Mexico has always been one of the top choices for overseas companies looking to form an effective and affordable foreign workforce. The price is usually one of the first things companies consider, and Mexico, with its low labor costs, stable economy, and high growth rate, always scores well in that category.
Location is also a huge advantage. By opening up a branch office in Mexico, companies can access the massive US market and all of the emerging markets in Central and South America all at once. Mexico's time zone is also particularly convenient for companies looking for a gateway to the US market. The Spanish mother tongue is ideal for nearly all of South America.
That's not to say that the market in Mexico is not attractive. The annual 2.5% GDP growth (before Covid) means Mexico is emerging as a consumer market in its own right. It is already the second largest economy in Latin America and the 15th largest economy overall, and if current growth rates continue, it will not be long before Mexico cracks the top 10. All signs point in that direction for the foreseeable future.
Mexico is also an easy market to enter in several different ways. Perhaps none as simple as working through a Professional Employment Organization (PEO). Companies that offer PEO for Mexico are experts in Mexico's labor and tax laws and help make the initial foray into the Mexican market as quick and easy as possible.
Key Labor Laws in Mexico
While using a Mexican PEO service might get your company started even if you don't know much about Mexican law, it's a good idea to familiarize yourself with the country's labor code as quickly as possible. That way you stay in control of the operation without being entirely reliant on others to guide you. Of course, local partners are always a good resource for staying up to date. But knowing the basics is empowering and adds to your ability to make good business decisions.
Here is a rundown of the essential labor laws in Mexico:
Minimum Wage - The hourly minimum wage is 123.22 Mexican Pesos. That translates into $877.16 USD per month.
Work Week - The standard workweek in Mexico is 40-48 hours and can span over 6 days, at 8 hours per day.
Overtime - Overtime is considered time worked beyond the agreed-upon work schedule. The first 9 hours of overtime in a week are paid 200% of the usual hourly rate, and hours after that are paid 300%.
Maternity Leave - Mothers that give birth may take as much as 3 months of paid leave. They are compensated by Mexico's social security.
Paternity Leave - When a baby is born to a family, fathers can take a week of paid leave, compensated by the employer.
Payroll Taxes - Mexico has a range of taxes paid by the employer that can go as high as 22.75%
Paid Time Off - Employees receive PTO days based on the length of their tenure at the company. After one year, an employee receives 6 days. After two years, 8 days. By the time they reach 5 years at the company, they get 14 days. That goes up again when they hit 10 years when they receive 2 additional days for every five years served.
Three Main Employment Options
Companies looking to start hiring in Mexico can choose between three primary employment options. They can open an entity and start a standard payroll operation if they expect a permanent stay in Mexico. They can work through a PEO and begin hiring immediately, without an entity. Or they can work with independent contractors.
Opening an Entity - Companies that are confident that they are coming to stay for the long haul can open a legal entity through the Mexican government and tax offices. This is the longest and most involved employment option, but ultimately the most stable and the one that offers the most options, such as building partnerships. While both other options are short-to-medium term solutions, opening an entity is a strong long-term option.
PEO - A company that is testing the market or just wants to take advantage of a short-term opportunity would do well with a PEO (also known as Employer of Record). The PEO serves as the legal employer for the employees while the client directs them in their day-to-day duties. It saves the client from having to open an entity and is useful when the company is unsure about the long-term viability of the project. If it looks stable, it's easy to change to an entity.
Contractors - Working with independent contractors is an appealing option for companies looking for short-term help. Contractors are officially self-employed, so companies don't pay employment taxes or provide benefits. Companies also avoid having to deal with the complexities of a global payroll because the contractors are paid in a lump sum, with no taxes to withhold. The major disadvantage of working with contractors is the risk of misclassification. When companies start to treat them as employees but still classify them as contractors, the government could swoop in and levy heavy fines.
Why PEO is Best Short/Medium Term Solution
Each of the employment options has its advantages and disadvantages, which align with the needs of different companies. The entity is the long-term solution for all projects in Mexico, and ultimately any successful overseas office will end up opening an entity if the project is successful enough.
Contractors are useful for short, independent projects at any stage, but as the primary employment option, they are only a practical solution at the earliest stages of development.
So, for the short-to-medium term, what might be called the exploratory period, PEOs offer the best option. They let companies test the water in Mexico, but with the administrative ease of contractors - in full legal compliance and without risk of misclassification.