Employee lawsuits over legal profit-sharing limits in Mexico have been dismissed as inadmissible

The Mexican Constitution of 1917 contained Article 123 to defend the social rights of workers, as a result of the demands of those who did not have these rights, under which companies, in their capacity as employers, took on various tasks by hiring staff take to form an employment relationship.

Therefore, profit sharing became a constitutional public social right that incorporated the employee into the life and operation of the company.

Subsequently, the Federal Labor Code (Ley Federal del Trabajo) of 1970 included broad individual and collective guarantees, including statutory employee profit sharing (PTU, based on the term in Spanish).

As a result of the foregoing, in Mexico it is an obligation for employers to distribute the profits of companies generated in a financial year.

As in Mexico, PTU has been introduced in several countries with the aim of giving workers the right to benefit from the results of the companies they work for, with a redistributive aim.

In Ecuador, PTU corresponds to 15% of net profit; 10% is divided equally and the remaining 5% is divided based on family expenses.

In Peru, the PTU is calculated based on profits after investments and taxes, and the rate varies between 5% and 10% depending on economic activity.

Brazil takes a different approach, as participation criteria can be linked to profit or outcome, depending on the negotiations between the company and employees.

On the other hand, there are countries where profit sharing is not an obligation. That is the case for Canada, where profit sharing is used as a way to compensate employees for good work, with the intention of incentivizing employees to work to earn better profits for the company.

In France, the PTU is calculated by applying a financial formula to the company’s net profit. The obligation applies only to taxpayers with 50 or more employees.

In Germany, it is mandatory to pay PTU to employees whose salaries depend on the company’s profits, as the employee is considered to assume part of the economic risk for the company’s results.

As you can see, it is not mandatory for all countries and there are different schemes for granting this benefit, but the common denominator is the intention to share the result of the efforts fairly with the staff.

In general terms, and until the reform published in the Federal Government Gazette (Diario Official de la Federación) on April 23, 2021, the profit share was calculated only in the following way.

The amount to be paid out is 10% of the taxable income of the immediately preceding tax year. For example, let’s assume taxable income for fiscal year 2023 was $1 million. Therefore, the PTU amount to be distributed (10%) will be $100,000.

The first half of this $100,000 (i.e. $50,000) will be distributed to employees in proportion to the number of days worked in fiscal year 2023. A minimum of 60 days must have been worked to be entitled to PTU.

The remaining $50,000 is distributed based on each employee’s daily wage multiplied by the number of days worked during the year.

The reform published on April 23, 2021 aimed to protect workers by limiting the extent of outsourcing, since, as stated in the explanatory memorandum to the reform, outsourcing led to a new paradigm within the business world: a gradual decrease in the participation of employees in corporate profits.

However, the legislature has also considered setting a limit on the maximum amount for the payment of PTU, an issue that will be analyzed in this article.

Pursuant to the reform of April 23, 2021, a Section VIII was added to Article 127 of the Federal Labor Code, which establishes new limits in addition to the rules mentioned above. It states: “The right of workers to participate in the sharing of profits, recognized in the Political Constitution of the United Mexican States, shall be in accordance with the following rules: (…) VIII. The amount of the profit sharing will be a maximum of three months of the employee’s salary, or the average of the profit sharing received over the past three years; The amount most favorable to the employee is applied.”

Therefore, under the new scheme, in addition to calculating the two halves of the 10% of the taxable income to be distributed, it is mandatory to limit the PTE to be distributed, taking into account these two new limits, and the one that is preferred indicates the employee should be applied:

• Limit 1 – maximum three months of the employee’s salary; And

• Limit 2 – the average PTU received by the employee over the last three years (in the event that the employee has not yet completed that employment, the average corresponding to a comparable position in that period will be taken into account, according to the Guide to complying with the obligations regarding profit sharing issued by the Ministry of Labor and Social Affairs (Secretaría del Trabajo y Previsión Social) on March 25, 2022).

In response to this situation, many employees have applied directly amparo lawsuits in the district courts; among them the most representative mining groups in Mexico.

Although there have been some cases in which judges have ruled in favor of the workers (for example, the Eighth District Labor Court in Mexico City, in the indirect order 2071/2022), the rulings are not yet final, as there are appeals for review has been filed against them. Therefore, a collegiate district court will finally settle the case.

It should be noted that on April 3, 2024, the Lower House of the Supreme Court of Mexico (SCJN) issued a decision declaring that the two limits established in Article 127, Section VIII, of the Federal Labor Code are constitutional, in a statement about Amparo and Overhaul 633/2023.

The vote in that ruling was unanimous (by the five judges of the Second Chamber of the SCJN). Therefore, article 94, paragraph 12, of the Political Constitution of the United Mexican States and article 223 of the Amparo Law, which provide as follows, apply.

“Article 94. The reasons justifying the decisions contained in the judgments of the Plenary Assembly of the Supreme Court of Mexico, by a majority of eight votes, and of the Chambers, by a majority of four votes, shall be binding on all. competent authorities of the Federation and of federal entities.”

“Article 223. The reasons justifying the decisions contained in the judgments of the chambers of the Mexican Supreme Court of Justice constitute binding precedents for all competent authorities of the Federation and of the federal entities, if taken by a majority of four votes. Matters of fact or law that are not necessary to justify the decision are not binding.”

Returning to the Amparo judgment in review 633/2023, Communication No. 101/2024 was published on the website of the Mexican Supreme Court: “The Lower House of the Mexican Supreme Court has confirmed that the amount of profit sharing has a maximum limit of three months of the employee’s salary or the average of the profit sharing received over the past three years, whichever is more favorable to the employee, as provided for in Article 127, Section VIII, of the Federal Labor Code, as amended in the Decree published on April 23, 2021 that regulated outsourcing, and the Guide to Compliance with Profit Sharing Obligations issued by the Ministry of Labor and Social Affairs.

“With regard to the law, the House unanimously declared that the Congress of the Union has the power to legislate in labor matters and to make provisions relating to profit sharing, such as the one challenged.

“As regards the three-month salary ceiling, it was emphasized that this limit is not absolute, as it allows to take into account the average of the amount paid to the employee’s category, position or level over the last three years . , where preference is always given to the best option for the employee; without retroactively affecting workers’ rights, as the Federal Constitution does not establish a minimum limit for such purposes, so this variable is always subject to change.”

The ruling by the House of Representatives of the SCJN provides certainty for employers and employees regarding the new method of calculating the amount of PTE to be paid in Mexico.