Starting a business in Mexico

1. Introduction

Mexico’s labour landscape has undergone more transformation in the past decade than in the previous forty years. Key developments including Mexico’s ratification of the United States-Mexico-Canada Agreement (USMCA) in December 2018 and various International Labour Organisation (ILO) conventions have driven significant reforms to the Federal Labour Law. These changes were designed to strengthen core labour rights, such as freedom of association and collective bargaining, and have reshaped employer obligations nationwide.

Despite these reforms, labour relations in Mexico remain highly regulated, and employees typically enjoy greater statutory protections than in many other jurisdictions. For this reason, both companies currently operating in Mexico and those considering entry should carefully assess the local labour law framework.

De La Vega & Martínez Rojas, S.C. is a leading Mexican labour and employment law firm, headquartered in Mexico City and offices in Monterrey, with a nationwide network of correspondents. Our team of experienced attorneys provides comprehensive legal counsel, combining expertise in both individual and collective labour matters to support clients in the prevention, management, and resolution of labour disputes.

We maintain strong institutional relationships with federal and local labour authorities, as well as with international organisations, allowing us to offer strategic, results-oriented legal solutions tailored to each client’s needs.

The following is a high-level overview of the Mexican labour law framework, designed to help your organisation understand the implications of doing business and hiring talent in Mexico.

2. Labour and Employment Law Requirements

a) Employer Policy Requirements

Mexico’s labour law system is rooted in Article 123 of the Mexican Constitution, which sets out the fundamental social rights of employees. This article is the cornerstone of Mexican labour regulation and seeks to ensure equity in the employer-employee relationship, especially in matters involving working conditions, benefits, and collective rights.

Key constitutional rights include:

• Limits on working hours and mandatory weekly rest days;
• Paid vacation, public holidays, and Christmas bonus (aguinaldo);
• Maternity and paternity leave, and restrictions on the work of minors and pregnant or breastfeeding employees;
• Equal treatment and non-discrimination;
• The right to profit sharing, minimum wage, and regulated overtime pay;
• The right to unionise, bargain collectively, and strike (enhanced under the 2019 labour reform that introduced freedom of association and union democracy);
• Access to social security and participation in the National Workers’ Housing Fund (INFONAVIT);
• Obligations for mandatory training and occupational safety.

In 2017 and 2019, constitutional and legislative reforms transferred jurisdiction over labour disputes from conciliation and arbitration boards to the newly established Labour Courts, modernising the dispute resolution system.

All employment relationships in Mexico regardless of the employee’s nationality are governed by the following primary statutes:

• Federal Labour Law (FLL) – reformed in 2019 to incorporate USMCA commitments and strengthen collective rights
• Social Security Law (1997) – governs employer and employee contributions and benefits under IMSS
• INFONAVIT Law (1972) – mandates employer contributions to the national housing fund for workers

Together, these laws ensure that all employees in Mexico benefit from non-waivable statutory protections, and that employers are subject to clear compliance requirements for hiring, compensation, benefits, and labour relations.

The FLL is Mexico’s principal employment statute. It defines an employment relationship as the rendering of a subordinated personal service by one individual to another in exchange for payment. The essential element is subordination, which the Mexican Supreme Court has interpreted as the employer’s legal right to control and direct the employee’s work, and the employee’s corresponding duty to obey.

 

Once an employment relationship exists, the rights and obligations under the FLL apply automatically, regardless of how the parties label the agreement (e.g., civil contract, services agreement, etc.).

Mandatory Employee Benefits under the FLL

Employees in Mexico are entitled to several non-waivable statutory benefits, including:

Year-end bonus (Aguinaldo):

At least 15 days of wages, payable no later than December 20 each year.

Paid vacation:

Employees with over one year of service are entitled to at least 12 working days of paid vacation, increasing by 2 days per year of seniority, up to a maximum of 20 days. From the sixth year onward, the vacation entitlement increases by 2 days every 5 years.

Vacation premium:

An additional 25% of the salary payable during the vacation period.

Mandatory paid public holidays:

Including January 1, the first Monday of February (Constitution Day), the third Monday of March (Benito Juárez’s birthday), May 1 (Labour Day), September 16 (Independence Day), the third Monday of November (Revolution Day), December 25, October 1 (every six years, presidential transition), and others designated by federal or state law.

Profit sharing:

Under Section 127 of the FLL, employees are entitled to 10% of the employer’s pre-tax annual profits. As of the 2021 reform, profit-sharing is capped at:

Three months of the employee’s salary; or

The average profit-sharing amount received in the last three years,

whichever is more favourable to the employee.

Additional Legal Frameworks: Social Security and Housing Fund

Social Security Law (1997):

Regulates employer and employee contributions to the Mexican Social Security Institute (IMSS), which provides access to:

• Healthcare
• Disability and maternity leave
• Retirement and pension benefits
• Occupational risk insurance

National Workers’ Housing Fund Institute Law (INFONAVIT):

Requires employers to contribute 5% of the employee’s base salary to a government-managed housing fund. This fund allows employees to qualify for mortgage loans and other housing-related support.

In 2022, INFONAVIT increased the maximum loan amount available to qualifying employees.

 

b) Employee Training Requirements

Under Mexican labour and social security law, employers are required to establish and formally document several “joint committees” at each worksite. These committees are composed of both employer and employee representatives and serve as collegiate bodies for collaboration and compliance in various areas of workplace management.

The integration, registration, and ongoing operation of these joint committees is mandatory, and their existence is subject to inspection by federal and local labour authorities. Failure to comply may result in administrative sanctions or enforcement actions during labour audits.

The following joint committees must be established by all employers in Mexico:

1. Health and Safety Committee
2. Training and Productivity Committee
3. Internal Labour Regulations Committee
4. Seniority Committee
5. Profit Sharing Committee
6. Non-Discrimination Protocol Committee

Training and Productivity Committee: Under the  FLL, all employers in Mexico are required to provide training to their employees, and employees are likewise obligated to participate in training that enhances their job skills, productivity, and quality of life.

For employers with more than 50 employees, the law requires the creation of a Teaching, Training, and Productivity Joint Committee, as established under Article 153-E of the FLL.

Purpose:

This committee is responsible for monitoring, implementing, and improving the company’s training programs and strategies aimed at increasing productivity. It serves as a collaborative mechanism between employer and employee representatives.

Integration:

• The committee must include an equal number of employer and employee representatives.
• The number of members is to be determined by mutual agreement either directly between the employer and employees or, where applicable, between the employer and the union holding the Collective Bargaining Agreement (CBA).
• In companies with multiple locations, high headcount, or specialised technological needs, multiple committees or subcommittees may be formed to ensure effective coverage.

Formalisation and Documentation:

• The committee must be formally established using the DC-1 form (Report on the Incorporation of the Teaching, Training and Productivity Joint Committee).
• The company must also develop:
  • A training plan using Format DC-2, and
  • Maintain individual training records using Format DC-3 (Skills Certificate).

Compliance and Inspections:
Although there is no obligation to file these documents with the Ministry of Labour and Social Welfare (STPS), all records (DC-1, DC-2, and DC-3) must be kept on file at the worksite and made available to labour inspectors upon request.

 

 

c) Employment Agreements

In Mexico, written employment agreements are mandatory. All employees must sign an individual employment agreement outlining the terms and conditions of their role. The concept of “employment-at-will” does not exist under Mexican law; employers must have justified cause, as defined in the  (FLL), to terminate the employment relationship. If no cause exists, the employer must pay statutory severance, as outlined in the FLL.

Importantly, even if no written agreement is executed, the existence of a labour relationship evidenced by the actual performance of subordinated personal services automatically triggers the employee’s full constitutional and statutory rights. The lack of a written contract does not invalidate or waive the employee’s legal protections.

According to Articles 24 and 25 of the FLL, working conditions must be established in writing, and both employer and employee must receive a signed copy of the agreement.

Each employment agreement must include the following:

1. Full identification of the parties (name, nationality, sex, marital status, CURP, and address).
2. Nature of the employment term: Indefinite, for a specific job or term, for initial training or seasonal work, subject to a probationary period (where applicable);
3. Description of the services to be performed.
4. Place(s) where the work will be carried out.
5. Duration of the work shift.
6. Salary amount and method of calculation.
7. Payment terms (payday, location of payment).
8. Agreement to participate in employer-provided training programs, as required by law.
9. Designation of beneficiaries for death or disappearance benefits under Article 501 of the FLL.
10. Any other agreed-upon employment conditions (e.g., vacation days, rest days, bonuses).

The employer is legally responsible for executing the employment agreement and ensuring compliance with all applicable legal formalities.

In unionised workplaces, the employer and the union must enter into a Collective Bargaining Agreement (CBA) to regulate collective employment conditions. The purpose of the CBA is to promote or improve labour conditions for the employee group, while offering the employer a more stable and committed workforce.

CBAs must be in writing and are renewable, but they cannot waive or reduce the constitutional or statutory rights established under Mexican labour law. The agreement may always provide for better conditions than those set by law but never less favourable.

A valid CBA must include:

• The names and domiciles of the employer and union;
• The address(es) of the worksite(s) where the CBA will apply;
• The duration of the agreement (indefinite or for a specific project);
• Work schedules, rest days, and holidays;
• Salary levels and payment terms;
• Training programs, including initial training for new hires;
• Provisions for the integration and operation of joint committees (e.g., health and safety, training, profit sharing); and
• Any additional conditions mutually agreed by the parties.

Following the 2019 labour reform, employees now enjoy full freedom of association, including:

• The right not to be forced to join a union;
• The right to freely elect union leaders through personal, free, and secret voting;
• Access to transparent union finances and governance;
• The right to opt in or out of having union dues withheld by the employer; and
• Protection against dismissal or sanctions for resigning from the union.

Notably, “exclusion clauses,” which previously allowed union membership to be a condition for employment are no longer permitted in CBAs. However, the closed shop clause still exists in the law, though its application is now heavily restricted and rare in practice.

Managers and high-level executives may be excluded from the scope of general CBAs. While in theory, management employees may organise and enter into their own collective agreements, such unions are virtually non-existent in practice.

As a result of the recent labour reform, all union and CBA registrations are now handled by the Federal Centre for Conciliation and Labour Registration (Centro Federal de Conciliación y Registro Laboral), regardless of the company’s industry, geographic location, or the union’s scope.

To register a CBA, the union must:

• Provide documentation proving its democratic incorporation;
• Obtain a Representation Certificate issued by the Federal Centre; and
• Secure the approval of the employees covered by the agreement, through a personal, free, and secret vote.

These reforms aim to ensure transparency, union legitimacy, and true employee representation in all collective labour processes.

3. Corporate Law Requirements

When establishing operations in Mexico, foreign employers typically incorporate a Mexican subsidiary. This allows them to engage employees locally while maintaining limited liability as the Mexican entity is legally separate from the parent company. Mexican law generally does not apply the concept of “piercing the corporate veil,” which reinforces this legal separation.

Common Entity Types

The two most common types of legal entities are:

• Sociedad de Responsabilidad Limitada (S. de R.L.): Similar to a U.S. limited liability company, this structure is well-suited for smaller, closely held businesses. It requires 2 to 50 partners, each holding equity quotas (not shares), and decisions typically require majority approval of partners. Equity quotas are not freely transferable and are not publicly tradable.
• Sociedad Anónima (S.A.): Comparable to a U.S. corporation, this type is often used for larger or more structured organisations. It requires a minimum of 2 shareholders (with no maximum) and can issue shares that are negotiable and may be publicly traded if certain regulatory conditions are met. Transfers of shares are typically easier unless limited by the bylaws.

Both types can be established as variable capital companies, which we strongly recommend. This structure allows for increases or decreases in capital without the need for a formal amendment to the bylaws, reducing administrative burden and cost.

Governance and Management

Each entity is managed by:

• Partners’ or Shareholders’ Meeting: The highest decision-making body, empowered to approve major actions, appoint directors or managers, grant powers of attorney, and modify corporate structure.
• Sole Manager/Director or Board of Managers/Directors: Day-to-day management may be carried out by one individual or a board. They hold legal authority and are responsible for acting in the best interest of the company.
• General Manager and Attorneys-in-Fact: Operational management is often delegated to a general manager or other officers, with specific powers of attorney granted to represent the company in legal, administrative, or financial matters.
• Statutory Examiner: Required only for S.A. entities, this role supervises corporate governance and ensures shareholder protections. In S. de R.L. entities, this position is optional and must be included in the bylaws.

Key Steps to Incorporate a Subsidiary

To establish a subsidiary in Mexico, the following must be completed:

1. Name Approval: Submit three proposed names to the Ministry of Economy.
2. Drafting Bylaws: Define corporate purpose, capital contributions, management structure, and powers.
3. Formalisation before a Notary: Execute the incorporation deed before a Mexican Notary Public.
4. Post-Incorporation Registrations: Register with the Public Registry of Commerce, tax authorities (SAT/Hacienda), and the National Registry of Foreign Investments.
5. Tax Identification (RFC): Foreign shareholders may be exempt from obtaining an RFC if the Mexican entity submits an annual shareholder disclosure instead.

This structure is necessary to hire employees, open bank accounts, and comply with labour obligations in Mexico. From a labour compliance perspective, the presence of a Mexican legal entity is crucial to lawfully manage employment relationships and fulfil tax and social security obligations.

4. Payroll and Benefits Providers

On April 23, 2021, Mexico’s FLL was amended to prohibit personnel subcontracting and establish a new regulatory framework for specialised services. These changes eliminated the concept of “intermediary” and clarified that employment agencies may only assist with recruitment, selection, and training but do not assume the role of employer this responsibility lies solely with the company that benefits from the services.

The reform prohibits subcontracting arrangements in which an individual or company provides or places its own employees at the disposal of another party. However, it allows the provision of specialised services or execution of specific works, provided these do not form part of the beneficiary’s corporate purpose or core business activity.

Contractors offering such services must register with the Ministry of Labour and Social Welfare (STPS) under the REPSE system and renew this registration every three years. Back-office services within corporate groups are also allowed if they meet these criteria.

All specialised service agreements must be documented in writing and include details such as the scope of services and the approximate number of employees involved. Importantly, beneficiaries of such services may be held jointly and severally liable for labour obligations if the contractor fails to comply.

The reform also introduced quarterly reporting obligations to the Mexican Social Security Institute (IMSS) and INFONAVIT, requiring disclosure of agreements, employee lists (including CURP, social security numbers, and salaries), and the tax ID of the service beneficiary. Failure to comply with these requirements or engaging in unauthorised subcontracting may result in significant fines ranging from 2,000 to 50,000 times the UMA.

These changes have made compliance with subcontracting rules far more demanding, and companies operating in Mexico must now carefully structure their service relationships to avoid misclassification and liability risks.