On January 1, 2014, a major Income Tax Law reform entered into force with significant impact on labor benefits.  Fringe benefits that were exempt for workers (and were 100 percent deductible for employers), now will only be deductible up to 47 or 53 percent depending on whether the employer maintains the same benefit and compensation package that was in effect prior to January 1, 2014.

This tax impact has marked the collective negotiations process for 2014 as to the extent employers are already charged with this economic cost aside from the annual review of their collective bargaining agreement.

Currently the real challenge for trade unions and employers is in connection with the workforce already covered by collective bargaining agreements, specifically those agreements that have been in effect for more than three decades. Those collective agreements normally contain fringe and social welfare benefits that have important tax advantages for both parties, such as savings funds, punctuality bonuses, and employees’ quotas to Social Security paid by the employer among others. While not taxable for employees, these benefits were 100 percent deductible for employers for income tax, and did not increase the salary basis for Social Security and Housing Agency contributions. 

Food coupons, savings funds, overtime, punctuality and perfect assistance bonuses, and supplementary contributions made by employers to create or increase Pension funds were included in the collective bargaining agreements with the intention of providing more cash flow to employees, and to allow them to have a better compensation package or future retirement benefits. Moreover, old-time collective bargaining agreements and most of the Compulsory Bargaining Agreements (i.e. Compulsory Bargaining Agreement for the Rubber Industry) used to include the obligation of employers to pay employees’ social security contributions.

Additionally, when the employer (as a taxpayer) has unionized and non-unionized employees, the deduction is conditioned on the fact that those disbursements are equally averaged for each non-unionized worker, in an equal or minor amount than the deductible expenses for the same concept made by each unionized worker. Furthermore, the ability to deduct employees’ social security contributions paid by the employer is now being eliminated.

These new tax dispositions directly impact the payroll cost of Mexican employers, and impose an additional burden on 2014 collective negotiations. According to accounting and tax experts, the immediate impact of these dispositions on the payroll cost may vary from three to seven percent in each case.

Click here to view table.

In the first months of 2014, Companies have analyzed the possibility of converting to salary, fringe benefits currently granted that will be impacted by the Tax reform. This process is commonly known as “Monetizing.” So far, these cash conversions do not appear to be a viable option since they will have an impact on other benefits. (e.g. vacations, vacation premiums, social security and housing agency contributions, and tax withholdings applicable to employees).

In general terms, salaries included in collective bargaining agreements are reviewed on a yearly basis, and other contractual terms and fringes are negotiated at two-year intervals.  These negotiations are generally marked by two official factors: an increase to the minimum wage, and the annual inflation rate.

For 2014, the minimum wage was increased by 3.9 percent and the official inflation rate was around four percent. Adding the direct impact of the tax reform in the payroll cost, plus the expected salary increase based on the above-mentioned parameters represents a major task for Mexican employers in this year’s collective negotiations.

New formulas to substitute the already affected fringes and social welfare benefits must be found, not only to secure the net income of employees but also as means to retain the workforce and enhance the productivity and competitiveness of Mexican companies.

Alternatives are on the table: differentiated salary increases may be granted among categories of workers or lines of production that are tied to productivity. The modification and inclusive cancellation of those benefits and prerogatives earned by workers by virtue of time should be revisited in collective negotiations in order to secure the viability of the working centers. New alternatives to compensate the workforce, secure their net income and also provide improved results on production must be found.  

The renewal of the collective bargaining agreements and the mechanisms to review them is a task that cannot be left for generations to come. Flexibility and productivity should be the common denominators and main objectives. 

Collective negotiations must assume and adopt the necessary changes to confront the profound transformations experienced by globalized economies. Unions and employers must review the deficiencies and distortions created by past negotiations that are not longer permitted.