Mexico issues extraordinary measures to address COVID-19 pandemic

Apr 14, 2020
International tax COVID-19

On March 30, 2020 the Mexican government, through the Ministry of Health, issued a Decree in the Official Gazette of the Federation announcing a variety of measures in response to the COVID 19 pandemic. In addition to several actions aimed at mitigating the spread of COVID-19 the government issued certain extraordinary measures that must be adopted by all individuals and entities located in Mexico. This guidance applies from March 30 through April 30, 2020. The following is an overview of this guidance, and how it may impact U.S. multinational companies with business activities or employees in Mexico.

Essential and non-essential activities

The extraordinary measures include the requirement that all non-essential activities must cease, and companies performing these should send their employees home. Rather than providing a definition of the term non-essential activities, the guidance defines what constitutes essential activities. Essential activities are those directly associated with the following:

  • Combatting of the COVID-19 pandemic and the care of affected patients, such as operation of hospitals, clinics, emergency services, private medical practices, and related activities
  • Manufacturing, distribution and supply of medical equipment, medicines and supplies
  • Public safety and national security
  • Strategic sectors, such as banking, production and supply of food and water, production and distribution of gasoline and other fuels, telecommunications, and child and elderly care
  • Governance, tax collection and administration and law enforcement
  • Maintenance of the public infrastructure (i.e., roads, energy distribution, sanitation)

Additionally, guidance published on April 6 provides that the manufacture and distribution of the following items are also considered essential activities:

  • Steel
  • Carbon extraction
  • Concrete and cement
  • Glass
  • Electronic commerce and related digital services
Labor-related impact of non-essential activities

As mentioned above, effective immediately, companies carrying out non-essential activities are to cease the performance of those activities, and employees directly involved in those non-essential activities are to be sent home. The cessation of operations has certain consequences for employers, which are unique to Mexican labor law.

Existing Mexican labor laws allow employers to cease, for a temporary period, the employment relationship with employees when the SH declares a health “contingency”. While it would seem evident that the announcement of the extraordinary measures imposed by the SH qualify as such a declaration, the question is not clear to date.

One position is the COVID-19 pandemic is a health emergency rather than a contingency and therefore, employers are required to pay full compensation to employees during the cessation of operations. Under this position, employers that cease to pay wages during the forced cessation may be required to pay severance payments to impacted employees. Depending on the seniority and pay of employees, these severance payments could prove substantial.

An alternative position is that as long as an employer pays the official minimum wage[1] for a maximum period of one month following the cessation of operations, they will be considered in compliance with Mexican labor laws and not required to pay severance. Of note, under current legislation, after the one-month period expires the employer must return to paying full-compensation or face potential severance payments. Implementation of this position should be evaluated against other potential adverse implications such as employees attempting to file lawsuits against the company as a result of experiencing such a drastic reduction in take-home compensation.

Prior to implementing any reductions in salaries, U.S. multinational companies with employees in Mexico should consider certain actions to provide an opportunity for both parties to agree on the terms of the reduction in compensation. Some suggested actions are:

  1. Develop a strategy, together with labor counsel
  2. Negotiate with the employee’s representatives the terms of a potential reduction, and
  3. Sign an agreement with the employee’s representatives
Opportunity to shift essential activities to Mexico

The guidelines do not specify whether the essential activities are limited to production of goods or services consumed, used, or placed in service in Mexico. This provides the opportunity for U.S. companies involved in essential manufacturing activities with manufacturing operations in Mexico, to consider shifting all or some of their production relating to essential activities to their Mexican facilities. This is especially relevant for U.S. companies with a Maquiladora operation in Mexico.

Shifting the performance of essential manufacturing activities to Mexico could provide some of the following benefits:

  • Keeping part or all of the Mexican manufacturing operations active (instead of idle) during the period from March 30 to April 30, 2020
  • Taking advantage of lower labor rates in Mexico, compared to the U.S.
  • Local market exposure for the essential goods manufactured in Mexico

Before making the decision to shift essential production to Mexico, there are many tax and non-tax considerations. Companies may wish to:

  • Confirm the manufacturing activity qualifies as essential, per the SH guidelines
  • Confirm the necessary permits to manufacture and export production from the Mexican facility (i.e., sanitary licenses, IMMEX program, VAT certification, among others) are in place
  • Evaluate U.S. and Mexican tax consequences of shifting production to Mexico
  • Consider the impact on supply chain management and logistics
  • Consider requirements and cost to reengineer and/or retool Mexican facilities

Other extraordinary measures

Social distancing while performing essential activities

Companies that are performing essential activities must observe the following social distancing measures:

  • No gatherings of more than 50 individuals can take place
  • Individuals must wash their hands frequently
  • Individuals must follow sneezing etiquette
  • Only long-distance greetings will be allowed

Companies that remain active during the quarantine period (from March 30 to April 30, 2020) must implement measures to ensure that employees comply with the above social distancing measures.

The guidance is silent with respect to penalties or consequences associated with non-compliance. However, employers that do not comply may be exposed to negligence charges imposed by the SH, labor authorities, along with civil or even criminal liabilities.

  • The guidance strongly urges (but does not mandate) the public to exercise self-sheltering during the period March 30 to April 30, 2020.
  • Self-sheltering is mandatory for individuals that meet any of the following conditions, even if their job or activity is considered an essential activity:
    • Are 60 years or older
    • Are pregnant or puerperium
    • Have hypertension, diabetes, respiratory conditions and/or compromised immune systems

Please contact your RSM advisor with any questions.

[1] As of the date of this document, the average minimum wage in Mexico is MX$ 160.00 per day, equivalent to approximately US$ 7.00 at current exchange rates

RSM contributors

  • Edgar Lopezlena
    Mexico Practice Leader
  • Antonio Rodriguez
    Senior Manager