Key Concepts in Labor Relations and The Differences Between Liquidation and Final Settlement
Understanding the differences between liquidation and final settlement (finiquito) is essential for businesses operating in Mexico. This article will also explore key points that employers must consider to ensure proper handling of labor relations, both contractually and in terms of working conditions.
Fundamental Concepts for Employers in Mexico
Labor Contract: A written labor contract is crucial for every employee, outlining employment conditions such as duration, salary, benefits, work hours, and specific job duties. Failing to establish this can lead to legal repercussions for the company.
Work Hours: Employers must adhere to the work hour regulations in the Ley Federal del Trabajo (LFT), paying close attention to articles 5, 59, 60, 61, 63, 64, 65, 66, 67, and 68.
Minimum Wage: Employers must pay at least the minimum wage set by Mexican labor authorities, which varies by region and is updated annually.
Labor Benefits: Employers should ensure compliance with benefits like vacation days, vacation bonuses, social security, savings funds, and others.
Social Security: Employers are required to register their employees with the Instituto Mexicano del Seguro Social (IMSS) and contribute the necessary fees.
Union Rights: Employees are entitled to join labor unions for the protection of their rights and the possibility of collective bargaining.
Termination of Employment
When terminating an employee's contract, it’s important for employers to follow proper legal procedures. This may include giving prior notice or paying certain compensation, depending on the reason for termination and the employee’s tenure. Having a legal advisor is key in these situations, as disputes over severance pay or legal entitlements are common.
In Mexico, liquidation and finiquito are two distinct processes in ending an employment relationship. Below are the key differences:
Liquidation
Liquidation refers to the payment and calculation of all rights and benefits an employee is entitled to upon the termination of their employment contract, primarily based on their years of service. Liquidation typically includes:
Constitutional Severance: Equivalent to three months' salary for each year worked.
Seniority Premium: An additional amount based on years worked and the constitutional severance.
Unused Vacation Days and Vacation Premium: Payment for any unused vacation days and vacation bonuses.
Proportional Christmas Bonus (Aguinaldo): A proportional calculation based on the time worked during the fiscal year.
Finiquito
A finiquito is the payment made by the employer to the employee at the end of their contract, covering benefits accrued during the most recent annual period. These benefits include unused vacation days, vacation premium, and a proportional Christmas bonus. Additionally, the final settlement includes any unpaid wages earned up to the termination date.
Key Differences
Liquidation: Typically occurs when the employer decides to terminate the employment relationship, resulting in a payment calculation based on the employee’s years of service.
Finiquito: Occurs when the employee resigns from their position, with the employer compensating for benefits accrued during the last working period.
Important Considerations
It’s crucial for businesses to stay updated on labor laws, as regulations may change over time. Seeking advice from a legal expert in labor law or corporate affairs is recommended to ensure compliance with current laws and regulations in Mexico.
At Zeitgeist Consulting Group, we offer comprehensive support for legal, fiscal, and accounting matters during every stage of business establishment in Mexico. Contact us at info@zeitgeist.mx for more information.
