One of the many challenging issues faced by companies doing business overseas is managing legal risk in employment matters. Assume that your TX based company does business in Mexico and decides to transfer a key executive from the US to Mexico. The transfer seems good business judgment until something goes wrong and the corporation decides to terminate that executive. The executive is paid from a US payroll. Said executive does forum shopping and threatens to sue your company in Mexico to maximize severance compensation, using the statutory protections afforded to employees in Mexico. You have not prepared for this scenario and the cost of severing the ex-patriate is skyrocketing. What could you have done to mitigate the risk and costs?
It is not uncommon to see companies activate execution mode and take swift foreign transfer decisions. Business driven as this might be, it is essential to implement the transfer in accordance with the laws of the recipient country. When a person is sent to work from the US to Mexico, whether the person is an ex-patriate that actually moves to Mexico, or whether the executive is US based but travels back and forth from TX to Mexico, you will still be exposed to the risk of severance payments or Labor litigation in Mexico if you do not implement proper measures.
These are some important aspects that you need to take into consideration:
- Labor Laws in Mexico protect the employee. The burden of proof rests on the employer. An employment contract is presumed even if not in writing. To rebut that presumption, the employer must prove that there is no working relationship, that the employing company does not direct the work product of the employee and that it does not benefit from it.
- The transferor US entity as well as the transferee Mexican corporation can both be classified as employers. In addition to suing the Mexico transferee company, Mexican counsel for terminated employees often resort to the tactic of placing the foreign transferor entity as a co-defendant in a labor claim for the sole purpose of making it more cumbersome to defend.
- Local severance is generous and Mexican statutory protections control. Severance in Mexico comprises 3 months’ worth of salary, plus 20 days of salary for every year of seniority and proportional allotments of vacation, Christmas money, savings fund and compulsory profit-sharing plans.
- If the employee perceives US source income while employed in Mexico, you need a mirror or shadow payroll in local currency. The fact that an executive is not on a payroll, merely means that he will initially be deemed an independent contractor but can later be assimilated to employee status and have actionable rights under the Labor Regulations.
- Because there is a rebuttable presumption that the employer has hired the employee, the employer needs to discharge its burden of proof. Absent a settlement, termination can lead to litigation. A dispute may take upwards of two years and if employer fails to prevail, retroactive monthly salary payments (up to a year) could accumulate on top of the initial amount of severance compensation. The so-called “fallen” salaries are triggered by litigation precisely because the employee pleads that the labor relationship has not come to an end.
- When a settlement is possible, both parties must sign and ratify the contents of the settlement before a Mexican Labor Board. An employee working in Mexico does not waive his or her cause of action unless it is ratified before a Labor Board.
- In practice we have also seen cases where a US based company compensates key Mexican executives based in Mexico by making deposits into a US bank account. This is common where prior to any termination episode, the Mexican employee was transferred from Mexico or another country to the US and is later repatriated to Mexico. Aside from any tax or immigration law implications, a corporation will not be shielded from severance payments in Mexico by claiming that no salaries were actually paid in Mexico.
LKC in conjunction with its strategic alliance firm in Mexico can help you tailor proper protections before your company engages in ex-patriate practices or pays US compensation to executives working in another country.