Why Foreign Companies Should Hire Staff Through a PEO in Mexico

Foreign companies should consider hiring staff through a Professional Employer Organization or ‘PEO’ in Mexico during their expansion process. Mexico has become one of the hot growth spots for Foreign Direct Investment (FDI), boosting new commercial activity. This is due to the many benefits and opportunities for doing business in Mexico, supported by comprehensive trade deals between its North American counterparts.

With that being said, there are challenges and uncertainty that companies will face when expanding. One example of this is hiring staff in Mexico before establishing a physical presence in the country. It’s important for companies to have local sales executives on the ground to start growing their market presence and brand awareness, and building relationships.

Each country has its own strict requirements and regulations when it comes to employment. Combined with a language barrier for English speakers, this can be a complex step for foreign companies. A PEO can help reduce these challenges and make expansion possible.

Options for expansion: company formation or PEO in Mexico

In Mexico, it’s required by law that each employee is hired by a Mexican-based employer, leaving a foreign company with two options for expansion: forming a company or hiring staff through a Professional Employer Organization (PEO).

Company formation can be a costly and at times stagnant process. There’s a greater level of risk involved with a larger financial investment. The second option is using a trusted, local PEO in Mexico. This option allows companies to hire staff through a co-employment model, reducing the level of financial investment needed for a company to expand.

What is a Professional Employment Organisation (PEO)?

A PEO company offers a set of services to act as an employer for an employee. This service is usually provided to a foreign company that is not incorporated in Mexico but intends to have employees legally working there. Mexican Federal Law mandates that employees be hired by a Mexican entity with full legal requirements of employment law.

A Co-Employment model is designed in sharing the employer responsibilities between a PEO and an employee. Co-Employment is used to supply services and benefits to the employer for example tax requirements or handling of wages.

Another service of PEO is acting as an Employer of Record. As an Employer of Record, the PEO takes full responsibility for traditional employment tasks and liabilities, such as processing payroll.

The PEO will be in charge of fulfilling the labor obligations towards the employees and towards the authority will be the one who acts as the employer.

What are the basic Employment Regulations in Mexico?

All foreigners must have the legal right to work in Mexico, granted by the National Migration Institute (INM).

In an employment contract, all employees in Mexico have the right to the following:

Minimum wage

In Mexico, the minimum wage is $123.22 pesos per day (approximately $6 USD).

Vacation

There is a minimum of 6 days of vacation for the first year. From the second to fourth year of work, it will increase by 2 days each year. From then on, it will increase by 2 days every 5 years.

In the first year, the employee will be entitled to a 25% extra monetary bonus which will be added on top of each of the vacation days taken.

Sick leave

An employee receives 60% of their salary if they are unable to attend work for more than 3 days due to illness, provided the employee has a doctor certificate to show.

Christmas bonus

Christmas bonus in Mexico is known as an ‘Aguinaldo’, and it’s a mandatory bonus that must be paid by 20 December each year. This bonus is calculated from a minimum of 15 days of the employee’s monthly salary each year.

Overtime

If an employee works over the maximum 48 hours per week, they’re entitled to an overtime rate of 200% each hour, based on the hourly wage after the 48 hours.

Maternity Leave

Maternity leave will last 6 weeks prior to the birth of the child and 6 weeks after. The mother will be entitled to two thirty-minute breaks at work for the first 6 months back at work. The father will be entitled to 5 days of paternity leave.

Foreign staff

A company can only have 10% of foreign staff in junior roles but an additional and unlimited amount at an executive level.

Profit-sharing

Each employee is entitled to up to 10% of pre-tax profits earned by the employer.

Social security

each employee must contribute to Mexican Institute of Social Security (IMSS). Employers must withhold funds at a rate of 5% of the Gross Salary for the National workers’ housing fund institute and recruitment savings program, which is under Infonavit tax sent to IMMS.

Probation period

This is not mandatory for employers when hiring employees. By employment law, the probation period differs in length of time depending on the job position. For managers and high executives, this can be up to 180 days whereas employees that have a technical or specialized background it is 90 days. The employee will not receive any benefits from IMSS and the employer will only withhold the income tax.

Employment termination

Mexico provides strict safeguards and protections for employees. The maximum statutory benefits that any employee may claim are during termination include:

• Severance payment of 3 months.
• 20 days of the employee’s salary for each year the employee is working in that company.
• Seniority premium, available to employees that have worked for the employer for 15 years or longer.

What are the benefits for Foreign Companies hiring a PEO in Mexico?

Due to the increase of FDI in Mexico, foreign companies have decided to hire a PEO because of the security and benefits that it provides. When you hire staff through a PEO in Mexico, you can:

• Save time and money: Hiring a PEO will save significant time and reduce costs for your business. PEO providers enable small and medium-sized companies to expand and operate in Mexico without the requirement of full company incorporation, which can be a more lengthy and costly process. Companies can also hire fixed-term employees through a PEO in Mexico without the hassle of going through the full hiring procedure themselves.

• Mitigate risk: Expanding into a new market comes with a level of uncertainty. By hiring a PEO in Mexico during your market entry phase, your company can test the waters with a small-scale investment before deciding on whether it is a good option to formally incorporate your company. At the other end, engaging with a PEO upfront also allows you to exit the market more easily, noting that you wouldn’t need to go through formal liquidation procedures to do so.

• Get localized support: PEO will reduce the burden on your company to hire employees in Mexico. These organizations ensure that you are fully compliant with Mexico employment requirements when hiring, ultimately mitigating legal risk for your company. 

• Comply with legal requirements: Employment law can change frequently in Mexico, making it difficult and time-consuming to keep up to date with current regulations. Using an external human resources provider offers peace of mind that your company operates in accordance with local regulations.

• Have more time to focus on your job: One of the most tangible benefits you will experience from using a PEO service provider is the freedom you will have to directly manage your employees that are working abroad. A PEO in Mexico removes the administrative burden on you, giving you time to focus on working directly with employees and growing your business.  

Is a PEO partner in Mexico a worthwhile option for your company?

By engaging with a PEO in Mexico, you will be able to expand your company with greater ease and flexibility and reduce risk and uncertainty.

With a PEO you can focus directly on your employees and business growth, whilst saving time and costs. Your local executives in Mexico can start promoting your brand and making valuable connections in the local market, while you operate from your headquarters.

If further expansion proves not to be a worthwhile option for you, you can operate with a PEO over the long term, or choose to exit the market with greater flexibility than a fully incorporated company.

Use Biz Latin Hub as your PEO provider in Mexico

Mexico is an exciting country with many economic opportunities and a friendly business environment. However, expanding into Mexico there will be challenges and risks therefore it is important to have a trustworthy PEO to represent your business.

Biz Latin Hub offers a premium service through an experienced, bilingual and knowledgeable legal and accounting team, assisting foreign companies wanting to enter into Mexico. Having us as your PEO will ensure hiring employees will be executed, efficiently, professionally and compliant with the law.

 If you are unsure about what the best solution to hiring employees in Mexico may be, and would like more information regarding the possibility of using a PEO, our team will be delighted to help. Contact us today to find out more about how we can support you.

For more information about hiring recruitment in Latin America, see the following presentation below about your options.

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