Severance Pay in Mexico
Navigating severance pay in Mexico requires a clear understanding of the legal obligations under the Federal Labor Law (LFT). Whether termination occurs through voluntary resignation, justified dismissal, or unjustified dismissal, this guide will provide an in-depth look at severance requirements, calculation methods, and employee rights in Mexico.
Key Takeaways
✔️ Severance pay in Mexico is mandatory in cases of unjustified termination, and it includes three months’ salary, plus additional compensation based on years of service.
✔️ For voluntary resignation or justified termination, severance pay is not required, but employees are still entitled to accrued benefits like vacation pay and the Christmas bonus.
Introduction to Severance Pay in Mexico
Severance pay in Mexico is determined by the circumstances of the employee’s termination. The Federal Labor Law (Ley Federal del Trabajo or LFT) defines the rights and obligations of both employees and employers in Mexico. Depending on the termination type, different rules and calculations apply.
Article 46: “The employee may terminate the employment relationship at any time, by giving notice to the employer, and no severance shall be owed, only the payment of accrued benefits.”
Article 48: “In the event of unjustified termination, the employer shall be required to either reinstate the employee or pay severance compensation.”
Voluntary Resignation: Understanding Finiquito
When an employee voluntarily resigns, they are not entitled to severance but must receive their finiquito (settlement). The finiquito consists of accrued benefits such as:
- Payment for all days worked but not yet paid
- Accrued vacation days
- Proportional Christmas bonus (Aguinaldo)
Notice Period and Documentation of Resignation
While no specific notice period is mandated, a 15-day notice is customary. Employees must provide a formal, written resignation letter to finalize their departure.
Streamline Your Expansion with EOR Services in LATAM
Expand across Latin America effortlessly with our Employer of Record (EOR) services. We handle compliance, payroll, and employee management, ensuring smooth operations while you focus on growing your business.
Justified Termination: No Severance Required
In cases of justified termination, severance is not required. Employers must, however, pay the employee for accrued wages, vacation pay, and a proportional Christmas bonus.
Article 47: “The employer may terminate the contract without liability, provided there is a valid cause, such as dishonesty, disobedience, or neglect by the employee.”
Complexity of Proving Justified Termination in Mexico
Proving that a termination is justified in Mexico can be particularly challenging for employers. The Federal Labor Law (LFT) sets strict guidelines that heavily favor employee protection, requiring employers to provide substantial evidence of misconduct or poor performance. Simply stating a reason for termination is not enough; the employer must gather solid documentation, such as written warnings, performance reviews, or reports of misconduct, to justify the dismissal.
Even with detailed records, the burden of proof lies with the employer, and if an employee disputes the termination, the case may be brought before the labor courts. Mexican labor courts generally tend to side with employees, and if the employer cannot provide conclusive evidence, the termination may be deemed unjustified. In such cases, the employer could be required to reinstate the employee or pay additional severance, making it crucial for businesses to carefully document any actions leading to termination.
How to Calculate Severance Pay in Mexico
The calculation of severance pay varies depending on whether the termination is due to resignation, justified, or unjustified termination.
Calculating Finiquito for Resignation and Justified Termination
Even if no severance is owed, employees must still receive:
- Wages for days worked
- Accrued vacation days
- Proportional Christmas bonus (Aguinaldo)
Calculating Severance for Unjustified Termination
For unjustified terminations, the severance calculation includes:
- Three months’ salary as base severance
- 20 days’ salary per year of service
- Seniority premium of 12 days’ salary per year, capped at twice the minimum wage
Example Calculation
For an employee earning $30,000 MXN per month and working for 5 years:
- Base severance: 3 months’ salary = $90,000 MXN
- 20 days per year of service: 20 × 5 × daily wage = $100,000 MXN
- Seniority premium: 12 × 5 × daily wage = $60,000 MXN
Total severance: $250,000 MXN, plus accrued benefits.
Consequences of Failing to Pay Severance on Time
When Does Severance Payment Need to Be Made?
In Mexico, severance payment must be made immediately upon termination, particularly in cases of termination without cause. Once the termination is agreed upon or a decision is made, the employer is legally obligated to settle all severance-related payments right away. These payments include accrued wages, bonuses, vacation days, and other entitlements, as well as severance compensation such as three months’ salary, 20 days’ salary per year of service (if applicable), and the seniority premium.
For resignation or mutual agreement, the settlement terms should be clearly outlined, and payment is generally due on the employee’s final working day unless otherwise agreed upon.
What Happens If the Company Exceeds the Deadline?
If an employer fails to provide severance payment within the required timeframe, the company could face significant legal consequences, including:
Fines and Legal Penalties: Mexican labor courts can impose fines and penalties on companies that delay or fail to pay severance. These penalties can be substantial and increase depending on the length of the delay.
Accrued Wages: The company may be liable to continue paying the employee’s full salary for every day the severance payment is delayed, often referred to as “expired wages.” This can last for up to 12 months following the termination notice.
Labor Lawsuits: Employees can file legal claims in labor courts for delayed severance payments. These lawsuits can be time-consuming and costly, and Mexican labor law tends to favor employee protections.
Reinstatement Risk: In some cases, if the company does not fulfill its legal obligations, the employee may demand reinstatement to their position or a higher severance amount.
Employers are strongly advised to comply with the law and settle severance payments promptly to avoid these legal and financial repercussions.
Manage Severance pay in Mexico with Europortage
Navigating the complexities of severance pay in Mexico can be challenging, especially when dealing with justified and unjustified terminations. At Europortage, we provide comprehensive support to ensure your business remains compliant with Mexican labor laws, from calculating severance to managing legal obligations. Our team of experts handles every detail, ensuring smooth terminations while minimizing risks of legal disputes and penalties. With over 20 years of experience, we help you manage end-of-employment processes efficiently and in full compliance with the law.
If you need assistance with severance pay or termination procedures, don’t hesitate to contact us today!
