MexECON Blog

Labor Reform Passes Congress

On November 13, the Mexican Senate gave final approval to a law reforming much of the country's labor market.  On balance, the reform should make it easier for Mexican businesses to hire and fire workers, depending on how it is implemented and how any future court challenges play out.  The reform should help encourage job creation, investment, and productivity gains in Mexico.  It should also help draw more workers into the formal economy, where they will enjoy greater legal protections and benefits, as well as becoming part of the tax base.  Some of the reform's most important provisions are as follows:

Limit Awards of Back Wages.  Under Mexico's current labor law, employers accused of labor violations can be sued for unlimited back wages, giving employees and their attorneys an incentive to draw out suits and creating great legal risks when hiring.  Even when plaintiffs do not deliberately try to extend the process, Mexico's slow and plodding judicial system can lead to long, expensive suits.  Under the new reform, a suing employee may receive no more than 12 months of back wages, plus 2% interest on 15 months' worth of the employee's wages until the suit is concluded.  Back wages will stop accruing when a suing employee dies.  Comment:  This reform tilts the balance of power in labor suits toward the employer, so it imposes a real cost on Mexican workers.  However, it should help lower the cost of hiring. 

Eliminate Closed Shop Rule.  Previously, Mexican labor law allowed "closed shop" agreements, whereby employers were required to hire only union members and all employees had to be members of a union.  Taking its cue from a Supreme Court ruling that found such requirements to be unconstitutional, the reform will outlaw closed shops.  Comment:  By allowing employers to hire and fire without regard to an employee's union membership, this provision will give employers greater flexibility in their personnel decisions and potentially cut their personnel costs.

Broaden Wage Payment Methods.  Under current law, employers are not allowed to pay their workers by the hour.  The law also does not address whether employers can make wage payments by any method other than check or cash.  Under the new law, employers may pay by the hour, subject to restrictions on maximum working hours and a minimum payment for each day worked of approximately 60 pesos ($4.62 at current exchange rates).  For an employee working eight hours, the minimum wage would be equivalent to about 7.80 pesos, or $0.60, per hour.  The new law also explicitly allows employers to pay by direct deposit or other electronic means.  Comment:  Many Mexican employers do not find the current restriction on hourly wages too burdensome, since they can pay piece rates or otherwise get around the rule.  Nevertheless, the reform may significantly improve the flexibility of employers and workers in some industries.  For example, the reform may open up opportunities for students to find part-time work, which will help them build skills and ease their transition to full-time employment.

Allow Probationary Periods and Training Contracts.  Under current law, Mexican employers do not enjoy the luxury of a probationary period in which they can "test drive" an employee and easily let him or her go if it doesn't work out.  The new law allows for probationary periods ranging from one to six months and initial training contracts of three to six months.  Comment:  Workers who are newly hired under these provisions would face a higher risk of layoff.  The employer, however, would face a lower risk of making a bad hiring decision and not being able to jettison the worker.  On balance, that is likely to encourage greater hiring and investment.

Regulate Outsourcing Practices.  The new law allows Mexican companies to outsource some aspects of their business, but only if the outsourced services are not similar or equal to the main business of the firm and are not simultaneously carried out by the firm's own workers.  Comment:  Some observers have complained that this provision is highly ambiguous and could actually stunt the development of outsourcing in Mexico.  How this provision plays out may ultimately depend on how the courts look at it.

Many of the provisions in the new labor law simply supply the legal framework for trends that were already developing in Mexico.  Nevertheless, the reform is a step in the right direction, as it formally addresses some of the country's most important impediments to job creation and employment flexibility.  According to Ricardo Martinez, a consultant for Baker & McKenzie, the reform should help create about 400,000 new jobs in Mexico, though he says those jobs will primarily be part-time.  Perhaps more important, passage of the reform demonstrates that the Mexican Congress now has the ability to pass needed deregulation initiatives that could accelerate growth and make the economy more competitive.  Few such reforms have passed the Congress in recent years.  Still, it is important to note that the original labor proposal by President Felipe Calderón was significantly watered down.  Even though President-Elect Enrique Peña Nieto supported the original proposal, traditionalists in his Institutional Revolutionary Party (PRI, by its Spanish initials) successfully excised many important measures to rein in the country's powerful unions.  The jettisoned provisions included moves requiring unions to make public their finances and to run voluntary, direct, and secret voting.  These developments suggest that when Peña Nieto is inaugurated in December, he should not expect a free hand to pass other promised reforms.

Patrick Fearon, CFA
Vice President, Fund Management

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