What on earth is a Vacation Premium?

And 8 other Questions you’ll have when you set up payroll in Mexico

When you expand your operations into Mexico, you’ll naturally anticipate learning a little bit about the nuances of payroll in another country. Mexico has a few laws that are foreign compared to what we’re accustomed to in the US such that you may find yourself reading and re-reading the definitions and thinking, “REALLY?” The answer is yes, these are real employment benefits in Mexico.

1. Vacation Bonus

Get a Bonus for Going on Vacation!

Known as Prima, the vacation premium is an additional cash benefit given to employees for use on their vacation. It is calculated as a minimum of 25% of daily salary multiplied by the number of days of vacation. When an employee takes a vacation day, they are paid their daily wage PLUS 25%. Some employers do grant more than the minimum. The Prima is an accrued benefit, so it must be calculated each pay period and should be accounted for as a liability to be paid when an employee redeems their vacation time or upon separation from the company.

2. Christmas Bonus

The Christmas Bonus (Aguinaldo in Spanish) is an annual bonus that businesses are required to pay their employees. The payment is often referred to as the “thirteenth month” and must be paid by Dec 20th of each year.

Aguinaldo is calculated based on the employees salary, and is equivalent to at least 15 days wages, though many businesses choose to pay more. While many employers pay the Christmas bonus in December, they may also choose to spread the bonus throughout the year, normalizing cash flow.

The Aguinaldo is accrued as the year progresses, so if an employee separates from the company the pro-rated Aguinaldo is paid out as part of the separation.

3. Profit Sharing

One of the biggest differences between US companies and Mexican companies is that in Mexico companies are required to share 10% of their profits with their employees. Profit sharing is abbreviated PTU (Participación de los Trabajadores en las Utilidades de la Empresa, or translated “Employee Participation in Company Profits”) Profit sharing in Mexico is different than what we might call profit sharing or equity here in the US. In Mexico, profit sharing is legally mandated and not incentive based, is not part of a retirement fund, nor does it involve equity in the company. This profit sharing percentage is determined by a National Commission, and may be updated as economic conditions shift over time.

4. Severance

Okay, Severance is not a new word for US business leaders, but be careful, Severance means something completely different in Mexico!!

If an employee is terminated without cause, the business is required to pay the following severance

-90 days of salary + benefit amount AND

-20 days of salary + benefit amount for each year of service; AND

-12 days of salary only for each year of service; AND

-Accrued leave benefits and unpaid salary

To be clear, the above termination payments are required by law, unlike in the US where severance payments vary widely based on a number of factors.

You can see that it is quite expensive to terminate an employee without cause. It’s important to understand the financial implications of hiring and terminating employees.

When terminating an employee for cause, no severance is owed but unpaid salary and accrued benefits are owed.

5. Overtime Rules

There are several nuanced rules associated with overtime that you need to be aware of, as there is a significant difference between overtime in Mexico and the US. The rules outlined below are required by the federal government, but keep in mind that many companies will offer a higher level of overtime benefits to attract and retain employees.

In Mexico, overtime is paid at 2X the normal pay rate. Once a worker surpasses three hours of overtime on a day, they are paid 3X the hourly rate. If an employee works overtime for more than three consecutive days, then they will be paid at 3X the hourly rate as well. Finally, if the weekly hours of overtime exceed 9 hours, every hour above that is paid at 3X the hourly rate.

6. UMA

UMA stands for Unit of Measurement and Update. This is a number that is used for a reference, by which calculations are made to determine a number of employment benefits. The UMA serves as a single number by which all payroll related wages and benefits can be updated based on economic changes (accounting for inflation, etc).

In plain english, many countries will base benefits and taxes on the minimum wage. Mexico uses the UMA for the base, which allows them to adjust the minimum wage without having a direct policy effect on all other workers in the economy.

7. SBC

One might translate SBC to “base salary.” The term in Spanish is Salario Base de Cotización (SBC). It basically means the salary in relation to which you are making your deductions. And the main difference with the regular salary is that it includes bonuses, vacation time, aguinaldo (christmas bonus), commissions et cetera.

It is important to note that two employees with the exact same salary will have a different SBC due to vacation benefits. Thus,the SBC must be calculated for each employee individually based on their vacation benefits.

8. Sunday Pay

Employees required to work on a Sunday must, at a minimum, receive an additional 25% of their daily salary on top of their normal daily salary.

9. Pantry Voucher

Food vouchers are not a statutory requirement in Mexico, but they are a common benefit that employers like to grant to attract talent. The vouchers are tax free for the employees and the money is often delivered through debit cards provided by the employer. Vouchers are just like cash and can be used for groceries at predetermined stores.

As you read about these payroll functions, it’s probably hard to imagine how you would ever correctly run payroll for those employees. KarbonPay can help. We’ve built our Mexico payroll platform to automatically calculate all of the above, plus more. We help you configure your payroll from the beginning, and we’re here for you every month to answer any questions that come up.

Let’s set up a time for you to learn more about KarbonPay and how we can be your partner in setting up your team in Mexico.