Employment lawi Labour law overview
Private labour and employment relationships in Mexico are regulated by Article 123, Section A of the Federal Constitution (CPEUM), and by the Federal Labour Law (LFT), which regulates Article 123.
Both the CPEUM and the LFT are the result of the Mexican Revolution, which is why the guidelines established in the LFT are based on the social principle of protecting the working class. This is clearly reflected in Article 18 of the LFT, which stipulates that 'in the case of doubt, the interpretation most favourable to the employee must prevail'.
Under the LFT, employees shall not be discriminated against based on their position within a company. This principle applies not only to lower positions in a company, but also to higher positions. As such, in accordance with the LFT, people in management positions and executives of companies are entitled, just as any other employee, to, inter alia, payment of overtime, holidays, Christmas bonuses and rest days.
The following list of special rights and obligations are applicable to trust employees (directors or executives) in Mexico:
- they cannot be members of the same union as the rest of the employees;
- they cannot vote in the event of an inter-union conflict;
- they cannot represent the employees in mandatory joint commissions;
- their employment relationship can be terminated because of a loss of confidence;
- employers can legally refuse to reinstate them in the case of litigation;
- administrators, directors and general managers are not entitled to participate in mandatory profit distributions;
- they are considered as de facto representatives of the employer;
- a probation period of up to 180 days can be agreed for them; and
- their training and instruction relationship can be agreed for a period of up to six months.
From a Mexican labour perspective, non-competition obligations and other restrictive covenants such as non-solicitation are very difficult to enforce. Mexican labour courts are likely to considered these type of obligations as contrary to the principle of work freedom embodied in Article 5 of the CPEUM, which establishes that any individual can perform any kind of services or activities, provided such services or activities are not illegal; Therefore, any restriction on an individual to engage with a company or to perform specific activities would not be valid or enforceable.
Furthermore, and different from many jurisdictions, Mexico's labour courts cannot issue injunctions or cease and desist orders that may impede a company from hiring an individual or an individual to accept employment from a company.
Consequently, post-employment non-competition or non-solicitation obligations would be very difficult to enforce in Mexico before the labour courts.Civil overview
From a Mexican civil law perspective, non-compete obligations are agreements between two parties in which one party accepts the responsibility not to compete in a certain market during a certain period of time in a determined territory. To secure compliance with such an obligation, parties will usually agree on the payment of an indemnity that will be triggered in the event of contravention.
Based on the above, the main object of the obligation will be a negative covenant: that is, a covenant to refraining from doing something. It is important to note that, according to Mexico's civil laws, a negative covenant must be possible and lawful: that is, there shall be no contradiction of Mexico's public laws or common standards of conduct. A party who fails to comply with the covenant will be subject to the payment of damages.
One of the most important principles in Mexican civil law is that parties are bound by what they expressly agree to, and also by the legal consequences of good faith, common practice and traditions. Based on this principle of contractual freedom, a non-compete agreement will be legal and enforceable under Mexican civil law when non-competition clauses or agreements are entered into to prevent unfair competition. Consequently, as long as a non-compete clause or agreement is intended to offer advance protection and assure strict confidentiality and a high standard of loyalty to prevent future losses or any kind of economic damages, we consider it to be lawful under civil law. Non-compete obligations are limited for a defined term, and to a defined territory, set of clients, and activities, products or services.
Mexican civil law recognises the validity of sanctions or penalties arising from a breach of a non-compete obligation and establishes some limitations: the amount of the penalty cannot be greater than the principal obligation, and a judge can reduce the amount of the penalty when the obligation was partially complied with.iii Termination of employment
In accordance with the LFT, an employment relationship is deemed as 'the rendering of a personal service by one person to another, under the latter's direction and control, in consideration for the payment of a salary'.
It is important to note that in Mexico, 'employment at will' is not recognised, even for managerial positions or executives. Employment relationships in Mexico are ruled by a stability principle that states that, unless a just cause or a justified ground to terminate a relationship exists, employees cannot be terminated without being entitled to a severance payment.Termination of an employment relationship
The LFT provides that an employment relationship may be terminated for the following reasons:
- by mutual agreement;
- death of an employee;
- termination of a specific job or the term of a capital investment;
- the physical or mental incapacity or disability of an employee;
- force majeure or acts of God;
- the self-evident non-profitability of an operation;
- the depletion of the resources of an extractive industry; and
- insolvency or bankruptcy being legally declared.
The LFT provides that an employer can only terminate an employment relationship for cause in the event that a employee carries out one or more of the specific causes provided in the LFT.Severance payment
Employees dismissed without a justified cause (wrongful termination) are entitled to receive the following severance payment:
- three months of daily total compensation at a rate equivalent to an employee's daily salary;
- a total of 20 days of daily total compensation for each year of services rendered;
- a seniority premium, equal to 12 days of salary per each year of services rendered, with a salary limitation of up to twice the minimum wage, if an employee's salary exceeds that limitation;
- back salaries from the date of the dismissal throughout the first 12 months of litigation. After the first 12 months of litigation, a monthly interest at a rate of 2 per cent over the amount of 15 months of salary will be generated; and
- the accrued and proportional part of employment benefits.
In accordance with the LFT, an employee has the option in the event of a wrongful termination to receive the above-mentioned severance payment, or to ask for his or her reinstatement to his or her job.Daily total compensation
Daily total compensation or integrated salary is deemed as the payroll salary, plus any fringe benefits such as commissions, compensations, allowances and other benefits in kind.
The commissions, bonuses or premiums to which an employee may be entitled, derived from his or her activities as a sales employee, are considered to be part of the employee's salary; thus, they should be integrated into his or her salary for purposes of the calculation of the statutory severance. To measure the average salary of a sales employee, the sum of his or her salary and any commission or bonuses achieved during the past year of services should be divided into 365 days.iv Overview of employment liabilities derived from equity incentive plans
It has become common practice in Mexico for companies to allow their Mexico-based executives to participate in equity incentive plans (options, stock options, restricted units, etc.). It is important to note that participation in equity plans, if not correctly formalised, could trigger the following employment-related risks.Potential joint liability
In terms of the LFT, employers are solely responsible for the employment relationship; consequently, only an employer should be obligated to pay salaries and benefits to its employees. In the event that the participation of an executive in an equity plan is not correctly documented or formalised, there is a potential risk that a foreign entity and its Mexican subsidiary will be construed as being jointly liable for all the employment terms and conditions of a participant. This potential liability would arguably derive from the fact that employment with the local entity is a condition to entitlement under the equity plan.
Moreover, a Mexican labour court may potentially establish a link between the foreign entity and the local subsidiary as being jointly responsible for the terms and conditions of the plan, as the income deriving from the awards may be deemed as part of the employees' compensation scheme.Integration in daily compensation
In accordance with the LFT, in the case of termination of employment without a justified cause, employees are entitled to receive a severance payment. Two of the three severance concepts are based upon a daily total compensation amount.
In our experience, whenever executives and those in management positions are terminated, it has become common practice for such terminated employees to request the integration of the daily proportion of the amounts gained in equity awards plans into the daily salary. To date, the labour courts have not ruled on whether benefits gained from equity plans paid by related entities should be considered as part of an employee's compensation for severance purposes.
It is important to note that the LFT specifically provides that in the event of doubt, the interpretation that is most favourable to employees shall prevail. Accordingly, it is critical to have undisputed evidence to support the argument that the participation of local employees in an equity plan should not be considered as an employment benefit.
On 10 June 2016, the labour courts issued a resolution in which they ruled that the options and benefits derived from a stock option plan are not to be considered part of the employees' compensation unless such grant is included in the individual employment agreement of an employee.