1. Legal Framework Differentiating Employees from Independent Contractors

a. Factors that Determine Who is an Employee and Who is an Independent Contractor

Under the Federal Labor Law (FLL), an employment relationship is defined as the rendering of personal, subordinated services by one individual to another, in exchange for payment. The central legal element is subordination the employer’s right to direct the work and the employee’s duty to follow instructions.

According to the Second Chamber of the Mexican Supreme Court, subordination exists when the service provider is subject to the employer’s control regarding what, how, when, and where work is performed. Once subordination is present, the relationship is governed by labor law regardless of what the parties call it or how the agreement is labeled (e.g., a “professional services agreement”).

Even in the absence of a written employment agreement, the law presumes the existence of an employment relationship if the factual elements are present. This includes:

• The individual receives recurring compensation (even if labeled “fees”);
• They use the employer’s tools or infrastructure;
• They are identified as part of the company (e.g., through ID badges, email accounts, etc.);
• They follow a work schedule or perform work under direct supervision.

In contrast, an independent contractor:

• May be a natural person or legal entity (e.g., a company);
• Operates without subordination they determine their own methods, schedule, and tools;
• There is no exclusivity of the services nor subordination;
• Is not integrated into the beneficiary’s workforce or operations;
• Enters into a civil or commercial agreement, not an employment agreement.

b. General Differences in Tax Treatment

Employment Tax Obligations

In Mexico, employers have several mandatory tax and social security obligations when hiring employees, all of which are triggered by the existence of an employment relationship under the Federal Labour Law (FLL).

1. Income Tax (ISR)

Employers are required to withhold and remit the employee’s income tax (ISR) to the Mexican Tax Administration Service (SAT). The applicable rate depends on the employee’s income level, and the employer must withhold the correct amount from each pay check and file the corresponding returns.

2. Social Security Contributions

Employers must register employees with the Mexican Social Security Institute (IMSS) and are responsible for:

• Withholding the employee’s share of social security dues;
• Paying the employer’s own portion of social security contributions; and
• Filing monthly reports and complying with occupational risk and benefit classifications.

For legal purposes, these social security payments are considered mandatory contributions with tax-like effects.

3. Housing Contributions (INFONAVIT)

In addition to IMSS, employers must contribute to the National Housing Fund for Workers (INFONAVIT). This requires paying 5% of the employee’s base salary into the fund, which supports access to housing loans and subsidies for employees.

4. Local Payroll Tax

Most Mexican states impose a state-level payroll tax on employers, generally ranging from 1% to 3% of the employee’s gross salary. This tax is paid exclusively by the employer and must be reported and remitted to the relevant state tax authority on a regular basis.

Independent Contractors Tax Treatment

Independent contractors in Mexico are responsible for managing their own income tax (ISR) obligations. However, when the contractor provides services to a company, that company (as the service recipient) may be required to withhold a portion of the contractor’s income tax as a provisional payment, depending on the nature of the service and the legal classification of the contractor.

In addition, independent services are generally subject to Value Added Tax (VAT) at the standard rate of 16%. Contractors must issue proper invoices (CFDIs), collect VAT, and remit it to the tax authorities.

c. Differences in Benefit Entitlement

Employee’s Benefits

Under the Federal Labour Law (FLL), employees are entitled to a wide range of non-waivable statutory benefits, which do not apply to independent contractors. These benefits are mandatory and must be provided by the employer once an employment relationship exists, regardless of how the parties label the agreement.

Key employee benefits include:

• Year-end bonus (Aguinaldo): At least 15 days of wages, payable no later than December 20 each year;
• Vacation entitlement: A minimum of 12 paid vacation days after the first year of service, increasing with seniority;
• Vacation premium: An additional 25% of salary during the vacation period;
• Paid public holidays: Including January 1, the first Monday of February, the third Monday of March, May 1, September 16, the third Monday of November, October 1 (every six years when a new President takes office), December 25, and others established by law;
• Mandatory profit sharing: Employees are entitled to 10% of the employer’s annual pre-tax profits. The only exception is for the company’s top executive (e.g., CEO), as interpreted by the labour courts (Article 127, FLL).

In addition to the above, all employees must be:

• Registered with the Mexican Social Security Institute (IMSS), granting access to medical services, maternity benefits, disability coverage, and retirement;
• Enrolled in the INFONAVIT system, which supports housing benefits through employer contributions.

By contrast, independent contractors are not entitled to any of these employment-related benefits and are responsible for their own healthcare, retirement savings, and tax compliance.

Independent Contractors

Independent contractors are not protected under Mexican labour law, and their rights are governed exclusively by the terms of their civil or commercial services agreement. They are not entitled to statutory employment benefits, nor do they enjoy protection against dismissal. Either party may terminate the contract according to its terms, and any dispute would be resolved in the civil courts, not before a labour tribunal.

d. Differences in Protection from Termination

Employees

In contrast, employees in Mexico are protected by the principle of job stability. Unlike employment-at-will systems (such as in the U.S.), Mexican labour law permits termination only under limited, statutorily defined grounds or with full severance.

Under Article 47 of the Federal Labour Law (FLL), an employer may terminate an employee without severance only if there is a legally defined cause for dismissal (e.g., misconduct, dishonesty, repeated absenteeism). For managerial employees, Article 185 provides an additional cause: loss of the employer’s trust, provided it is reasonable and documented.

To dismiss an employee for cause, the employer must:

• Provide written notice to the employee;
• Notify the Labour Court in writing of both the reason and the employee’s last known address within 5 business days.

Failure to meet these requirements will result in the termination being classified as unjustified, exposing the employer to full severance liability.

The employer has a 30-day window to act on the dismissal cause from the date they became aware of the triggering event.

Severance in the Absence of Cause

If an employer chooses to terminate an employee without cause, the following statutory severance payments apply:

• Three months of consolidated salary (base pay + all regular benefits, whether in cash or in kind);
• Seniority premium: 12 days’ salary per year of service (capped at twice the daily minimum wage);
• 20 days of consolidated salary per year of service;
• Accrued benefits for the current year (e.g., proportional Christmas bonus, vacation days, vacation premium, commissions, savings fund, bonuses, etc.).

In Case of Litigation

If the employer fails to prove a justified dismissal, the employee may request either:

• Reinstatement to the same position (mandatory unless excluded by law); or
• Constitutional severance (three months’ salary), plus accrued benefits.

Additionally, the employee is entitled to:

• Back pay (salarios caídos) for up to 12 months from the date of termination; and
• If the case remains unresolved after that period, 2% monthly interest on a 15-month salary base.

Independent Contractors

Independent contractors in Mexico operate under civil or commercial agreements, not labour law. The termination of such agreements is governed by the terms agreed upon by the parties, which may include expiration dates, mutual consent, breach of contract, or force majeure.

There is no prohibition on engaging independent professional services, provided that the individual or entity:

• Operates autonomously (no subordination); and
• Does not place personnel at the disposal of the beneficiary.

e. Limitations on the Use of Independent Contractors

Since the 2021 labour reform, the subcontracting of personnel i.e., the provision of employees to perform tasks under the direction and control of a third party is prohibited, except in limited cases involving specialised services.

Key legal principles include:

• The “principle of reality” (Article 685 of the FLL), which means that substance prevails over form. Even if the contract is labelled “independent services,” labour authorities will assess the actual working relationship.
• If subordination, exclusivity, economic dependence, or integration into the beneficiary’s workforce is observed, labour authorities may reclassify the relationship as employment or illegal subcontracting.

Specialised Services and REPSE Registration

To legally engage third parties for specialised services, the following conditions must be met:

• The provider must be registered with the REPSE (Specialised Service Provider Registry maintained by the Ministry of Labor);
• The services must be distinct from the core business activity and corporate purpose of the service recipient.

Failure to comply may result in:

• Fines ranging from 2,000 to 50,000 times the UMA (approx. MXN $216,000 to $5.4 million, depending on the UMA at the time);
• Tax consequences: such payments will be non-deductible for ISR purposes and non-creditable for VAT, unless REPSE conditions are satisfied;
• Potential criminal liability for tax fraud, if simulated subcontracting schemes are used.

Independent Contractors vs. Specialised Service Providers

It is essential to distinguish:

• Independent contractors: Act autonomously, without placing personnel at the client’s disposal. REPSE registration is not required.
• Specialised service providers: May assign personnel to perform work at the client’s premises or on its behalf, but only for non-core business functions, and REPSE registration is mandatory.

A single provider may offer both types of services, but it is critical to maintain clear contractual separation, documentation, and operational distinctions to reduce legal and tax risk.

f. Regulations of the Different Categories of Contracts

Employee relationships: Employment relationships are governed by the Federal Labor Law (FLL), which is a law of public order and social interest. This means:

• Its provisions are mandatory and non-waivable;
• Parties cannot “contract out” of legal protections, even by mutual agreement;
• The law is employee-protective by design, ensuring minimum standards for wages, benefits, working conditions, and job security.

Once an employment relationship is identified regardless of how the contract is labelled the FLL and its obligations will apply.

Independent contracts: Independent contractors are regulated by the Federal Civil Code or the Commercial Code, depending on the nature of the services and the parties involved. These regimes are private in nature and reflect the principle of freedom of agreement.

Key features include:

• Parties may freely agree to the terms and conditions of the engagement;
• The default rules under the Civil or Commercial Code apply only on a supplementary basis, when the contract is silent on a particular point;
• There is no legal presumption of subordination, employment benefits, or labour protections.

In practice, this means that contractor arrangements offer greater flexibility but also less protection, and they carry legal risk if misclassified under labour law standards.

Specialised services: are regulated by federal labour law.

g. Judicial Remedies Available to Persons Seeking ‘Employee’ Status

If an individual hired as an independent contractor believes they are in fact performing services under a subordinate employment relationship, they may seek legal recognition as an employee under Mexican labour law.

To initiate this process, the individual must:

1. Appear before the relevant Labor Conciliation Centre (local or federal) to complete the mandatory pre-litigation conciliation stage; and
2. If no settlement is reached, obtain a certificate of non-conciliation, which allows them to file a formal claim before the competent Labor Court.

In the labour proceeding, the court will apply the principle of reality (Article 685 of the FLL), which prioritises the actual substance of the working relationship over the contract’s formal designation. If the court finds evidence of:

• Subordination (control over how, when, and where work is performed),
• Exclusivity or economic dependence, or
• Integration into the beneficiary’s organisational structure,

it may determine that an employment relationship exists regardless of the label used by the parties.