to your business plan.
I am Lucia Ibarra, Mindfacturing® Coordinator at Prodensa. I am located in Hermosillo, Mexico and have teammates in 11 different offices across the country.
I speak frequently with all the employees on our EOR and I also ensure that all my clients' questions are answered. I know they are not accustomed to the laws and regulations of hiring employees in Mexico, and I enjoy being the local partner they can rely on for transparency and a cost-effective payroll solution.
Read Next: What is Mindfacturing®?
