On June 10 2016 the Seventh Collegiate Court in Labour Matters of the First Circuit (Mexico City) published the first precedent in relation to employee stock option plans. Previously, there had been only a few isolated precedents resulting from tax-related cases, which established that an employee's profits from exercising stock options should be considered taxable income. However, tax precedents from 2009 and 2010 established that employee stock option plans were in fact benefits derived from employment relationships.


In its decision, the collegiate court held that if stock options are established in an individual employment agreement, they must be considered part of the employee's salary in accordance with Article 84 of the Federal Labour Law. This is significant because Articles 84 and 89 of the Federal Labour Law set out the way in which severance pay should be calculated on dismissal.

Article 84 establishes that salaries comprise:

  • payments made in cash for a daily wage;
  • gratuities;
  • bonuses;
  • housing;
  • commission;
  • in-kind benefits; and
  • any other amount or benefit provided to an employee for his or her work.

Article 89 provides that severance amounts should be calculated based on the consolidated salary referred to in Article 84.

In its decision, the collegiate court established that:

"Stock options granted by an employer to an employee, derived from the employment relationship between them, form part of the salary that the employee receives for his job, since such stock purchase results in a pecuniary difference in favour of the employee, provided the stock options have been established in the individual employment agreement, since in the absence of an express provision in that sense, stock options could not be considered as an employment benefit nor to be part of the consolidated salary."


Frequently, expatriate personnel undertaking assignments in Mexico demand severance pay in accordance with the Federal Labour Law on termination of their assignment as it awards them higher benefits. Further, expatriates often demand stock options be integrated into their salaries, which will form the basis of their severance pay calculation.

Since severance pay is linked to an employee's consolidated salary and his or her length of service, it is often costly for employers that have implemented sophisticated remuneration packages for their executives and expatriates in Mexico (eg, stock option plans).

One of the main aspects that makes the consolidation of stock options difficult is the impossibility to clearly determine the amounts that should be consolidated, if any – for example:

  • the value of the stocks granted to the employee;
  • the difference between the stock market price and the price at which the employee acquired the stock (if it was lower); or
  • the product of the sale of the stock.

Arguably, profits resulting from the sale of stocks are not income derived from an employment relationship, but rather from a commercial one.

Although this is an isolated precedent, employers must be careful when drafting either offer letters indicating general compensation packages or individual employment agreements under local law. Employee stock option plans must clearly indicate that they are not part of the employment conditions or benefits provided by the employer, but rather an extraordinary item of compensation outside the scope of the participant's employment contract and their regular or expected compensation for the purpose of calculating severance pay.

For further information on this topic please contact Nadia Gonzalez Elizondo at Santamarina y Steta by telephone (+52 81 8133 6000) or email (ngonzalez@s-s.mx). The Santamarina y Steta website can be accessed at www.s-s.mx.

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