Top Ten: Labor Restructuring in Mexico
Jan 13, 2016 Top Ten Download PDF
Corporations involved in restructuring their business and operations in Mexico due to mergers, acquisitions and spin-offs, must perform a prior analysis of the impact such restructuring will have on the workforce. This list summarizes the key areas an in-house counsel needs to be bear in mind if the restructuring process involves a transfer of personnel in Mexico.
1. Legal Framework
The easiest way to transfer personnel in Mexico is through an employer substitution process. An employer substitution takes place when the essential assets used in the operation of a business are transferred so that the transferee continues operating the business. The successor employer is jointly liable with the predecessor employer for all employment obligations to its employees. The Federal Labor Law (FLL) expressly provides that employer substitution does not affect existing employment relationships.
2. Collective Bargain Agreement
The employer substitution does not require the Union’s and/or the employees’ consent; however it requires notice to the Union and employees. Furthermore, according to the criteria of the Labor Board, both the former and the new employer must appear with the Union to ratify an employer substitution agreement before the Labor Board.
3. Seniority and benefits
One of the characteristics of the employer substitution process is that the new employer cannot modify existing working conditions. Benefits, work shifts, job positions and length of service (seniority) must be maintained by the new employer.
4. Employment Conditions
As previously mentioned, the new employer must respect the labor conditions that were previously set between the former employer and its employees. In Mexico, employment relationships are bilateral; therefore, it is not possible for the employer to change, on a unilateral basis, any employment condition without the employees’ written consent.
Any modification that implies a unilateral change of the employees’ working conditions entitles such employee to file a complaint for constructive dismissal. In this event, the employee would be permitted to request severance:
The FLL does not require the employee’s or Union’s consent to execute an employer substitution. If there is transfer of assets with the purpose of continuing the operation, the only requirement is to deliver a written notice of the date the employer substitution will take place. The FLL is silent regarding whether the former or the new employer shall give the notice. Common practice is for both companies to sign and deliver the notice.
6. Transfer of Assets
Although the FLL does not specify such requirement in case of an employer substitution, all binding case law resolutions issued by Labor Appeal Courts and the Supreme Court have ruled that for an employer substitution to take place, it is essential that there is a transfer of assets between the new and the former employer. Basically, the work tools that the employee needs to perform his or her employment need to be transferred form one employer to another. In case there is no transfer of assets, employees can challenge the employer substitution. It is important to bear in mind that the employer substitution process has not been established in the law to facilitate labor restructuring, but to protect employees. Therefore, the employees are transferred only if the assets are transferred.
7. Joint Liability
According to section 41 of the FLL, the former employer shall be jointly liable with the new employer for all the employer obligations arising before the date of the employer substitution up to a period of six months following the substitution. The six-month term shall only start running after the employees and the union have been given the notice of the employer substitution. Once this term has expired, the new employer will be the sole entity responsible for the labor relationship between it and the employees. The obligations include all the contractual and legal benefits as well as all social security obligations.
8. Employer Substitution Notice
The FLL does not require a specific template to be used while executing an employer substitution. Customarily, the employer substitution notice must state the date when the employer substitution will take place, and that the employer substitution shall not cause any damage or adversely impact the work conditions under which the employees were rendering their services, such as rights, obligations, labor benefits derived from the labor relationship. Also important is the statement that the new employer will recognize the employee’s hiring date and all mutual obligations acquired by the employee and the former employer will be in effect with the new employer.
Usually the notice is signed and delivered by the former and the new employer. It is important to get employees’ signatures acknowledging they have received the notice .
9. Employees on Leave of Absence
Planning of an employer substitution process requires analyzing employees on leaves of absence granted by the Mexican Social Security Institute. Notice shall be delivered to these employees as well. This requirement might necessitate a visit to the employee’s home address.
10. Additional Alternatives
If an employer substitution cannot be performed because there is no transfer of assets or because the new employer wants to change existing working conditions, another option that should be considered is the employee’s termination and rehire process. The main disadvantage of this alternative is that the employee’s consent will be required. Also, since labor restructuring is not a cause of termination under the FLL, in principle, employees would be entitled to severance for wrongful termination by the prior employer.
Due to the potential need to pay severance to employees, there are two alternatives. The decision will depend on whether the severance will be paid or not, and whether the new employer wants to assume the liability for past rendered services:
1. Termination of Employment Agreement without Seniority Recognition
Because such termination would be equivalent to a termination without “good cause,” the employees are entitled to Severance Pay (3 months’ aggregate salary plus 20 days’ aggregate salary per year of services and seniority premium), plus any accrued but unpaid benefits, such as vacations, vacation premiums, performance bonuses, and Christmas bonus, paid in proportion to the time worked during the year.
2. Termination with Seniority Recognition
If this option is chosen, the above-mentioned paragraph is not applicable since the new employer would be recognizing the employees’ seniority at the moment they are rehired. Therefore, the employer would only have to pay earned salaries and due benefits such as vacation, Christmas bonus, and other earned benefits until the transfer date, without Severance Pay.
3. General Outline in Case of Termination of Employment Relationship
In both options above, the previous employment relationship is terminated and the new employer assumes no liability arising from the past employer-employee relationship. In arranging the termination, a release is obtained from the employees in exchange for payment of severance and/or benefits. The former employer would have to cancel the registration of the employees with the social security system. The new employer would then need to register them back as new employees with the new salary.
After the execution of the termination agreement with or without seniority recognition, the new employer would be entitled to decide under what employment conditions the employees will be rehired, including appropriate salary and benefit plans, and avoid the risk of past labor liabilities.
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