Whether it is by means of a corporate acquisition, the formation of a joint venture or the creation of a Mexican subsidiary or branch, foreign enterprises doing business in Mexico always face the need to send foreign nationals to oversee their investments or operations in Mexico. The economic slowdown has now brought the need for some of these entities to lay off or reduce the workforce of their business ventures in Mexico. This has raised a very significant issue as to whether or not the foreign expatriates are entitled to severance payments under the labour laws of Mexico. Although the Mexican labour laws are federal in nature, the labour courts are local and do not form part of the judiciary, but rather of the state or local executive branch. Their decisions are not public or published and, unless this issue is taken by means of constitutional review to the federal circuit courts, there is no possibility of looking for a court precedent. In fact, even if a circuit court takes a particular view on the topic, such a precedent is, in general terms, not binding on any other circuit courts within the country. We have not found any circuit court precedent that may give some guidelines on the issue at stake. As surprising as it may seem, foreign expatriates rendering services in Mexico on account of foreign companies have been opting to sue in the Mexican labour courts against: (i) the Mexican entity; and (ii) the foreign parent and/or sister entity, claiming severance payments under the labour laws of Mexico.
Where the foreign expatriate was hired by the local Mexican entity and payment of his or her salary and fringe benefits came out of such Mexican entity, it is be clear that this individual will be entitled to severance payments under the laws of Mexico. Nonetheless, in many cases, these employees: (i) were hired by the foreign parent or a sister entity; (ii) were paid-out by these non-Mexican entities in foreign currency outside of Mexico; and (iii) agreed to be bound to the corporate policies and fringe benefits given in general terms to all employees of the foreign parent or sister entity; but nonetheless, their services were physically and permanently rendered within Mexico. In some cases, we have seen that the Mexican entity sponsored the expatriate's application for a working visa, and that they were directly subordinated to the instructions of another expatriate also located within the Mexican facility. This latter factual pattern is the one that raises the issue at stake.
Scope of severance payments
Under the Mexican labour laws, severance payments may fall into two categories depending on whether termination was with or without cause. If termination of the labour relation is with cause, the employee is entitled to receive an amount equal to 12 days of salary per year of employment (seniority premium). However, if termination is without cause, in addition to the seniority premium, employees are entitled to an amount equal to three months' salary, plus an additional premium equal to 20 days per year of employment if the employee is seeking the reinstatement of his or her employment and employer is not willing to do so. Furthermore, whether or not the termination is with or without cause, employees in general are entitled to: (i) accrued statutory Christmas bonus (15 days); (ii) accrued vacation premium during the entitled days of vacation (25% of salary); and (iii) accrued vacation term. Punitive or exemplary damages are never awarded but, if the employer does not prevail, the final judgment may award the employee the payment of his or her salary throughout the litigation procedure. This can turn out to be anything between 12 and 36 months depending on how aggressive was the case litigated, the court's calendar for the trial, as well as the circuit court's calendar to hear the constitutional review of the decision rendered by the local labour court.
Pursuing legal action in Mexico can become more attractive to foreign expatriates because: (i) Mexican labour laws give substantial procedural benefits to the employees throughout the litigation, it even imposes the burden of proof on the employer and all allegations made by the employee on his or her initial complaint are deemed to be true unless proven to the contrary by the employer; (ii) severance payments are mandatory by law and may not be waived by any agreement between the parties; and (iii) the expatriate will only be required to establish that termination occurred without cause. Mexican labour laws look at the "economic unit", which is the place where the services are rendered, and not to the corporate shell that exists within such economic unit. The fact that the services were being rendered in the Mexican premises may be deemed by the labour court as sufficient evidence to establish a Mexican labour relationship between the expatriate and the Mexican company. If such were to be the case, the employer will be required to prove that no such labour relation existed within Mexico, but rather that the expatriate was subordinated to the foreign parent or sister entity that actually paid his or her salary, and that such labour agreement or relation took place outside of Mexico and, therefore, not subject to or governed by the Mexican labour laws.
It is difficult to determine at the outset the potential outcome of litigation when the factual pattern raises many contacts to the Mexican entity, which is viewed as an economic unit by the labour laws of Mexico. Each case will have to be looked at individually. We nonetheless recommend that foreign parents and investors should look very carefully at the way they structure the hiring of foreign expatriates in Mexico.