Key Takeaways:
- The reason for an employee termination affects both the process employers need to follow and what the employee may be owed.
- A for-cause dismissal requires more than a valid reason. Employers must be able to support the grounds for termination and provide written notice explaining what happened and when.
- An unjustified dismissal can result in reinstatement or significant compensation, including three months' salary, back wages, and interest.
Employment relationships don't always work out as planned. Sometimes an employer needs to let someone go, an employee decides to leave, or a contract simply reaches its end.
Whatever the reason, terminating an employment relationship in Mexico follows a specific process, which can be confusing for international employers unfamiliar with the requirements.
It’s not enough to decide that an employment relationship should end and issue a final paycheck. Employers need to follow the required steps in the right order, from establishing the grounds for termination to providing the proper documentation and calculating final pay.
Missing a step or handling the process incorrectly can expose the company to legal and financial consequences.
What Are the Legal Grounds for Employee Termination in Mexico?
Termination laws in Mexico are primarily governed by the “Ley Federal del Trabajo” (Federal Labor Law, or LFT), which states that an employment relationship can end in one of three ways:
- Justified dismissal: The employer terminates the employee for a reason recognized under Mexican labor law.
- Unjustified dismissal: The employer terminates the employee without a legally recognized reason.
- Other forms of termination: The employment relationship ends for another reason, such as the employee resigning or a fixed-term contract reaching its agreed end date.
Termination With Just Cause
Mexican labor law allows an employer to dismiss an employee without severance when there is a legally recognized reason for termination. These reasons can include dishonesty, violence, intentional damage, serious negligence, disclosing confidential information, or more than three unjustified absences within 30 days.
But simply having a valid reason for termination isn't enough. The employer must also have evidence to support the dismissal and provide written notice explaining what happened and when. If the employer doesn't give the notice directly to the employee, it must submit it to the labor tribunal within the required timeframe for delivery.
When a dismissal is justified, severance isn't required, but the employee must still receive any outstanding wages and other amounts they've already earned.
Termination Without Just Cause
If an employer terminates an employee without a legally recognized reason, can't adequately prove the grounds for dismissal, or doesn't follow the required termination process, the dismissal may be considered unjustified. The employee can then request reinstatement or compensation. The claim first goes through conciliation and can move to the labor tribunal if no agreement is reached.
In most cases, the employee gets to choose between reinstatement and compensation. However, the LFT allows an employer to pay the required compensation instead of reinstating the employee in certain circumstances, including when the employee has less than one year of service or when the tribunal determines that continuing the employment relationship isn't possible.
An unjustified dismissal can get expensive, so employers should understand what they may be required to pay before moving forward.
Other Ways an Employment Relationship Can End
Not every employment relationship ends with an employer dismissing an employee. Other circumstances come with their own requirements for documentation and final pay.
- Resignation: If an employee voluntarily resigns, the employer still owes any outstanding wages and accrued benefits.
- Mutual agreement: If both parties agree to end the relationship, the agreement should be in writing, include a detailed breakdown of payments, be ratified before the labor tribunal or conciliation center, and not waive the employee's rights.
- Fixed-term contract or specific project: Mexican law generally presumes employment is indefinite, so fixed-term arrangements are only valid when the nature of the work justifies them. When a valid fixed-term or project-based contract ends, the employee is still entitled to pending salary, proportional “aguinaldo” (mandatory Christmas bonus), unused vacation, and vacation premium.
What the employee is owed depends on how the employment relationship ends, so employers should clearly document the reason and circumstances.
What Notice Is Required When Terminating an Employee in Mexico?
The employer must provide written notice explaining the reason for the dismissal and when the conduct occurred. The employer can hand the notice directly to the employee at the time of termination.
If that isn't possible, the employer has five business days to submit it to the appropriate labor tribunal, along with the employee's last known address so that the tribunal can deliver the notice.
The notice needs to be specific and clearly document:
- What happened
- When and where it happened
- Who was involved
- How the employer learned about the incident
- Which legal or contractual provision applies
If the employee doesn't receive the notice, either directly from their employer or through the tribunal, the dismissal is presumed unjustified unless the employer can prove otherwise.
What Severance and Final Payments Are Required in Mexico?
Two types of payments may be required when an employment relationship ends in Mexico:
- “Finiquito” covers outstanding amounts the employee has already earned. It's owed in virtually every type of termination, whether the employee resigns, is dismissed, or a contract ends.
- “Liquidación” is additional compensation owed in certain circumstances, primarily unjustified dismissals, and is owed in addition to the finiquito.
Finiquito: Outstanding Payments
Depending on the situation, the finiquito generally includes:
- Unpaid salary: Wages for any days worked but not yet paid.
- “Proportional aguinaldo”: The year-end bonus is a separate benefit of at least 15 days' salary per year, prorated for the portion of the year worked.
- Accrued vacation: Employees are entitled to at least 12 days of vacation after one year of service, with entitlement increasing with seniority. Unused and proportional days must be paid out.
- Vacation premium: Employees are entitled to a premium of at least 25% on the wages for their vacation period, which also applies to vacation paid out at termination.
- Any profit-sharing (PTU) owed for the relevant period.
A “prima de antigüedad” (seniority premium) may also be owed. It amounts to 12 days' salary for each year of service and applies when an employee is dismissed, whether the dismissal is justified or unjustified. Employees who resign may also be entitled to the premium if they have at least 15 years of service.
Liquidación: Severance Compensation
After an unjustified dismissal, the main portion of the “liquidación” is three months' salary, which the employee can claim instead of being reinstated.
The amount can increase if the dispute reaches the labor tribunal and the employer can't prove the grounds for dismissal. In that case, the employee may also be entitled to back wages, known as “salarios vencidos,” for up to 12 months from the date of dismissal. If the case continues beyond 12 months, interest begins to accrue.
Then there’s the additional compensation based on length of service. For employees with indefinite contracts, this is 20 days' salary for each year worked, in addition to the three months' salary and any applicable back wages and interest.
The calculation works differently for fixed-term employees. If the agreed term was less than one year, compensation is equal to half the salary for the time worked. For terms longer than one year, it's six months' salary for the first year, plus 20 days' salary for each additional year.
How Should Employers Handle the Termination Process?
Employers should take the following steps when terminating an employee in Mexico:
- Confirm the legal grounds and review the employment contract. Determine whether legally recognized grounds for dismissal exist, whether another form of termination applies, or whether the dismissal would be considered unjustified.
- Gather the documentation needed to support the decision. Collect attendance records, written warnings, witness statements, and any other evidence.
- Prepare and deliver any required written notice. For a for-cause dismissal, draft a specific notice and deliver it in person, or file it with the labor tribunal within five business days.
- Calculate final payments and any applicable compensation. Work out the finiquito, the seniority premium, and any liquidación owed.
- Complete the required settlement documentation and employment administration. Process final payroll and tax withholding, and complete any required social security updates.
Any termination agreement or settlement needs to be in writing, explain the circumstances in detail, and be ratified by the appropriate conciliation center or labor tribunal. It also can't require the employee to give up rights they're entitled to under Mexican labor law.
Termination disputes can get complicated, and relatively small mistakes can affect the outcome. Employers should get local legal guidance before finalizing a disputed termination.
What Happens if an Employee Challenges Their Dismissal?
An employee who believes they were wrongfully terminated can challenge the dismissal. If the employer can't prove there was a lawful reason for the termination or didn't follow the required notice process, the employee may be entitled to reinstatement or three months' salary, along with back wages, interest, and potentially additional compensation.
The process usually starts with mandatory conciliation. The employer and employee don't have to reach an agreement, but they generally must attend a conciliation hearing before the dispute can move to the labor tribunal. The conciliation process can't last longer than 45 days.
Certain disputes, including those involving discrimination, sexual harassment, beneficiary designations, or violations of fundamental rights, can bypass this step. If conciliation doesn't resolve the issue, the employee can then take the claim to the labor tribunal.
Compliantly Manage Employee Terminations in Mexico With RemoFirst
Mexican termination requirements can be difficult to navigate, particularly for employers unfamiliar with local labor laws. A missing notice, an incorrect severance calculation, or a settlement that isn't properly ratified can expose your company to back wages, interest, and lengthy disputes.
An Employer of Record (EOR) can take much of that complexity off your plate. With RemoFirst as the legal employer, companies get local support throughout the employment relationship, including when it's time to part ways with an employee.
We help ensure terminations follow the required process, final payments are calculated correctly, and the necessary documentation is completed — without your team having to become experts in Mexican labor law.
Whether you’re hiring your first employee in Mexico or already have a team there, book a demo to see how RemoFirst can help.
