Episode 12: Payroll in Mexico

Luisa Rollenhagen (00:07):

Hi, I’m your host, Luisa Rollenhagen, and you’re listening to another episode of Payroll Around the World.

Payroll Around the World is an audio series that explores the truly local side of payroll by taking you around the world, one country at a time, to talk to experts on the ground and find out what payroll there is really like.

After all, payroll can’t truly be global if it isn’t local as well.

Today, we’re going to Mexico. From the bustling energy of Mexico City and the manufacturing hubs in Monterrey to the lush seaside towns of the Yucatán Peninsula, this North American country is famed for its vibrant culture, ancient ruins, and world-renowned cuisine. The automotive industry, electronics production, and agriculture also play an important role in Mexico’s economy. And, of course, no discussion of Mexico would be complete without mentioning its deep-rooted traditions, from Día de los Muertos to the pre-Columbian origins of staple foods such as cocoa, corn, and chili peppers.

Mexico’s labor landscape is also shaped by a strong union presence.

Carlos Mandujano (01:26):

Mexico’s labor force is mainly in manufacturing and producing products. So most of those companies need to work with unions. So yeah, the unions in Mexico are big.

Luisa Rollenhagen (01:39):

However, there are some aspect’s of the country’s labor laws that are currently in flux.  The country is among several nations debating a reduction in weekly working hours. But unlike places like Spain and Iceland, which are exploring shifts from 40 to 37 hours or adopting a four-day workweek, Mexico is considering lowering its legal workweek to 40 hours, down from the current 48. In some cases, businesses have already begun independently reducing working hours for employees, a decision that’s been greeted with approval.

Marco (02:13):

Finally we can enjoy the weekend with our families.

Luisa Rollenhagen (02:16):

Like many other countries, Mexico is also striving to digitalize many of its HR and payroll processes in order to maximize efficiency and ensure compliance.

Delia Hernandez (02:26):

Mexican authorities have been implementing several rules and procedures to ensure compliance in the tax withholding and the statutory contributions calculations, and the payment and reporting methods to the authorities. So that includes the implementation of the electronic invoice that allows the tax authority to stamp in real time the earnings deductions and taxes deducted from payroll.

Luisa Rollenhagen (02:52):

We’ll be delving deeper into that topic and what it has to do with informal employment, which is a big issue in Mexico, in just a moment.

But first, I’d like to introduce our experts for this episode. You’ve just heard a little preview from both of them, and together, we’re going to explore the ins and outs of payroll in Mexico.  

Welcome, Delia and Carlos! Would you mind introducing yourselves?

Delia Hernandez (03:15):

My name is Delia Hernandez. I’m the delivery compliance manager for the Americas region. I’ve been working at ADP for almost 15 years and I have more than 30 years of experience in payroll and human resources.

Carlos Mandujano (03:31):

My name is Carlos Mandujano. I am the director of operations at ADP for the Mexico market. I’ve been working at ADP for almost 15 years now. 

Luisa Rollenhagen (03:40):

Thank you so much for joining us today. I’d like to start us off by taking a look at Mexico’s economy and labor market. What can you tell me about that?

Carlos Mandujano (03:49):

Of course. Well, the local economy, I can talk about economy for days because I love the subject, but this is about payroll. This payroll is tough to mention the numbers because Mexico, it’s a lot of informal. We have a lot of informal markets in Mexico. 

And as far as the labor market, the labor market is robust, but it’s a little bit hard to measure because of the informality. The informal market in Mexico is big. The official number of unemployment is 1.6 million people unemployed. But with the informality, we don’t know if those numbers are true. Just the unemployment numbers is 2.5 to 2.6% of a rate, but the reality might be different.  

Luisa Rollenhagen (04:32):

Yeah, I remember reading that, according to Mexico’s national statistics agency, the labor informality rate has been hovering around 50%. Combatting unregistered employment is therefore really important for the government, since it’s facing significant tax revenue losses. Not to mention, employees end up with limited access to social protections.

So what else do multinationals need to know about setting up shop in Mexico?

Delia Hernandez (04:58):

Mexico, it’s very important because it has a very dynamic population, a lot of skilled workers in a young workforce that is ready to work in Mexico. And also, Mexico has a strategic location and a dynamic economy. So, the Mexican market offers numerous opportunities for multinational companies. However, of course, entering into this market also comes with a set of unique challenges. So, to ensure a successful entry in sustainable operations, multinationals need to understand and prepare for these challenges. For example, regulatory understanding and adaptability, outsourcing restrictions, labor reforms, tax sessions at federal and local level, as well as getting to know the electronic invoice management that is running right now in Mexico.

Luisa Rollenhagen (05:56):

I want to delve deeper into the electronic invoice management that you just mentioned. If I remember correctly, Mexico introduced a digital invoicing system to have an official record of all financial transactions between employers and employees. It’s called the CFDI, isn’t it?

Carlos Mandujano (06:13):

The regulatory digital payroll, which is the CFDI. So that is a kind of a new law. It’s just 11 years old, but it is the electronic information that we need to send to the government for every payment that we make to the employees that substitutes an old law that we needed to present for the annual tax report for every employee. So now it is basically every period that we send information to the government so they get the information for the taxes.

Luisa Rollenhagen (06:42):

Oh interesting. What else can you tell me about the CFDI? I’d imagine it greatly improves transparency when it comes to pay and taxation.

Carlos Mandujano (06:51):

Do you want to go ahead, Delia? You are the expert on all the legislation. I can add my thing, but you go ahead first.

Delia Hernandez (06:56):

So the Mexican authorities have been implementing several rules and procedures to ensure compliance in the tax withholding and the statutory contributions calculations, and the payment and reporting methods to the authorities. So that includes the implementation of the electronic invoice that allows the tax authority to stamp in real time the earnings, deductions, and taxes deducted from payroll.   

Also, the employee is able to see and compare their salary payments in the tax authority website. I think this is something very, very important to know. This reflects transparency among the employee, the employer, and the government. So we can say that Mexico is pioneer in the implementation of the payroll electronic invoice since year 2014, with a robust system that allows the tax authority to reconcile tax remittances. So with this, the tax authority helps to provide transparency among the transactions occurring for employers and employees as well.

Carlos Mandujano (08:09):

And just to add something on the CFDI, it is not only for payroll, the electronic invoicing, it was implemented for many different transactions. So with that is the way the Mexican government knows where the money is going. So it’s about trying to avoid money laundering. It’s about trying to avoid tax evasion at many different levels. But at the level of the payroll is to the same thing, to make sure that the employers are paying the employee and the employee has their own invoice, their own receipt for the money, that the tax that was withhold for them. And also the social security contributions. Everything adds to improve the transparency on the government.

Delia Hernandez (08:52):

So in addition to what Carlos mentioned, there is also an agreement between the government bodies to share information between the tax, labor and the statutory social security authorities. So I think this also play an important role in the transparency and compliance. 

Luisa Rollenhagen (09:09): 

Walk me through how this works. I can imagine that enforcing the CFDI isn’t so easy when it comes to smaller businesses.

Carlos Mandujano (09:17):

So if you are registered as an employer, you got to provide the CFDI to your employee. But there are some many different informal businesses in Mexico, like those little stores, like the store that is in the small market in downtown Mexico City. So those are hard to measure because they are not registered as an employer, but the government wants to know that you’re paying the employee. So there are other measures to make sure that the money that it is given to the people is not money launder. There are some regulations to say, okay, you got a 10,000 pesos deposit, so where’s that money coming from? But yeah, it’s a little bit hard for the government to have under control the informality.

Luisa Rollenhagen (09:58): 

Right, it’s an effort to keep track of all these financial transactions.   

Anything else multinationals should know about Mexico?

Delia Hernandez (10:06):

So in regards to the regulatory understanding and the adaptability, one of the foremost challenges for multinationals in business in Mexico is the complex legal regulatory environment, which can be sometimes bureaucratic. This complexity can pose challenges in terms of compliance and operational efficiency. So it’s essential for companies entering in Mexico to have a deep understanding of Mexico’s local laws, regulations, and the standards. This includes labor laws, tax laws, environmental regulations, and even industry-specific requirements. Mexico’s regulations are subject to change, and multinationals must be adaptable to new laws and regulations and stay informed in flexible and be flexible in business operations. 

Luisa Rollenhagen (10:56):

Mexico also has 31 states, no? Do certain states have their own laws and regulations?

Delia Hernandez (11:02):  

It’s very important to clarify that in Mexico we have most of our taxation at the federal level. The tax withholding, I would say is at federal level, the statutory contributions, social security contributions, and housing funds contributions are at the federal level. And we only have the payroll tax, which is at the state level. And yes, so that means that every state has to create their own budget to fulfill the needs of the population of the city. And they have their own tax codes, revenue laws, financial laws that regulate how the contributions of each state are going to be captured or paid by the taxpayers. So for example, in Quintana Roo there is a payroll tax law, that’s the only law that we have in Mexico for payroll. In the rest of the states, everything related to payroll tax is regulated either in the state tax code or the financial law or in the state revenue loaw. And the payroll tax can vary from 2% up to 4% in each state.

Luisa Rollenhagen (12:17):  

Got it.   

Delia Hernandez (12:18):  

So that’s in regards to the regulatory compliance. Also something very important to mention for multinationals, it’s in regards to the outsourcing restrictions that have recently occurred in Mexico.

Luisa Rollenhagen (12:33):  

Can you tell me more about this outsourcing restriction?  

Delia Hernandez (12:36):  

In regards to the outsourcing restrictions in Mexico, since year 2021, outsourcing has been largely prohibiting Mexico. So companies can only engage the specialized service providers if the work is unrelated to the primary economic activity.   

Luisa Rollenhagen (12:55):   

What was the situation beforehand? Can you give me an example?  

Delia Hernandez (12:58):  

For example, before companies could hire staff through a third party, through a third party agency, for example, to work in their facilities, but they were not their employees, they were not part of their workforce. So since 2021 with these new changes in the federal labor law, now that is prohibited, outsourcing of this activity is prohibited. So now employers or companies now can only hire specialized services services only for those specific services that are not related to their main activity.  

Luisa Rollenhagen (13:37):  

Like payroll providers, for example? That would be one of those specialized services that are allowed?  

Delia Hernandez (13:43):  

Yeah. For example. Yes.  

Luisa Rollenhagen (13:45):  

So why was this restriction on outsourcing implemented?  

Delia Hernandez (13:49):

One of the most important reasons is because many employees, for example, that were hired through a third party vendor, they were not entitled to the profit sharing of the company, even though they were contributing and working in the company to reach the company goals and the company profits. But because they were not hired directly by the company, they were exempt from getting this profit-sharing distribution. So, that was one of the most important reasons why the union and the government changed or made this initiative, and they changed the federal labor law to regulate the outsourcing services.

Luisa Rollenhagen (14:34):

Oh, employees are entitled to a part of their employers’ profits? Please tell me more about that.  

Delia Hernandez (14:43):

So the obligation for employers to distribute the profit sharing, or PTU as it’s commonly known in Mexico, to the employees is based on the statutory provisions of the article 123 of the political Constitution of the United Mexican States, by establishing that employees have the right to participate in the employer’s profits. So in that regard, the federal labor law established that employers must pay the profit sharing to active and inactive employees within 60 days following the date on which the employer files its annual tax return.  

Something very important to highlight is that in April 2021, the federal labor law was amended to establish that profit sharing is now capped at a grade of three months of employee salaries, or the average of the profit received by the employee during the last three years. So this is something that we can say is new, but it’s also important to mention that there is an initiative right now in review to eliminate those capped ceiling amounts.

Luisa Rollenhagen (15:57): 

I see, that’s good to know. Speaking of salaries, I read that Mexico has been making concerted efforts to raise the minimum wage, with the minimum wage experiencing significant growth over recent years. What can you tell me about this topic?

Delia Hernandez (16:12):

Regarding the minimum wage, this is the lowest amount that the worker must receive in cash for the services rendered in a working day. And this amount must be sufficient to satisfy the normal needs of the head of the family in the material, social and cultural order, and to provide the compulsory education of the children. Now, there are professional minimum wage wages that are applicable in Mexico to a specific branches of the industry or commerce or special occupations, trades or labor. The minimum wage is to be fixed by regional committees formed by representatives of the workers, employers, and the government, and are subject to approval by the national committee organized in the same manner as the regional committees.  

So the Conasami, which is the National Minimum Wage Commission, is the entity that determines the minimum wage in Mexico. And it’s typically announced in December, the last two weeks of December. And then it’s effective on the 1st of January of the following year. So typically the minimum wage is effective for the entire calendar year from the 1st of January till the end of December.  

I think it’s important, I don’t know how would be with compared to other countries, but I think it’s important to mention for Mexico that in Mexico the minimum wage, employees that are paid at the minimum wage, are not subject to discount or reduction of wages.  

In addition, employees receiving the minimum wage are exempt for income tax withholding, and the employee portion of the statutory contributions shall be paid in full by the employer.  

Luisa Rollenhagen (18:02):

Interesting! I also read about the UMA, an economic reference unit in Mexico used to calculate fines, taxes, social security contributions, and certain labor benefits. What can you tell me about this?

Delia Hernandez (18:15):

The minimum wage values are very critical since many exempt calculations for tax purposes are linked to the UMA and the minimum wage and also are linked to certain statutory contributions and severance payments. Therefore, it’s very, very important to keep this data up to date to remain compliant with all legislative provisions. To give more context on the UMA value, on January 27th of year 2016, it was published a decree that amends the several provisions of the political constitution of the united Mexican states regarding the indexes of the minimum wage. And the unit of the measure and update will be used as a measure or reference to determine the amount of payment of the obligations foreseen in the federal, state and local laws.

Luisa Rollenhagen (19:10):

Right, so from what I understand, the UMA was introduced to decouple the amount of social contributions from the minimum wage. Previously, when the minimum wage increased, so did these obligations—sometimes making them unaffordable. By using the UMA instead, the government can adjust obligations independently of wage increases.

Since we’re on the topic of pay, just out of curiosity, what’s the pay schedule in Mexico like?

Carlos Mandujano (19:36):

It is actually weekly and biweekly, and for some industries it’s monthly. So we define, in Mexico we have the hourly employees and salaried employees. Those salaried employees that work in an office doing administrative tasks, sometimes they get paid monthly, but most of the time it’s semi-monthly. But for the big industries that we have in Mexico, most of them are unionized, so they get paid weekly.

Luisa Rollenhagen (20:13):

You just mentioned unions, and Delia had mentioned them earlier as well. What can you tell me about unions in Mexico?

Carlos Mandujano (20:20):

There are a lot of unions, since the country has many different industries, all of the industries, technology, automotive, tourism, all the industries that you can think of, but Mexico’s labor force is mainly manufacturing and producing products. So most of those companies need to work with unions. So yeah, the unions in Mexico are big.

Luisa Rollenhagen (20:43):

That’s good to know as well.   

So we’ve discussed quite a few compliance issues that multinationals need to keep in mind when it comes to Mexico. How is ADP helping clients navigate these?

Carlos Mandujano (20:54):

So we need to do everything that is possible to keep our system in compliance with the law. Our commitment with our clients is being in compliance. So that’s why we have Delia because she’s the expert and she’s constantly looking for new legislative changes and keeping us up to date all of us and the clients. But that is the main core of our business.

Delia Hernandez (21:16):

Basically, Carlos has mentioned something very, very important and very true. Compliance is one of the most important core values of ADP and at ADP we have a legislative management team that is a group of professionals around the world that network with various internal and external resources to conduct legislative monitoring and research, including in Mexico of course. The legislative management team is dedicated to analyze every legislative change impacting payroll in early stages. We can say in the early stage of the bill when it’s been discussed in the congress until it’s final publication, until it’s official. And we explained these legislative changes to our associates in a timely matter to understand it and apply it in the payroll system. And we finally communicated to our clients through the client’s portal for the review and the action when it’s applicable.

Luisa Rollenhagen (22:15):

Absolutely. You need to have that local expertise in order to ensure the highest level of compliance in a country like Mexico.  

I want to take a moment here to properly introduce Marco. You heard from him briefly at the beginning of the episode, and now he’s going to tell us a bit more about one of the big issues in Mexico’s labor landscape today: The possible reduction of legal working hours, which are currently 48 hours per week.  

In this series, we don’t just share the invaluable local knowledge of ADP’s professionals and partners, but also speak to real people on the ground about their own lived experiences with work and pay.  

Marco is from Central Mexico and has been working at a company specializing in adhesive products for 25 years. 

Marco (23:00):

Hi, my name is Marco and I’m from San Luis Potosí, Mexico. I’m an industrial zone worker.

Luisa Rollenhagen (23:07):

As is the case in many manufacturing companies, Marco and his colleagues are shift workers. While some of the shifts would add up to 40 hours a week, other shifts still clocked 48 hours a week.

Marco (23:19):

We had one shift that we called the six-by-two. It was six continuous days of work, with two days of rest. This amounted to 48 hours for all the shifts. Additionally, the days of rest were rotated. So you would maybe work from Monday to Saturday, then rest on Sunday and Monday, and then you start work again on a Tuesday. And so on it went. Then your break was on Monday and Tuesday, and then the following week it would be Tuesday and Wednesday. It kept rotating.  

At the end of the day, this wasn’t good for us. It’s not the same to have time off on Wednesday and Thursday if you want to spend it with your family, because the children are in school, there are errands to be done around the house, it’s just not the same as spending the weekend with your family.

Luisa Rollenhagen (24:01):

The employees at Marco’s place of work are represented by a union, which used the most recent contract negotiations to bring up the possibility of eliminating the six-by-two shifts, thereby cutting down overall working hours.

Marco (24:15):

We were able to get rid of the shift with the help of the union. When they negotiated the last contract, they asked to eliminate this shift, precisely so workers could spend more time with their families.  

We organized and started a petition that represented the majority of the workers, and we brought it to the negotiating table with the company. And that’s where the negotiations started, and we were able to successfully get the company to accept this petition from the majority of the employees.

Luisa Rollenhagen (24:41):

Since Marco’s employer has eliminated the 48-hour work week, he and his colleagues have experienced a significant increase in the quality time they’ve been able to spend with their families. He’s also been able to pursue hobbies that he previously had little time for. 

Marco (24:57):

On a personal level, this has liberated me from a certain amount of stress. Being able to rest on those two days, and being able to enjoy it with my family or work on my own projects, it just gives you additional time for you and your family. I’ve been able to relax more, play some sports, or just do something for fun in my free time.   

I’ll give you a personal example. I like riding my motorcycle. So now, I can go out on my motorcycle with my daughter or my partner, and go for a ride and visit some towns or something. This type of relaxation really helps me a lot.   

And well, seeing how our complaints, that we’ve been making for years, have been addressed, that has definitely given us a sense of satisfaction.

Luisa Rollenhagen (25:39):

Marco has also been following the national debate on officially lowering the legal working hours. He believes that, sooner or later, an official change will come.  

Marco (25:49):

I’ve been seeing the debate, and you see how the company has already accepted this change — it’s like, this is the direction in which we’re all moving. A proposal to the government has been introduced, and at some moment this change will have to happen. The government themselves are already starting to slowly prepare, maybe so the change will not be so drastic.   

There are still many companies that are not ready to make this change. But I believe that, at the end of the day, this change will come, because many workers have similar shift arrangements like the one we had. Some are even worse, where they only have one day of rest and six days of work.   

But some companies are already starting to relax the hours. They might be doing five and a half days, for example.

Luisa Rollenhagen (26:33):

I was curious to know more about the general attitude to lowering the weekly working hours in Mexico, so I went back to Carlos and Delia to learn more.

Carlos Mandujano (26:41):

As of right now in the law for I don’t know how many years, the regular working hours is 48 hours per week, considering a lot of employees work from Monday through Friday. So they need to work nine hours. But the law says that it is usually to work eight hours from Monday through Saturday, but since they work from Monday through Friday, so they need to work an additional hour or something like that. But it’s regulatory or based on the law or the labor law, it’s 48 hours. I’m going to allow Delia to talk about the initiative that the government is suggesting now to work only 40 hours. I dunno if you have anything else to add, Delia.

Delia Hernandez (27:22):

So in Mexico, there is three shift work available or approved by the Ministry of Labor, which is 48 hours maximum a week for a daily shift, which that includes eight hour maximum a day for a daily shift, 7.5 hours a day for a mixed shift and seven hours a day for a night shift. That’s the maximum. Whatever exceeds of this work shift should be counted as overtime that will falls under overtime regulations as well. And yes, it’s a very important topic what Carlos mentioned. In regards to the shift work. Currently, there are several initiatives, not only one, but there are several initiatives in the Congress being reviewed right now that it’s a very, very important hot topic right now in Mexico to reduce the shift work from 48 to 40 hours a week, including two days of rest. So currently the maximum shift work is six days and with one day of rest, and the initiative is proposing to have five days of shift work per week with two days of rest. We are having very close eyes on these initiatives in the Congress to see how it’s going to be implemented in Mexico.

Luisa Rollenhagen (28:48):

It’s really an interesting development, considering so many European countries, where 40 hours is the norm, are talking about reducing the weekly hours down to 37 or 35, or even introducing a 4-day work week. So it’ll be interesting to see whether other countries across the globe, including Mexico, will begin following this trend.  

We’re going to start wrapping up, but before we go, I’d like to ask you two one of my favorite questions. What do you personally love about working in payroll?  

Carlos Mandujano (29:19):

I love that question because this is deeply personal for me. People might be excited for many different reasons, but for me personally, I love the opportunity to help people. So we help companies to pay their employees in time every week so the employees can get their hard working money every week, every other week. So for me that is very important. That is scary, but at the same time, it is a huge responsibility. That’s what it makes it fun. So it is greatly satisfying for me to help companies to pay their people.

Delia Hernandez (29:56):

Payroll has a very important role in every company as this is one of the most important items in the company expenses, but also payroll plays a critical role in the economy of any country because it represents the employer and employee contributions to the nation to cover the needs of its population. So I think it’s a huge role of the payroll department and also running payroll has a social impact for the timely and correct payment of salaries to every person to be able to bring food to their families. And I think it has also this human side that Carlos well mentioned, right? And right now, payroll, it’s also very interesting area in terms of the technology because technology is impacting payroll like never before. And transforming the way we develop technology to adapt to the new environment for the benefit of employers and workers.  

Luisa Rollenhagen (30:53):

That’s true, there are some really exciting things happening in the field, and—as you said—, we’re going to be experiencing some groundbreaking transformations that will really take the user experience to new heights.  

Delia and Carlos, thank you so much for joining me today! It’s been a pleasure to chat with you, and I appreciate all of the expertise and insights you gave us today.   

I loved learning about Mexico’s role in pioneering a federal digital invoicing system, and found it fascinating to hear about the current discussion regarding weekly working hours.   

I hope you got a bit of a deeper insight into how payroll in Mexico works today. If this episode has piqued your interest or your company is considering expanding into Mexico and you want to learn more about payroll there, please go to the ADP website adp.com  

And don’t forget to subscribe to learn more about payroll around the world with each new episode.  

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