Business owners are always looking for ways to get ahead of the curve. Keeping a step ahead of the competition and innovating their own business is key to long term survival. One route that we believe is not used nearly enough by small and medium-sized enterprises (SMEs) is nearshoring. SMEs can easily take advantage of Mexican Labor Laws to keep their business running lean and efficient.
Understanding why moving your operations to Mexico is important. We are going to look at the top reasons why you should consider building teams in Mexico and the unique advantages you can enjoy as a business owner. We will also provide some of our best practices for building a team in Mexico from our own experiences and those of our clients.
Why You Should Consider Nearshoring Your Workforce to Mexico
There are 3 main considerations that most companies analyze before building a presence in Mexico. The easy one to recognize is the cost savings. Wages in Mexico and the cost of living in general is significantly lower to the entire United States. Nearshoring in Mexico provides an immediate boost to every companies bottom line.
Another big consideration for businesses is proximity to the United States. Mexico being the U.S.’s neighbor means that almost the entire country falls either under the Central, Mountain or Pacific time zones. During daylight savings parts of the country even fall within the Eastern time zone. Being on the same schedule makes working virtual on teams significantly easier than using teams located in Asia.
Mexico’s proximity also lends to many cultural similarities. While the primary language in Mexico is obviously Spanish, most skilled workers also have extremely high levels of English. Almost every student learns it in school, but many have family roots in the United States with 36.3 million Mexican-American residents in the U.S. – that’s equivalent to roughly 25% of Mexico’s total population. Cultural similarities especially when it comes to business are much more similar than most believe.
The final reason is liability. Mexican labor laws are highly protective of workers’ rights – however the judicial branch has traditional tended to side with businesses in disputes. This can help keep U.S. businesses that establish a presence in Mexico safe. But there are unique features of Mexican labor laws that can flat out eliminate foreign businesses’ liabilities in the country.
Advantages Under Mexican Labor Laws
The employment schemes of Mexico provide loop holes that U.S. business owners can take advantage of. These loop holes can virtually eliminate business risk, not require the business to establish a physical presence, maximize their working hours and provide flexibility and cost savings.
Mexico has two main employment schemes that are not very different from the United States. The traditional employment creates an employer-employee relationship that is considered indefinite and at will. This scheme requires employers to offer a large range of benefits, follow strict termination laws and pay significant taxes on each employee.
The second employment scheme is called an honorario. Mexican labor law states that an honorario does not constitute an employment relationship – but rather a commercial relationship. As a commercial relationship, the foreign business is not required to provide benefits, has much looser termination laws (like ending a service agreement in the United States) and only requires the foreign business to pay Value-Added Tax (VAT). Honorarios cannot go after the foreign business for labor law violations. This scheme maximizes cost-saving and flexibility for foreign businesses.
Employee termination in Mexico is extremely difficult. The burden to prove just termination rests on the employer. Employees can only be terminated for violating for a few reasons and can easily sue for an unjust termination:
- Mistreatment of Employer
- Disclosing Trade Secrets
- And 3 unjustified absences within 30 days
It is a nightmare to try to prove any of these in court. Courts will typically side with the employee in these instances unless the violation is grossly apparent. Further, if your termination is found to be unjust the are entitled to be reinstated or receive a severance pay equivalent to 3 months plus benefits. Your business will also incur a fine of up to $20,000 USD.
Terminating an honoraio is much simpler. As it is considered a commercial relationship, honorarios can be terminated for any reason and do not have the legal remedies that employees have. This scheme means that businesses can establish and close operations rapidly – providing more flexibility and opportunities to test the employment market.
Mexican labor law entitles employees to significant benefits as well. The total benefits cost can come to approximately 36%-40% of their salary. The benefits they are entitled to are paid vacations, Christmas bonuses, mandatory profit sharing, housing taxes, social security and paying into the national health service IMSS. Benefits can become a significant expense that can wipe away a lot of the cost-savings for business owners.
Honorarios are not entitled to any of those benefits. The commercial nature of the employment means that they cannot receive those benefits under Mexican labor laws. Establishing an operation in Mexico makes it difficult to use the honorario scheme and avoid paying the benefits. However, utilizing a nearshoring agency allows foreign business owners to avoid the entire cost of benefits.
The minimum wage laws in Mexico are bifurcated between the North of the country and the rest of the country. States along the U.S. border have a different minimum wage requirement than the other states in Mexico. There is also another significant difference when compared to U.S. minimum wage law.
Mexican labor law sets minimum wage on a daily basis instead of an hourly basis. Minimum wage employees along the border earn $176 Pesos a day – or about $8.80 in U.S. Dollars. The remainder of the country earns $88 Pesos a day or $4.40 in U.S. Dollars. These minimum wages are for mainly unskilled labor.
But that does not mean that skilled labor is expensive either. The average starting salary in the U.S. for a graduate with a Bachelor’s is over $50,000 US dollars – for an entry level employee. A comparable employee in Mexico starts between $23,000-$28,000 USD. And the differences are even larger for more experienced employees.
Mexican law dictates the maximum number of hours in a day and week for an employee. Employees working on a day shift can work a maximum of 8 hours a day between the hours of 6 AM to 8PM. There is also a maximum of 48 hours a week for normal time – meaning that employees in Mexico typically work 1 more full day than U.S. employees.
The law also states that companies can require overtime and pay double for those hours. After 8 hours of overtime, the company must pay triple time for each additional hour. Employees also are eligible for an additional 25% pay on top of overtime if they work on Sundays.
However, those laws apply to employees only. They do not apply to workers under the honorario scheme. Honorarios are under at-will employment and as such they only work the hours as they see fit. They are not eligible for the same benefits and protections that traditional employees have – and therefore do qualify for overtime pay.
Best Practices for Nearshoring to Mexico
Working with a nearshored team can give some business owners anxiety. Giving up control and putting trust into a team that you may never meet in person is difficult for many business owners to digest. There are certain steps you can take as the business owner to create an easy and hassle-free nearshoring experience.
The goals and responsibilities for each role that you nearshore should be clearly defined. The honorario should know exactly who they are working with, what is expected of them and how your business handles the processes that should be done. This means that having a good training program and explanations of your business’s workflow can help eliminate confusion. We typically recommend using a program like Confluence to clearly document your processes so that every honorario has a reference guide at their disposal.
Another very important key to success is having a clear communication channel. These honorarios are essentially your employees – you have full control of their schedule and what they are working on. Being able to quickly jump on calls, share concerns or answer questions is important. Our clients achieve this in different ways.
Most utilize Slack to provide quick communication channels to all your team members – both in the home country and Mexico. Clients also sometimes utilize a virtual office – where there is an actually camera and microphone in each office to quickly resolve any doubts and make it extremely easy to collaborate. It’s just like being in the same office with them.
They should also know exactly who they report to. This reduces confusion for the honorarios and makes your entire nearshoring experience more efficient. Sharing one nearshored employee between multiple teams can create challenges in efficiency and missing deadlines as the employees do not know exactly who to work with.
Many companies make the mistake of trying to overwork nearshored employees. This can only lead to burn out and higher turnover – which is not a good result for your business or the honorario. It is naïve to expect a single nearshored employee to handle significantly more than 1 domestic employee was handling on their own.
The advantages of cost savings are tempting, but it only translates to more output if you utilize the savings to invest in additional employees. Your cost savings on 1 employee can allow you to hire 2 or possibly more in some areas which can more than double your output. The goal should be to maximize your budget and get the most return on each dollar spent – and that starts with realizing that 1 employee can only do the work of 1 employee no matter where they are located.
Working with an experience Nearshoring firm like Bosque de Talentos can help you take advantages nearshoring your workforce while avoiding all the pitfalls that come along with it. Mexican labor laws are uniquely written to benefit U.S. businesses that are looking for new employment options. More SMEs are realizing the options available to them – and that includes that their workforce does not just need to be in one location. It is time for your business to start taking advantage of evolving labor options.