Employee vs. contractor: how to classify workers in Mexico (quiz included)
Apr 20, 2023
When hiring workers in Mexico, one of the first steps is to classify them—are they employees, or are they independent contractors? Each worker's classification will have cost and tax ramifications for your business—and many foreign companies look to contractors as a more cost-effective way to tap into a country's talent pool.
Considering Mexico makes regular amendments to its laws surrounding worker rights and employer-employee relationships, it can be difficult for businesses—especially those based outside of Mexico—to keep up. But falling behind on local laws is risky. Misclassifying independent contractors as employees in Mexico can put your business at risk of fines, back taxes, and legal action.
Learn about how to classify your workers correctly—and stay compliant with Mexican labor and employment laws—in this guide.
Table of Contents
- Classifying workers in Mexico
- What is an employee in Mexico?
- What is a contractor in Mexico?
- Worker classification overview: Employees vs contractors in Mexico
- How to classify your global workers in 90 seconds
- Penalties for misclassification of workers in Mexico
Classifying workers in Mexico
As in many countries, Mexico categorizes employees and contractors differently—and classifying them correctly can be the difference between smoothly running your global team and racking up huge fines and penalties (more on those below).
What is an employee in Mexico?
In Mexico, an employee is defined as an individual who performs work or services for an employer. The Mexican Federal Labour Law (Ley Federal del Trabajo or FLL) sets out the legal framework that governs the employment relationship in Mexico and defines the rights and obligations of employees and employers.
To be considered an employee in Mexico, an individual must have a subordinated relationship with the employer, which means that the employer has the authority to direct and supervise the employee's work and can determine the terms and conditions of employment.
It's worth noting that the Mexican labor law recognizes the importance of protecting workers' rights, and it provides specific regulations for different types of employees, including domestic workers, farm workers, and those who work in the maquiladora industry. The law also covers a set of protections and benefits that employees are entitled to, including:
- Minimum wage
- Paid leave
- Retirement benefits
- Social security contributions
- Overtime pay
- Profit sharing
What is a contractor in Mexico?
In Mexico, an independent contractor is defined as an individual service provider or self-employed person who does work for a client or customer without having a subordinated relationship with them. This means that the contractor has more control over their work and the terms and conditions of the services they provide.
Rather than being governed by the Mexican Federal Labor Law (Ley Federal del Trabajo), independent contractor relationships fall under the civil code and commercial regulations. These require a worker to meet certain criteria to be considered an independent contractor rather than an employee (more on that below).
It's important to note that the criteria for determining whether an individual is an independent contractor or an employee in Mexico can be complex and often depend on the specific circumstances of the working relationship. The distinction is significant because independent contractors are not entitled to the same legal protections and benefits as employees under Mexican labor law, such as social security benefits, paid time off, and severance pay.
Worker classification overview: Employees vs contractors in Mexico
High level of worker control. Contractors should have more autonomy over their work, including when, where, and how they complete it. Contractors set their own work schedules.
Subordination required. Employers can directly supervise their employees in Mexico, including giving them specific instructions on how to complete their work or requiring them to work at certain times or from certain locations.
Contractor provides equipment. Contractors should complete all work using their own equipment and tools. Employers should not offer to reimburse them for any expenses.
Employer provides equipment. Equipment and tools should be provided by the employer, whether that's directly or via a stipend.
Payment due after invoicing. Contractors should invoice for their work once it is complete.
Regular salary or wage payments. Employees receive payment on a regular schedule, regardless of the work they completed during the pay period.
Benefits not required. Contractors are not entitled to statutory employee benefits.
Benefits provided. Mexican labor law requires providing employees with statutory benefits.
Disciplinary action not allowed. An employer cannot take disciplinary action against a contractor for misconduct but can end the working agreement according to the terms of the worker's contract.
Subject to disciplinary policies and other procedures. Employees may be disciplined by their employers and must follow other company policies as required of them.
Work is non-exclusive. Employers cannot prohibit contractors from providing services to any other entities.
Work can be exclusive. Employees may be restricted from working for other companies, especially competitors.
Responsible for income tax (ISR) and other tax obligations. Contractors pay their own taxes to the Mexican tax authorities, without their employers making any deductions on their behalf.
Responsible for payroll tax and deductions. Employment tax, social security, payroll tax, and other deductions are remitted by the employer.
How to classify your global workers in 90 seconds
Are you classifying your workers correctly? Find out now.
Accurately classifying your employees and contractors is crucial for complying with employment regulations in Mexico and around the world. With our free classification quiz, you can mitigate the potential business risks and ensure you’re correctly classifying employees and contractors—in just 90 seconds.
Penalties for misclassification of workers in Mexico
One of the most important reasons for clearly defining the employment relationship your company has with workers in Mexico is the penalties for misclassifying them. Misclassifying employees as independent contractors or subcontractors can result in significant penalties for businesses. Some of the potential risks include:
- Back pay and benefits. Misclassified employees can argue that they are owed back pay for their work, as well as pay for statutory benefits employees are entitled to that they did not receive.
- Government penalties and fines. Fines from the Mexican government can be steep—up to $222,000 in some cases.
- Severance pay. Employees are entitled to severance pay if their work agreement is terminated. If a contractor is terminated and later found to have been misclassified, you could be ordered to pay them severance.
- Legal damages. Misclassified employees can take legal action and pursue damages against the company that misclassified them.
- Criminal charges. In some cases, it's even possible for representatives of a company that misclassifies workers in Mexico to be charged with a crime.
Hire and pay contractors in Mexico with Rippling—quickly and compliantly
Running a global workforce is hard work—especially when it comes to understanding and complying with local labor laws.
But with Rippling, you can onboard and pay contractors in Mexico in a single system with localized onboarding, flexible payments in local currency or USD, and country-specific consulting agreement templates.
Rippling and its affiliates do not provide tax, legal or accounting advice. This material has been prepared for informational purposes only, and is not intended to provide, and should not be relied on for tax, legal, or accounting advice. You should consult your own tax, legal, and accounting advisors before engaging in any related activities or transactions.