Labour and employment disputes in Mexico are extremely common, as access to justice is guaranteed free of charge by the state. Basically, the legal framework for labour and employment disputes is set out by the Mexican Constitution, the Federal Labour Law, the Social Security Law and all the applicable jurisprudence and criteria issued by the collegiate circuit courts and the Mexican Supreme Court of Justice.
The federal and local conciliation and arbitration labour boards (the labour boards) are the authorities in charge of resolving employment disputes, and they are formally part of the executive branch of the government. However, on 23 February 2017, the Constitution was reformed to create labour courts, which will replace the labour boards and will form part of the judicial branch of the government. This, of course, has entailed a major change from how labour processes were handled and resolved in the past and Mexico is now moving to a new paradigm.
Consequently, as of 1 May 2019, the Federal Labour Law has also been reformed and, in accordance with the transitory articles of the reformed Law, local labour courts will begin activities within three years and federal labour courts within four years (whether a local or a federal labour court hears a private sector matter will depend on the type of activity performed by the employer).
Although the Federal Labour Law reform represents a great change and presents significant challenges, in general, and at its substantive core, the spirit of the Federal Labour Law remains the same in many ways, as it largely favours the employee and places a heavy burden on the employer to provide evidence of employment conditions and the existence of certain documents, among other things. Furthermore, in as much as the law provides procedural protections and benefits for employees that are not granted to the employer (such as options not to attend preliminary hearings and to have lawsuits ratified as filed), conditions are not equal for both parties.
In principle, the practice of labour law should be prompt and expeditious, as guaranteed by the Constitution. However, this principle has not been duly observed by the labour boards, which have proved slow in exercising their authority, often taking as long as four years to resolve an employment dispute. This has served as an additional motive for putting the judiciary in charge of labour justice matters.
The following sections address the general outline of the ordinary procedures in labour and employment law in Mexico, as well as the most relevant disputes arising within employment relationships, and they also provide a more detailed explanation of the above-mentioned labour law reforms and the factors that triggered them.
Conflicts arising from employment relationships will now be resolved by federal or local labour courts. As mentioned above, the federal labour courts will start functioning within four years, while local labour courts will commence activities within three years. There is a proposal for local labour courts to start in 10 states in 2020.
Until the labour courts begin functioning, the labour boards will continue to oversee labour and employment cases through a process of hearings regarding conciliation, demands and exceptions, followed by stages for the offering and admission of evidence. However, the Federal Labour Law reform has created new institutions, introducing the following procedural stages to be undertaken before recourse is made to the new labour courts.
i The Federal Centre for Conciliation and Labour Registration
The Federal Centre for Conciliation and Labour Registration (the Federal Centre) will have, among others, the following two main functions:
- to register all collective bargaining agreements, internal regulations and union organisations, and any of their related administrative functions. The Federal Centre must initiate this function within two years of the enactment of the Federal Labour Law reform; and
- to provide at the federal level the conciliation function as a prerequisite to bringing a labour claim. The Federal Centre must initiate this function within four years of the enactment of the Federal Labour Law reform.
Similarly, on local matters, each state will create its own conciliation centres, which must start operating within three years of the enactment of the Federal Labour Law reform. These local conciliation centres will only exercise the pre-litigation conciliation function, and will not have responsibility for registering collective bargaining agreements, internal rules or union organisations.
ii Labour dispute procedures
Prior to bringing a claim in the labour courts, employees or employers, or both, must open a conciliation procedure. This procedure will last up to 45 days and will suspend the statute of limitations for bringing a labour claim. Should the employee and the employer fail to reach an agreement, either the Federal Centre or the local conciliation centre will issue a certificate stating that the procedure has been exhausted. This certificate is a requirement for initiation of a labour claim.
Disputes arising over discrimination, termination of pregnant employees, appointment of beneficiaries, collective bargaining agreement entitlement claims or challenges to union statutes will not require this pretrial procedure.
If the parties enter into litigation, the plaintiff will present the claim and evidence, so that the defendant can produce its answer and furnish evidence. Once that has been done and the parties have exercised their corresponding rights to object, the labour courts will summon the parties to a preliminary hearing at which the case will be 'purged', meaning that the subsequent stages will focus only on those items that are in contention. The labour court will admit evidence and will schedule a trial hearing, in which all the evidence will be rendered and the parties allowed to present allegations.
Following the reform, there are also expedited special procedures for the appointment of beneficiaries of deceased parties; for cases of the disappearance of an employee due to a delinquent act; in relation to social security matters (which constituted around 80 per cent of the total workload of the current labour boards); and in respect of entitlement to collective bargaining agreements.
Another important development is the incorporation of electronic means of legal service for the parties to a dispute.
iii Collective matters
In full compliance with the 98th Convention of the International Labour Organization (ILO), the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP) and the signed and ratified North America Free Trade Agreement 2.0 (now known as the Agreement between the United States of America, the United Mexican States, and Canada, or USMCA), the Federal Labour Law reform deals with the freedom of association and unionisation (to belong or not to a union), effective negotiation of collective bargaining agreements, and the prohibition on employers inducing employees to support, or not support, a union. In all collective procedures involving voting, the relevant labour authorities must guarantee that employees can cast their votes in a free, personal, secret and direct manner. Before the Federal Labour Law reform, union voting was carried out by raising hands, a practice that was heavily criticised as undemocratic.
Unions that seek the execution of a collective bargaining agreement must obtain a certificate of representation from the Federal Centre showing that they represent at least 30 per cent of the employees subject to the collective bargaining agreement. If any other union requests a certificate of representation in respect of the same constituent body of employees, the employees will have to vote for the union of their choice and the one that obtains the majority vote will obtain the certificate.
The Federal Labour Law reform has also introduced a requirement for unions to hold a vote in which the employees must decide whether to accept any proposed revision of the applicable collective bargaining agreement or the scale of wages. If the majority of the employees do not accept the proposed revision, the union will be entitled to strike or to postpone the strike until reaching an agreement satisfactory to the majority of the employees.
Further, the employer will be obligated to deliver a copy of the collective bargaining agreement to each employee within 15 days of its presentation to the Federal Centre.
iv Other relevant matters
Private settlement agreements
Termination agreements between employers and employees that are executed without the intervention of the labour authorities will be valid; however, if a provision contains a waiver of a right, that provision will be null and void, but the rest of the agreement will continue to be valid.
Notice of rescission
The lack of a rescission notice to the employee or to the labour authorities will create the presumption of unfair dismissal. However, the employer may prove at trial that the termination was justified.
Payment of severance by consignment
In cases of a termination of an employee with service of less than one year, where it is impossible to continue the employment relationship under the requisite criteria of the labour authorities, where the employee is an 'employee of trust' (mainly administrative employees), or where the employee is a household or temporary worker, the employer will be able to consign the severance payment through the labour court according to the particular circumstances of the employee, so that the employer can conclude the employment relationship without incurring additional back wages.
III TYPES OF EMPLOYMENT DISPUTES
The Federal Labour Law identifies the categories of labour disputes to be resolved by the labour courts and the most relevant of these are listed below, along with their most important procedural characteristics.
i Unfair dismissal
The most common disputes in Mexico have their origin in unfair dismissals, as in Mexico the concept of 'employment at will' is not applicable.
Therefore, according to the Federal Labour Law, any employees that are unfairly dismissed are entitled to receive the following:
- payment of all accrued legal and contractual benefits up to the date of termination (such as vacations, vacation premium and year-end bonus);
- severance payment of three months of consolidated salary;
- payment of 20 days of consolidated salary per year of service; and
- Payment of 12 days per year of service with the salary capped at twice the daily minimum wage for the area.
An employee wishing to file a lawsuit for unfair dismissal has a period of two months from the date of the dismissal or service of the rescission notice (see Section III.ii) in which to file his or her claim. This type of claim is pursued through standard proceedings before the labour courts.
ii Employment rescission
The Federal Labour Law provides a list of justified causes for termination, which if duly proven, exempt the employer from paying severance. The following are justified causes for termination:
- The employee deceives the employer (or, where applicable, the union that suggested or recommended the employee) with false certification or references that attribute qualifications, aptitudes or abilities to the employee that he or she lacks. This reason for termination will lapse after the employee has rendered 30 days' service.
- The employee in performance of his or her job is not honest or honourable; commits violent acts; threatens or injures the employer, the employer's family, the management or administrators of the company, or damages the establishment (except where the employee has been provoked or acted in self-defence).
- The employee commits one of the acts stated at (b) against a co-employee and, as a consequence, the discipline and order of the workplace is affected.
- The employee commits any of the acts stated at (b) against the employer, the employer's family or the management or administration outside the workplace so seriously that it makes continuance of the employment relationship impossible.
- While discharging his or her duties, the employee intentionally causes material damage to the company buildings, machinery, instruments, raw materials or any other asset related to the job.
- The employee causes the damage stated at (e) not intentionally but negligently, provided that the negligence is the sole cause of the damage and the damage is serious.
- The employee, through imprudence or inexcusable carelessness, compromises the safety of the establishment or the people present inside it.
- The employee commits immoral acts in the establishment or place of work.
- The employee reveals industrial secrets or makes known private personal matters that damage the business.
- The employee has more than three absences in a period of 30 days without the employer's permission or a justifiable excuse.
- The employee disobeys the employer or its representative, without just cause, provided that the disobedience relates to the work for which the employee has been hired.
- The employee refuses to adopt preventive measures or to follow the procedures established for avoiding accidents and illnesses.
- The employee arrives at work intoxicated or under the influence of some narcotic or intoxicating drug, except where, in the latter case, there exists a doctor's prescription for the medication. Before beginning his or her service, the employee must bring his or her medical condition to the attention of the employer and present the doctor's prescription.
- Any implemented sentence that imposes prison time on the employee and prevents him or her from completing the employment relationship.
- The lack of documentation required by law for the performance of the contracted activity, whenever this documentation is imputable to the employee.
The Federal Labour Law provides that an employer that dismisses an employee for any of the above stated causes must deliver a written notice to the employee with a detailed explanation of the conduct that triggered the termination and the date or dates on which the conduct occurred.
If the employee does not agree with the rescission, he or she may file an action for unfair dismissal within two months of the rescission notice being duly served.
However, the employer is also allowed to dismiss the employee and present the rescission notice to the labour board (or, in future, the labour court), and the labour board then serves the employee with the causes for termination. In addition, following the 2019 Federal Labour Law reform, if, prior to any claim being served to the contrary, an employer demonstrates to the labour authorities that it terminated an employee with just cause, it does not have to comply with the formality of a written notice to the employee.
iii Payment of accrued benefits:
As employees are not legally obliged to give prior notice when terminating their employment voluntarily, in many cases they are not paid their accrued benefits immediately. Therefore, employees may claim their accrued benefits within one year of termination, including their year-end bonus, vacations and vacation premium, as well as any other contractual benefit that could be owed to them.
If the amounts at issue exceed the equivalent of three month's salary, the dispute is governed by the rules of the ordinary process detailed above. If the amounts are not greater than three month's salary, they are claimed by means of a special expedited procedure.
iv Beneficiary designation
According to the Federal Labour Law, employment contracts should contain a specific section for employees to designate the beneficiaries of their accrued benefits in the event of death or disappearance related to a crime. Nevertheless, an investigation must take place to designate beneficiaries in these cases, or if there is a dispute between alleged beneficiaries. Again, these matters are dealt with through a special procedure, to guarantee an expedited process.
v Work-related accidents and sickness
Pursuant to the Federal Labour Law, social security in Mexico is mandatory for all employees, regardless of their position or salary level. Therefore, employers and employees are obliged to pay a premium so that all employees are covered by the insurance provided by the Mexican Social Security Institute.
The benefits of this insurance include a severance payment or pension in the event of a work-related accident or sickness, which can be claimed through the special expedited procedure. Typically, these kinds of procedures involve both the employer and the Mexican Social Security Institute, on the basis that the Institute should meet the obligations imposed on the employer provided that the employer has been compliant in paying the requisite premiums.
vi Conflicts of an economic nature
From a labour standpoint, conflicts of an economic nature are those that have the intention of modifying, implementing, suspending or terminating employment conditions or relationships for economic reasons that make it impossible to continue the previous conditions or employment.
This kind of dispute may be filed by the union, the majority of employees in a workplace or by the employer itself. Labour courts should seek to arrive at a settlement between both parties.
Pursuant to the Federal Labour Law, strikes are the temporary suspension of activities at a workplace, performed by a coalition of employees. All strikes shall have at least one of the following purposes:
- to achieve a balance between diverse production factors, harmonising employment rights with those of capital;
- to obtain from the employer a signature to a collective bargaining agreement or to force an agreement's revision;
- to enforce compliance with any of the clauses contained within a collective bargaining agreement;
- to enforce compliance with all profit-sharing related provisions;
- to support a third-party strike that has any of the above purposes (solidarity strike); and
- to enforce the revision of the collective bargaining agreement salary scale.
Strike claims will be resolved by the labour courts, ruling on the validity or invalidity of the claim. As in many labour disputes in Mexico, parties are invited to settle the claim, and this is very common in the case of strikes.
IV YEAR IN REVIEW
As mentioned in the introduction, since early 2017 there have been several changes in Mexico regarding labour and employment, primarily for the following reasons.
On 23 February 2017, the Constitution was amended, introducing a complete change to the existing labour justice system in Mexico, including stricter principles on the freedom of association and collective bargaining rights, rules for more transparent elections of union leaders, and the transition of the conciliation and arbitration boards to labour courts.
Factors in this reform include a background of criticism of the Mexican government in international forums, especially at the ILO, and the country's desire to adhere to the Trans-Pacific Partnership Agreement (now the CPTPP); there has also been pressure in relation to the renegotiation of the North America Free Trade Agreement (or NAFTA), now known as the Agreement between the United States of America, the United Mexican States, and Canada (or USMCA). Mexico has previously been accused of fostering collective bargaining agreements without union representation, whereby unions were imposed upon employees, violating their right of freedom of association. The objective of the constitutional reform was to prohibit these collective bargaining agreements, commonly known in Mexico as 'protective agreements'.
As mentioned previously, the constitutional reform also affected employment law by eliminating conciliation and arbitration boards from the executive branch of government and creating labour courts under the judicial branch of government. In addition, the constitutional reform entailed a reform of the Federal Labour Law and, as stated above, this was duly published on 1 May 2019. The enactment of the Federal Labour Law reform has introduced important changes that will guarantee much more expeditious processes. Furthermore, the Federal Labour Law reform favours conciliation over litigation by creating a mandatory pretrial conciliation stage, to be administered by the state conciliation centres, although competence for the registration of collective bargaining agreements will be reserved to the Federal Centre.
As part of the background to the Federal Labour Law reform, on 20 September 2018, the Mexican Senate ratified the 98th Convention of the ILO, regarding freedom of association and free collective bargaining rights, meaning that this international treaty became part of Mexico's national legislation, functioning at the same hierarchical level as the Constitution.
In addition, the 98th Convention obliges signatory countries to enact and maintain legislation protecting workers' right to freely join or not join a union, or resign union affiliation, without employer retaliation. This Convention will prohibit Mexico from passing any legislation permitting the signature and registration of collective bargaining agreements where employees do not know which union is party to the agreement, or are not aware of the terms of the agreement. The changes to the Federal Labour Law are aligned and consistent with the constitutional reform of 2017 and, certainly, with the principles embodied in the CPTPP and the USMCA.
On 1 October 2018, the US Trade Representative and Canadian Foreign Affairs Minister announced that an agreement, including Mexico, had been reached to renegotiate the agreement previously known as NAFTA. However, the USMCA is still pending approval by the US Congress. The USMCA includes as part of its text a specific labour chapter for Mexico, unlike NAFTA, in which labour matters were part of an annex to the agreement. Under the USMCA, persistent violations of labour obligations with an impact on trade may result in commercial sanctions. Therefore, it is highly important for Mexico not only to have enacted the legislation for this major reform, but also to ensure it is enforceable.
In the past 12 months, important individual labour and employment law cases have been heard in Mexico and, drawing on our litigation practice experience, we present the following example of a notable labour dispute.2
A former chief finance officer (CFO) from a German global automotive parts manufacturer claimed a statutory profit-share payment, not from the CFO's employer but from an operating entity that benefited from the employee's services, which were provided to the operating entity by the CFO's employer. The CFO had been terminated with full severance pay and had signed a full release of obligations. However, following termination, he filed a claim for the payment of 10 per cent of the annual profit of the operating entity, which had no eligible employees, arguing that he had acted as CFO of both entities.
In this multimillion-dollar claim, the executive further argued that both legal entities, the employer and the beneficiary of the employer's services, comprised the same 'economic unit' under the Federal Labour Law, making them a single employer, which therefore had to comply with the statutory profit-sharing of all profits of both entities.
The labour lawsuit represented not only a substantial contingency for the client, but also, more importantly, a challenge to its business structure in Mexico. After five years of litigation through different levels of the Mexican judiciary system, the Supreme Court issued a resolution confirming the decision of the circuit court finding the arguments and evidence supporting the independence of the legal entities compelling. The Court also confirmed the validity of an agreement between related corporate entities to provide each other with services, thereby agreeing in writing on the elements they would have to share to comply with the purposes of their business arrangement.
Although the Federal Labour Law was substantially amended on 1 May 2019, notably the current rules for outsourcing services were not changed. Hopefully this decision will provide certainty to many businesses generating formal jobs in Mexico and, in facilitating expansion of these businesses' operations, will contribute to Mexico's productivity.
V OUTLOOK AND CONCLUSIONS
Mexico's labour law reform process represents an important opportunity for Mexico's employees and employers, but the passage of these reforms into law is just the first step. The effective enforcement of Mexico's new labour laws will be key in ensuring that the USMCA can actually benefit workers. For decades, unions only managed contracts to service the interests of employers that sought to avoid real collective bargaining and undermine the emergence of a democratic, independent workers' movement.
The proposed labour chapter in the USMCA includes provisions that require Mexico to end corporatist unions and their protective agreements, recognise independent unions, conduct elections for leaders and collective agreements, and establish independent labour courts. These are important reforms that must be properly funded in order to ensure that they are implemented and enforced in a timely manner.
The changes in Mexico's law likely will spur greater, and more meaningful independent unionisation than Mexican employers have experienced in the past and companies seeking to maintain the flexibility necessary to respond to a changing global marketplace should evaluate their labour relations strategies, both individual and collective.
To ensure the enforcement of the labour courts' decisions, the labour law reform requires substantial resources from Mexico's government; however, in the upcoming year, 2020, the Mexican congress is expected to approve the funding necessary for the implementation of the new legal framework and for the agencies needed to deliver these reforms.
Finally, Mexico's labour reform is expected to precipitate an important discussion regarding outsourcing. At present, under the Federal Labour Law, there is a common structure allowing employers to hire workers under this regime; however, Congress is analysing several legal proposals to change the outsourcing rules or, even worse, to have the outsourcing regime under the Federal Labour Law revoked altogether.
1 Alfredo Kupfer-Domínguez and David Puente-Tostado are partners and Sebastián Rosales-Ortega is an associate at Sánchez Devanny.
2 Complete article by Alfredo Kupfer Domínguez and David Puente-Tostado, 'Profit-sharing litigation in Mexico: A challenge to a common corporate structure', The In-House Lawyer, Summer 2019, 119.