Increased holidays in Mexico: Labour and accounting effects

The preliminaries of the reform of the Federal Labour Law, which came into force on January 1, 2023, created a lot of anticipation because of the changes it brought to the labour and fiscal world, which is explained because there had been no changes to vacation periods for years in Mexico.

It should be noted that its transitional provisions of this reform specify that its amendments will apply to individual or collective labour contracts in force, provided that they are favorable to the workers.

While each organization has its own benefits policies and it is best to analyze each particular situation, this change in the Law is generating interest and impact in most companies. So, what are the implications of these changes and what areas are affected by them in terms of worker benefits and company obligations? Below we will review some of these aspects and the estimated percentages of impact for companies that grant the minimum benefits provided under the Law as a reference.

Labour effects

  • Employee Benefits – Vacation days are increased, which in turn increases the vacation premium and the basis for compensation.
  • Social security contributions – By increasing holiday premiums, which are part of the basis for social security contributions, there is an increase in social security contributions that our experts at Mazars, estimate to be around 0.25% to 0.36%. Except for those employees whose income level exceeds the upper limit of contributions, in which case the impact will be zero.
  • Payroll Tax – Although it will depend on the state where the company operates, in general it will increase about 3% on the amount of increase of the holiday premium payment.
  • Operating Load – People will enjoy a longer vacation period, in a proportion of 33 to 100% depending on their seniority. This can lead to different strategies to ensure continuity of operation, productivity and quality, including maybe hiring more personnel to cover the extended absences.

Accounting effects

An entity must recognize the effects of the decree from the date of its enactment; this, because back then (December 27, 2022) there was evidence that the benefits to workers would change, generating an additional and inevitable obligation for the entity.

The main effects are as follows:

  • Liabilities for holidays – Holidays should be considered as short-term benefits as it is a paid absence. In addition, we must add up the holiday premiums, which amount to 25% of the salary. Vacation liabilities must be recognized within the expenses of the period.
  • Long-term and post-employment benefits – Provisions for long-term direct benefits and post-employment benefits, whose estimation formula involves a salary that includes the holiday premium, must be adjusted to the date of the decree to recognize their effects.

Regarding these accounting effects, the intention is that entities be able to evaluate the impacts of these adjustments so that they can anticipate whether or not the consequences may be material, since each entity has characteristics of its own.

The Mexican Council for Financial Reporting Standards, in Technical Report 56, recommends mentioning the change in the plan of direct employee benefits in the notes to the financial statements and, where applicable, the resulting amount of the adjustment to liabilities.

If you are interested in learning more about this topic, we invite you to watch our webinar “Vacation days increased in Mexico: financial and labour implications”, with the participation of our experts Alfredo Coronado, Audit Manager; Jorge Villanueva, Audit Partner; Juan Carlos Juárez, Human Resources and Payroll Director; and José Jiménez, Tax Partner.