09. Transfer of Undertakings

Employees’ Rights in Case of a Transfer of Undertaking

In connection with the sale of a business or transfer of undertaking, the FLL generally requires the acquiring entity to retain the selling entity’s workers, as well as to assume existing benefit liabilities, regardless of whether the benefits are privately sponsored (e.g., company-sponsored medical insurance) or legally mandated (e.g., paid vacation and vacation premium). This is known under Article 41 of the FLL as a substitution of employer:

The substitution of the employer shall not affect the work relations of the enterprise or the establishment. The substituted employer shall be jointly responsible with the new employer for the liabilities derived from the work relations and the Law, which originated prior to the date of the substitution, for a term of up to six months; upon expiration of such term, only the responsibility of the new employer shall subsist. The six-month term shall be computed as of the date of notice of such substitution to the union or the workers.

As a corollary of this retention obligation, the acquiring entity must recognise the workers’ length of service, so as to ensure that changes in the legal structure or the ownership of the employer do not undermine the workers’ vested rights. If the sale of a business in Mexico is structured as a stock purchase or a merger agreement that does not affect the seller’s corporate entity, a substitution of employer does not come into play. In these cases, the buyer automatically becomes the employer of the seller’s workers.

Article 41 of the FLL likewise contemplates continuity of the work relations in the event of an asset sale. When the buyer or substitute employer, assumes the workers’ terms and conditions of employment in effect prior to the substitution, the FLL does not require consent from, or consultation with, the workers. For a substitution of employer to apply, pre-substitution terms and conditions of employment – as established in the individual employment contract or collective agreement – must remain unaltered. If the substitute employer unilaterally implements detrimental changes to existing employment conditions, the employee can rescind the employment relationship and demand statutory severance. During the first six months following an employer substitution, both employers remain jointly liable for labour claims.

Requirements for Predecessor and Successor Parties

However, in order to consummate the transfer of workers through an employer substitution and properly allocate responsibility for labour liabilities associated with the asset sale transaction, both the seller and the buyer are required to comply with important procedural formalities, including the following:

• delivery of a notice of employer substitution to individual workers and to the union, if the workers are covered by a collective agreement; the notice of substitution is typically signed by both the seller (substituted employer) and buyer (substitute employer);
• delivery of notices to the Mexican Social Security Institute (IMSS) to ensure amendment to the existing registry to show the substitute employer as employer of the existing registry;
• delivery of similar notices to the National Fund for Worker Housing (INFONAVIT) and the National Fund for Development and Guarantee of Workers’ Consumption (INFONACOT);
• with respect to labour claims against the seller (substituted employer) pending before the courts or before an arbitration and conciliation board, each parties’ legal representatives must notify the corresponding authorities.

The procedural requirements listed above are accompanied by a host of administrative activities, such as changes to personnel management documentation (e.g., pay checks, business cards, identification badges, new employment and other form agreements for post-substitution hiring, vacation documentation, facilities’ signage, permits, shifts, attendance records, loan documents, and the like), revocation of pre-substitution powers of attorney (by the substituted employer), and issuance of new powers of attorney (by the substitute employer) for representation in labour matters, among others.