News, Insights and Best Practices for Manufacturing in Mexico

Mexican Congress Passes Pro-Business Labor Reform

09 Oct 2012

Category: Labor & Economics, Manufacturing in Mexico

Mexico’s lower house of Congress passed a long-awaited labor reform in the biggest effort in decades to instill new vitality into an economy where a third of the labor force is employed informally.

Economists and investors welcome the widely expected passage of the bill as a step in the right direction, saying it will boost Mexico’s competitiveness and contribute to job creation and, ultimately, economic growth.

New rules proposed by outgoing President Felipe Calderón will make it easier and less expensive for firms to hire and fire, create new types of temporary employment contracts which require no compensation when they expire, contracts involving payment by the hour, and the regulation of outsourcing practices.

Mexico has been waiting numerous decades to finally see a valid modification to its labor laws, and it could finally be proceeding. Congress-members from the right wing and the PRI worked cooperatively to pass the law, a bill that is likely to boost investment and help branch economic growth. Left wing critics aren't happy with the changes, but they do not have the political influence to stop the bill.

Enrique Peña Nieto, Mexico’s newly elected president, has articulated his support for the labor reform. This reform is intended to intensify market suppleness and diminish employment costs. While diluted in relation to union transparency, the bill has the potential to boost production, to enhance employment, and to develop keenness. Eventually, it is expected to intensify the manufacturing sector, while cultivating Mexico’s position for economic growth.

The reform has many supporters, but also a significant number of opponents.

Legislators from the leftist PRD party expressed their irritation with the new bill by wearing shirts saying, “yes to permanent employment and social security,” to the congressional hearing. The PRD, the main voice of disapproval in Mexico’s political realm, does not have enough votes to block bills that are jointly supported by the other main parties.

The new law modifies Mexico’s labor policies and consents employers to offer workers part-time work; hourly wages, and presents them the sovereignty to participate in outsourcing. Mexico’s federal labor law, with more than 1,000 articles, dates to the 1930s and hasn’t been considerably adjusted in more than 40 years.

The feeble economic growth in Mexico, which averaged 2.4% annual growth over the last 30 years, is widely attributed to the lack of economic reforms. The new reform, however, could add 400,000 jobs per year and could add up to one percentage point to economic growth each year.

President Calderón’s proposal, supported by the PAN, wanted to force unions to disclose income linked to worker dues, and to have their accounts audited externally, and called for direct union votes by secret ballot.

There is extensive agreement in Mexico for the need for some kind of labor reform. Experts say cumbersome unions, like those representing workers from the state oil corporation, end up holding back the economy and stunting Mexico’s ability to compete as many employees strive for inferior wages or are compelled into an immense, relaxed workplace with slight fortification.

Many American-based employers have started doing business in Mexico, and with the current laws they are encouraged to carefully evaluate Mexican labor law issues before finalizing plans to operate there. The burdensome restrictions placed on businesses by Mexico’s complex and pro-labor laws make it difficult to meet productivity goals. Some of the main provisions of the current laws include:

• Every employee not covered by a contract is authorized to a written agreement affirming specific terms of employment.

• Mexican employees are generally eligible to keep their jobs indefinitely. The employment agreement may provide for a specific period of employment only if the type of work to be performed calls for a certain activity or period of time.

• Mexican employers can dismiss an employee without sustaining accountability only for “just cause.” Mexican law provides specific examples of just cause for dismissal, the employer has the burden of proving just cause.

• A terminated employee may appeal to the appropriate federal or state conciliation and arbitration board. Conciliation and arbitration boards are administrative/judicial bodies responsible for mediating alleged labor law violations.

• As a practical matter, it is very difficult for the employer to win a termination case. Of the conciliation and arbitration board rules against the employer, as it usually does, the employee is still entitled to reinstatement or an indemnification equivalent to three months’ wages, whichever the employee chooses. The employee also is entitled to back pay from the date of termination until the date of the award, without offset for interim earnings.

• The employer is not obliged to reinstate employees in certain cases—for example, if the employee works in direct and constant contact with the employer and a normal relationship is impossible. If the employer does not reinstate such an employee, however, it must pay an indemnification usually equivalent to 20 days’ wages for each year of service, in addition to three months’ wages and back pay.

• Workers, who are terminated with or without cause, as well as those who resign within 15 or more years of seniority, also are entitled to a seniority premium equivalent to 12 days’ salary for each year of service.

• If an employee has to work on a Sunday, he is entitled to a 25% premium for that day. If an employee has to work on a mandatory holiday, he is entitled to double pay for that day.

• Employees are entitled to paid vacation days depending on years of service. Vacation pay equals regular pay plus 25%. Employees are entitled to a Christmas bonus equal to 15 days wages.

• Mexican employees are entitled to share in their company’s profits.

Now, the Senate needs to vote to approve the bill before the end of late October before the reform can be signed into law, a process that should take place in the next few weeks. This is expected to be a formality that shouldn't bring major changes.

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