Amendments address several legal loopholes and will substantially affect labor relationships in the country.

During his last day in office, President Felipe de Jesús Calderón enacted a number of major amendments (the Labor Reform) to Mexico's Federal Labor Law (Ley Federal del Trabajo)(the FLL), which dates back to the 1970s. The Labor Reform had become a critical matter in Mexico's legislative agenda, as the FLL was outdated in many material respects. Although many believe there is room for additional improvement, the amendments address several legal loopholes and will substantially and positively affect labor relationships in Mexico.

The Labor Reform was published in Mexico's Federal Official Gazette (Diario Oficial de la Federación) on November 30, 2012, and became effective on December 1, 2012. Below is a summary of some of the most important aspects of the Labor Reform.

Expansion of Types of Employment

Perhaps the most important change to the FLL, from an employer's perspective, will be the expansion of the types of employment relationships that are allowed. In addition to the already existing contracts for an indefinite term or a specific project, the Labor Reform introduces the seasonal employment modality, which allows for short-term employment to cover the need for additional workforce requirements during in-demand seasonal peaks, and the temporary employment contract, which allows for short-term employment to cover immediate needs.

In addition, the Labor Reform allows employers to utilize (i) trial periods and (ii) initial training periods, during which employers will have the ability to assess whether candidates have the required knowledge or skills to perform their duties. In those cases where candidates do not meet the required knowledge or skills, employers will have the ability (taking into consideration the opinion of a mixed employee-employer commission) to terminate them without paying penalties or mandatory severance. Trial periods will be limited to 3 months for rank-and-file workers and 6 months for management-level employees and high-level executives.

The U.S. concept of employment "at will" was not included in the Labor Reform and remains invalid in Mexico.

Outsourcing

Another keystone of the Labor Reform is the express regulation of personnel-outsourcing agreements. Importantly, the Labor Reform limits the applicability of employee outsourcing to specialized tasks that fall outside the beneficiary's ordinary course of business. In addition, it imposes joint employer liability on the beneficiary and the outsourcing company unless the relationship (i) is documented through an outsourcing agreement, (ii) does not cover all of the activities carried out in the workplace, (iii) is justified by its specialized nature, and (iv) does not cover tasks that are the same or similar to those performed by the beneficiary's employees.

Back Wages

Historically, labor courts in Mexico have been very protective of employees' rights and are often described as "employee friendly." One of the main concerns for employers in Mexico has been the manner in which disgruntled employees had, in many instances, abused the judicial system to slow down trials and accumulate back wages, which were previously uncapped and accrued until the employer had paid the applicable court ruling in full.

The Labor Reform addresses these concerns and places a 12-month cap on back wages (the Limitation Period). After the Limitation Period has expired, if an employee prevails in his or her claims against an employer, he or she will be entitled to collect 2% interest on back wages with a 15-month cap. The Labor Reform also suspends accumulation of back wages upon the death of the employee.

Hourly Wage

Another significant change resulting from the Labor Reform is the recognition of an hourly wage system, as opposed to the previous monthly wage system. This amendment allows employers and employees to explore alternative employment mechanisms as long as the maximum work shift is not exceeded (8 hours during day shifts, 7 hours during night shifts, and 7.5 hours for mixed shifts) and, at the very least, the minimum hourly wage and overtime hours are paid.

Harassment and Dismissal

The Labor Reform also adds sexual harassment and bullying to the list of justifiable causes for termination of a labor relationship in the FLL. The addition of these causes for termination represents an attempt to eradicate a practice that had been for years dismissed by many as a "cultural difference."

Paternity Leave

The Labor Reform introduces a mandatory paternity leave of five days' salary for male employees. This leave applies to adoption as well as birth.

Grandfathering of Preexisting Claims

Claims filed prior to the enactment of the Labor Reform will be grandfathered in under the provisions of the FLL previously in effect.

Implications

This legal reform is a positive step by the Mexican government toward stimulating job creation and providing greater certainty to employers on their legal and economic exposure when expanding their workforces. Companies should revisit their employment practices in Mexico to take advantage of, and ensure compliance with, these reforms. Employers that use outsourcing services to staff their operation in Mexico should review their existing practices and policies to ensure they comply with the new legal framework.