There are a number of reasons that foreign companies choose to set up manufacturing operations through shelter companies in Mexico.
Shelter Companies in Mexico Ensure Compliance and Mitigate Risk
In a world of specialization, it makes more sense for smaller manufacturing operations to focus on what they do best – produce product-- instead of investing in industrial buildings, international attorneys’ services, accountants and creating their own Mexican human resources infrastructure.
Reasons abound for choosing a Mexico shelter program as a means by which to initiate and maintain low-cost and low-risk manufacturing operations. In addition to providing a wide range of services shelter companies in Mexico ensure foreign manufacturers’ compliance with Mexican labor law.
Labor law -- guided by the Ley Federal de Trabajo and buttressed by other legislation --, although in some instances inflexible, hasn´t prevented hundreds of foreign companies, and thousands of foreign sole proprietors, from profitably navigating the Mexican economy. Many manufacturers entered into partnerships with shelter companies in Mexico to help them do so.
It is important for any company entering Mexico to do business to understand both the present and historical implications of the Ley Federal and other important, if less-known, legislation.
First, a synopsis:
The Mexican Revolution that began in 1910 led to creation of Article 123 of the Constitution of 1917. That Article gave workers the right to unionize and strike. It also provided protection for women and children, the eight hour work day and a living wage. It was not until 1931, however, that the Ley Federal was enacted. The law established Boards of Conciliation and Arbitration (Juntas de Conciliación y Arbitraje) made up of representatives of the government, employers and unions. Those boards have changed little since their formation.
“Mexico has not changed the labor legal framework drastically in the wake of the market reforms of the 1990s," a three year-old study by the World Economic Forum concludes. “The framework remains very much the one established by the 1917 constitution and the federal labor law adopted in 1970. In much of the legislation flexibility and efficiency, priority is given to the protection of worker’s rights. These include the provision of a minimum salary, some restrictions on forms of employment other than permanent contracts, a protection mechanism for workers in work-related disputes.”
Among features of the Ley Federal and the more recent Social Security legislation:
Dismissing an employee
Dismissing an employee can be costly. In some instances, being in Mexico under the auspices of a shelter service provider can mitigate these costs to a certain degree.
If a worker is fired without just cause, he or she is to receive three months of wages. If that sum is not paid at the time of dismissal, then an employer may be liable for the original sum, plus all wages that would have accumulated had the worker been present in the meantime. If the employee has worked for less than a year, the employee is to receive one half of the salaries of the period he received from the employer. If this period is greater than one year, then the compensation is to be equal to a sum equal to six months’ salary of the first year and twenty days per year for each of the following years. The compensation is based on the base salary of the employee during this period. Because shelter companies in Mexico are, for the purpose of Mexican labor law, the employer of record, the shelter company can, when possible, reallocate workers from companies from those that are laying off employees to other client companies that have a demand for manufacturing workers.
The Mexican Work Day
For every six days of work (Monday through Saturday), employees are entitled to one day of rest with full pay.
Overtime in Mexico
If an employee works overtime on a holiday, he is to be paid at triple the normal hourly wage. Any hours worked over 8 during one day are paid at double time.
If an employee quits, the employer must pay him the proportionate part of his vacation and year end profit-sharing. If an employee has worked for more than 15 years consecutively, the employee shall receive an additional sum equivalent to 12 days salary (calculated on the last salary received prior to resigning) for each year he has worked.
Mexican employees have a yearly vacation, which is not to be less than six working days. For every year an employee works, he is to receive an additional two working days. After four years, he is to receive two working days for every each additional five years of experience. In addition, the employee will will be paid no less than a 25% vacation premium calculation on his salary for the vacation period.
Employees are to receive 10 percent of the employers' profits. Included are employees who worked 60 days or more during the period. The distribution is to be made within 60 days of the date workers are required to pay income taxes. These profit sharing funds do not count when it comes to determining annual salary amounts.
A labor union is permitted in a place of employment provided that at least 20% of the employees belong to it. Even so, the registry process is slow and complicated.
Mexican Social Security Law
The Mexican Federal Social Security system, which includes medical personnel and facilities nationwide, is funded by a mandatory charge paid by the employer. In addition, employers are required to contribute to Instituto Nacional para el Fomento a la Vivienda para Trabajadores, the national housing fund. Together, these charges account for about 29 percent of an employee's base. As such, salary is considered to be 129 percent of base salary.
Manufacturing companies that establish wholly-owned subsidiaries in Mexico must have personnel that are very well versed in Mexico’s labor law in their organization, as well as have access to individuals that have Mexican legal expertise. Shelter companies in Mexico provide companies that manufacture in Mexico through their turnkey shelter programs with the guidance that they need to navigate these issues, as well as a host of others.