Determination of the Integral Daily Salary Pursuant to Mexico’s Federal Labor Law

March 18, 2009
Determination of the Integral Daily Salary Pursuant to Mexico’s Federal Labor Law

Mexico’s Federal Labor Law (LFT) provides that the indemnification to which terminated employees are entitled must be calculated in terms of thedaily integral salary (SDI). Thus, the calculation of severance indemnification, which includes three months of pay, twenty days of pay per year ofemployment and salary accrued between the date of termination and the date on which the severance indemnification is settled, is based on the SDI.Article 84 of the LFT provides: “Salary is composed of daily cash payments for services rendered, bonuses, wages, accommodations, vacation bonus,commissions, in-kind fringe benefits and any other amount or benefit given to the employee for such employee’s work.” The SDI provided for in theLFT must not be confused with the SDI set forth in the Social Security Law, because these are not the same concepts. To determine the SDI, theemployee’s base salary must be ascertained and added to, on a daily and pro-rated basis, any other amounts of compensation given to the employee,such as Christmas bonus, vacation bonus, commissions and contributions to the employee’s savings fund (only the amount of the employer’scontribution). Nevertheless, the applicable general rule to determine whether a compensation item should be included in the employee’s integral dailysalary is that such compensation must be paid directly to the employee in consideration for that employee’s work. In this sense, life insurance andmedical benefits are excluded from the SDI to the extent that the employer pays the corresponding premiums to the insurance company and not theemployee directly. On the other hand, SDI does not include overtime, unless such overtime accrues in a continuous and uninterrupted manner;vacation time is also excluded, since it is paid without the employee providing any services during such time off. Finally, work tools, such as anautomobile, cellular phone or computer are not considered part of the employee’s salary so long as such tools are delivered to the employee with theemployee’s acknowledgement that such goods are tools for the employee to provide services to the employer. Without such acknowledgement fromthe employee on the characterization of work tools, Mexican labor authorities may consider such tools as employee benefits, in which case they wouldhave to be included in the calculation of salary and could significantly increase the cost of a severance payment.

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