Employee vs. Contractor: How to Classify Workers in Mexico (Quiz included) [2024]

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.

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 Labor 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 Mexico's 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.

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, costing companies hundreds of thousands of dollars.
• 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.