Mexico Hiring Guide: Employer Costs, Aguinaldo, IMSS, Termination Rules and More

Mexico is Latin America's second-largest economy and a manufacturing and services hub tightly linked to the United States and Canada through the USMCA trade agreement.

Employers hiring in Mexico need to navigate a detailed federal labor code, mandatory profit-sharing, and social security obligations that differ meaningfully from those in the US or Canada.

 
Overview

Mexican employment law is built around the Ley Federal del Trabajo (Federal Labor Law, or LFT), which applies to virtually every employer-employee relationship in the country and leaves little room for contracting around its minimum standards. Written contracts are effectively mandatory, statutory benefits are generous compared to the US, and terminating an employee without cause is expensive.

For international employers, the main practical challenges are: mandatory profit-sharing (PTU), a labor code currently mid-reform on working hours, layered social security contributions administered through IMSS and INFONAVIT, and a termination regime that assumes dismissals are unjustified unless the employer proves otherwise.  

Why employers hire in Mexico:

1. Manufacturing and nearshoring: Proximity to the US, USMCA trade terms, and a mature manufacturing base make Mexico a leading nearshoring destination.

1. Technology and shared services talent: Cities like Mexico City, Guadalajara, and Monterrey have deep pools of software engineering, finance, and customer support talent at costs well below the US and Canada.

1. Time zone alignment: Mexican time zones overlap almost entirely with US business hours, which supports real-time collaboration.

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Employment Contracts

Under Article 24 of the LFT, employment relationships must be documented in a written individual employment contract. In practice, an employer without a written contract is not exempt from the law, the relationship is simply presumed to be indeterminate (permanent) and any dispute over its terms is resolved in the employee's favor.  

Every employer hiring in Mexico should issue a written, Spanish-language contract before the employee starts work.

Types of employment relationships (Article 35)

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Trial and training periods are not stackable

A trial period and an initial training period cannot both apply to the same role. Both are non-renewable, and during either the employee keeps full salary, statutory benefits, and social security coverage — Mexican trial periods are not a lower-cost or lower-protection status.

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What the contract must include

1. Full identification of employer and employee, including CURP (unique population registry code) and RFC (tax ID) where applicable.

1. Job title, duties, and workplace location.

1. Duration (indeterminate, fixed-term, or seasonal) and, if applicable, trial or training period terms.

1. Working hours and schedule (day, night, or mixed shift).

1. Salary amount, form, and place of payment.

1. Statutory benefits: vacation, vacation premium, and Christmas bonus (aguinaldo) at minimum.

1. Training obligations and any other terms agreed between the parties, provided they meet or exceed the LFT minimums.

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Mexican-workforce quota for foreign hires (Article 7, LFT)

Employers must keep at least 90% of their overall workforce Mexican. For technical and professional roles specifically, foreign hires are capped at 10% of that specialty's headcount unless the employer can show no qualified Mexican candidates were available — and even then, the employer and the foreign hire share a duty to train Mexican workers in that specialty. The quota doesn't apply to directors, administrators, or general managers. This matters for companies planning to relocate foreign staff into a Mexican entity rather than hiring locally.

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3. Working Hours and Overtime

A major legal change is underway

Mexico enacted a constitutional and federal labor law reform in 2026 to gradually cut the standard workweek from 48 to 40 hours. 2026 is a transition year with no change to the legal maximum; the phased reduction itself begins January 1, 2027. Employers should plan schedule and payroll system changes now rather than waiting for 2027.

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Current standard hours (through December 2026)

The LFT recognizes three types of shifts:

1. Day shift (jornada diurna): Between 6:00 a.m. and 8:00 p.m., maximum 8 hours a day / 48 hours a week.

1. Night shift (jornada nocturna): Between 8:00 p.m. and 6:00 a.m., maximum 7 hours a day / 42 hours a week.

1. Mixed shift (jornada mixta): Combines day and night hours (with no more than 3.5 night hours), maximum 7.5 hours a day / 45 hours a week.

The phased reduction to 40 hours (2027–2030)

The reform also requires employers to provide at least one paid rest day for every six days worked, and — starting January 1, 2027 — to electronically record each employee's clock-in and clock-out times and produce those records to labor authorities on request. Employers that fail to maintain electronic time records face fines from 250 to 5,000 UMA (roughly MXN 29,300 to MXN 586,600 in 2026 UMA terms). The law is explicit that the reduction in hours cannot be used to reduce pay or benefits.

Overtime

1. First 9 hours a week: Paid at 200% of the regular hourly rate (double time). This weekly cap will rise gradually alongside the hours reform, reaching 12 hours a week by 2030.

1. Beyond the weekly cap: Paid at 300% of the regular hourly rate (triple time).

1. Overtime worked without employer authorization can still create liability if the employer knew about it and did not stop it.

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Minimum Wage

Mexico's Comisión Nacional de los Salarios Mínimos (CONASAMI) sets the general minimum wage annually, effective January 1. For 2026, effective January 1, 2026:

The northern border free zone (ZLFN) covers 43 border municipalities and carries a materially higher minimum wage to reflect proximity to the US labor market and cost of living. Some professions and trades also have CONASAMI-set "professional minimum wages" above the general minimum — these should be checked for the specific role and location.

Minimum wage vs. UMA

Don't confuse the minimum wage with the UMA (Unidad de Medida y Actualización), a separate index used to calculate fines, caps, and certain statutory thresholds — not to set pay. The UMA for 2026 is MXN $117.31 per day.

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Payroll and Taxes

Payroll cycle

Weekly and biweekly (quincenal) payroll are the most common cycles in Mexico, though monthly payroll is also used, particularly for salaried professional and management roles.  

Employers must issue a CFDI de nómina — an electronic payroll receipt stamped by the Mexican tax authority (SAT) — for every payment, which is the standard proof of payment and payroll tax compliance.

Individual income tax (ISR)

Employers withhold income tax (Impuesto Sobre la Renta, or ISR) from wages each pay period under Article 96 of the Ley del Impuesto Sobre la Renta (LISR), using tax tables published annually by the SAT.  

For 2026, the monthly ISR withholding table has 11 income brackets ranging from 1.92% (on the lowest bracket, up to roughly $746 of monthly taxable income) to 35% (on monthly taxable income above roughly $375,976). Lower-income employees also receive a subsidio para el empleo (employment subsidy) of up to $406.83 per month, which directly reduces the ISR otherwise due.

Verify the exact bracket figures before running payroll

ISR bracket thresholds and fixed quotas are republished each year in Annex 8 of the SAT's Resolución Miscelánea Fiscal, along with separate tables for weekly, biweekly, and annual pay periods. Because these figures are precise to the peso, employers should pull the current-year table directly from the SAT rather than relying on a prior year's figures or third-party summaries.

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2026 annual ISR brackets (individuals, Article 96/152 LISR)

For reference, the 2026 annual income tax brackets are:

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State payroll tax (impuesto sobre nómina)

In addition to federal withholding, every state levies its own payroll tax on total employer payroll, generally in the 2%–4.25% range. A few examples for context:

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Employer payroll obligations:

1. Withhold and remit monthly ISR on employee wages.

1. Register the employee with IMSS and remit monthly social security contributions (see Section 6).

1. Remit monthly INFONAVIT (housing fund) contributions.

1. Pay state payroll tax (impuesto sobre nómina), a state-level tax on total payroll generally ranging from about 2% to 4.25% depending on the state.

1. Issue the annual aguinaldo (Christmas bonus) by December 20 (see Section 8).

1. Calculate and pay employee profit-sharing (PTU) by the applicable May/June deadline where the company is profitable (see Section 8).

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Social Security Contributions

Mexico's social security system is administered by the Instituto Mexicano del Seguro Social (IMSS) and funded through mandatory employer and employee contributions calculated on the Salario Base de Cotización (SBC) — a contribution base that includes the daily wage plus the proportional daily value of regular benefits like aguinaldo and vacation premium.  

The SBC is capped at 25 UMA per day (about MXN $2,932.75/day, or roughly MXN $89,156/month, in 2026).

IMSS insurance branches

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As a practical planning figure, total employer IMSS contributions generally run in the range of roughly 20% to 30%+ of an employee's SBC, depending on the employer's occupational risk class and where the employee's Cesantía y Vejez rate sits on the pension reform's phase-in schedule (this rate is scheduled to keep rising through 2030).  

Employees contribute a smaller share, typically in the range of 2.4% to 2.8% of SBC, deducted directly from pay.

INFONAVIT (housing fund)

Employers must also contribute 5% of the employee's SBC to INFONAVIT (Instituto del Fondo Nacional de la Vivienda para los Trabajadores), which funds subsidized employee housing loans. This is an employer-only contribution, paid alongside IMSS through the same monthly filing.

Confirm current-year rates before quoting employer cost

The Cesantía y Vejez employer rate increases annually under a multi-year pension reform schedule running through 2030, and occupational risk premiums are reassessed per company based on claims history. Always confirm the exact rates for the current year and the specific employer before finalizing a cost estimate.

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Leave Entitlements

Annual vacation

A 2023 reform to the LFT (known as "Vacaciones Dignas") doubled the statutory minimum vacation entitlement. Employees are entitled to paid vacation starting after their first year of service, on the following schedule (Article 76):

1. At least 12 of the days owed must be taken continuously; the rest can be split by agreement between employer and employee.

1. Vacation must be granted within 6 months of the employee's work anniversary.

1. Vacation days cannot be paid out in lieu of time off while the employment relationship continues (only accrued, unused vacation is paid out on termination).

1. Employees also receive a vacation premium (prima vacacional) of at least 25% of the salary corresponding to their vacation days.

Maternity and paternity leave

1. Maternity leave: 12 weeks total — 6 weeks before the due date and 6 weeks after birth, paid through IMSS at 100% of the employee's wage (subject to IMSS's own contribution-based rules). With a doctor's authorization, up to 4 of the pre-birth weeks can be transferred to the post-birth period.

1. Paternity leave: 5 working days of paid leave for the birth or adoption of a child, paid by the employer.

1. Adoption leave: 6 weeks paid leave following the placement of a child.

Sick leave

Employees covered by IMSS receive a sick-leave subsidy directly from IMSS (not the employer) equal to 60% of the SBC, starting on the fourth day of a non-occupational illness confirmed by an IMSS-issued disability certificate (incapacidad).  

The first three days are typically unpaid unless the employer's internal policy provides otherwise, and the employee generally needs at least 4 weeks of prior IMSS contributions to qualify. This subsidy runs for up to 52 weeks and can be extended by a further 26 weeks if the illness continues.  

Work-related injuries and occupational illness are compensated at 100% of the SBC from the first day, also through IMSS, with no minimum contribution period required, for up to the same 52-week horizon.

Public holidays

Work on a mandatory holiday must be paid at triple the regular daily wage in addition to the employee's normal pay for that day.  

Mexico also observes several widely-followed but non-mandatory dates — including Holy Week (Semana Santa), Cinco de Mayo, Day of the Dead (November 1–2), and Día de la Virgen de Guadalupe (December 12) — where many businesses close by custom or local practice even though the law doesn't require it.

Bereavement leave

The LFT does not currently set a statutory number of days for bereavement leave, though several reform proposals to add one (typically 3 to 5 paid days) have been introduced in Congress without being enacted.  

In practice, most Mexican employers voluntarily grant around 3 days of leave — paid or unpaid depending on company policy — for the death of an immediate family member. Employers should set this out clearly in their internal policy or collective bargaining agreement rather than assume a legal default applies.

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Employee Benefits

Aguinaldo (Christmas bonus)

Every employee is legally entitled to an annual aguinaldo of at least 15 days' salary, to be paid no later than December 20 each year. Employees who worked less than a full year receive a proportional amount based on days worked.  

Many employers pay more than the 15-day minimum as a competitive benefit — 30 days is a common market practice for professional roles.

Profit sharing (PTU)

Employers must share 10% of their annual taxable profit with employees (Participación de los Trabajadores en las Utilidades, or PTU), a constitutional right under Article 123 and regulated in Articles 117–131 of the LFT. Key rules:

1. Companies must pay PTU within 60 days of filing their annual tax return — in practice, by around May 30 for most corporate taxpayers; individual employers have an extra month.

1. The 10% pool is split: 50% distributed equally based on days worked, and 50% distributed in proportion to salary earned during the year.

1. Employees who worked at least 60 days during the fiscal year are eligible, including most temporary staff; directors, general partners, and independent contractors are excluded.

1. Since a 2021 reform, each employee's individual PTU is capped at whichever is greater: 3 months of their salary, or the average PTU they received over the prior 3 years.

1. Newly established companies are typically exempt from PTU in their first full year of operation, and companies with no taxable profit each year have no PTU obligation for that year.

Other common benefits

1. Meal and grocery vouchers (vales de despensa): A popular, partially tax-exempt benefit, commonly worth 10%–15% of salary.

1. Savings fund (fondo de ahorro): An optional, tax-advantaged employer-employee matched savings plan, common in mid-size and large companies.

1. Major medical insurance (gastos médicos mayores): Not legally required (basic care is covered through IMSS) but a standard competitive benefit for professional roles.

1. Life insurance: Common as a supplementary benefit, particularly for management-level hires.

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Termination Requirements

Mexican law strongly favors employees in termination scenarios. Ending an employment relationship falls into one of three categories, each with very different cost and process implications.

Resignation (renuncia)

An employee who resigns voluntarily is entitled to a finiquito: unpaid wages, accrued and unused vacation plus vacation premium, and the proportional aguinaldo for the year. No severance or dismissal indemnification applies.

Justified dismissal (despido justificado)

Article 47 of the LFT lists specific just causes for dismissal without liability to the employer, such as dishonesty, violence, repeated unexcused absence, or failure to follow safety rules. To rely on a just cause, the employer must notify the employee in writing of the reason and date of termination and follow the required procedure. Even in a justified dismissal, the employee is still owed a finiquito (unpaid wages, accrued vacation and premium, proportional aguinaldo).

Unjustified dismissal (despido injustificado)

If the employer cannot prove just cause — or simply wants to end the relationship without cause — the employee is entitled to a full liquidación, which includes:

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Notice periods

Mexican law does not require a minimum advance notice period for dismissal in the way many other countries do — instead, the emphasis is on paying the correct indemnification and following the Article 47 written-notice procedure when claiming just cause.  

Employers should still check any notice terms set out in the individual employment contract or an applicable collective bargaining agreement, which may impose additional requirements.

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Hiring Through an Employer of Record (EOR)

An Employer of Record is a local entity that legally employs workers on a company's behalf — handling the employment contract, payroll, tax withholding, IMSS and INFONAVIT registration and contributions, statutory benefits, and compliant termination — while the client company directs the employee's day-to-day work.  

It is one route among several for hiring in Mexico, alongside setting up a Mexican legal entity or engaging independent contractors.

EOR is especially helpful when:

1. Testing the market: Hiring one or a few employees in Mexico before committing to the cost and timeline of entity setup.

1. Speed: Onboarding employees in days or weeks rather than the months typically needed to incorporate and register a new entity with the SAT and IMSS.

1. Compliance confidence: Navigating a detailed, employee-protective labor code — including PTU calculations, the shifting IMSS pension contribution schedule, and the phased working-hours reform — without building in-house Mexican payroll and labor law expertise.

When a local entity may be a better fit

1. Large, long-term headcount plans where the per-employee cost of an EOR outweighs the fixed cost of running an entity.

1. Roles that require a Mexican entity for regulatory, banking, or client-facing purposes.

If you decide to set up your own presence in Mexico, there are three main options for foreign companies:

• Representative office: For market research and promotion only; cannot generate revenue.  

• Branch: Can operate in Mexico but remains part of the foreign parent company.  

• Subsidiary: A separate Mexican company, most commonly an S.A. de C.V. (similar to a corporation) or S. de R.L. de C.V. (similar to an LLC).

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Mexico remains one of the most attractive countries in the world for nearshoring, technology, and shared-services hiring. Whether you set up your own entity, use an Employer of Record, or work with contractors while evaluating the market, understanding obligations up front helps you budget accurately and avoid costly missteps.

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Frequently Asked Questions

Do I need a Mexican entity to hire employees there?

No. You can hire through an Employer of Record without establishing your own legal entity in Mexico, or engage independent contractors for genuinely non-employment work. Direct employment does require either your own entity or an EOR acting as the legal employer.

What's the difference between finiquito and liquidación?

Finiquito is the standard settlement of pay owed at the end of any employment relationship (unpaid wages, accrued vacation and premium, proportional aguinaldo). Liquidación adds the dismissal indemnification and seniority premium owed specifically when a dismissal is unjustified.

Is profit sharing (PTU) mandatory for every employer?

Yes, for most employers with taxable profit in the relevant fiscal year, PTU is a constitutional right, not an optional benefit. Very small or newly formed companies (typically in their first year) and businesses with no taxable profit are exempt for the periods in which the exemption applies.

Can probationary employees be dismissed without indemnification?

Not automatically. During a validly documented trial or training period, an employer can end the relationship if the employee doesn't meet the job's requirements, but the employee still keeps full salary, benefits, and social security coverage for time worked, and the employer should still follow a documented, defensible process.

Is the standard workweek changing?

Yes. Mexico is phasing in a reduction from 48 to 40 hours a week between 2027 and 2030. There's no change to the legal maximum during 2026, but employers should plan for the first reduction (to 46 hours) taking effect January 1, 2027.

How is severance calculated for a long-tenured employee?

Unjustified dismissal pay combines a flat 3 months' wages, 20 days' wages for every full year of service, and a seniority premium of 12 days' wages per year (capped at twice the minimum wage), plus proportional benefits for the current period — all calculated on the employee's integrated daily wage.

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This guide reflects Mexican federal labor, tax, and social security rules as of 2026. Rates, thresholds, and the phased working-hours reform will continue to change — confirm current figures with IMSS, the SAT, or a local advisor before finalizing compensation or termination decisions.

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Knit provides Employer of Record, Global Payroll, and Professional Employer Organization services in Mexico as part of its global coverage across 172 countries and regions, alongside value-added services like entity registration, tax compliance, and work visas for companies that later decide to establish their own presence.  

Hiring in Mexico? Let's talk it through.

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