By Baker & McKenzie

January is a month in which it is advisable to update the workforce cost in Mexico, due to the changes that normally appear in some of the factors that are taken into consideration in the calculation of such cost. Indeed, the minimum wage was revised pursuant to the resolution issued by the National Minimum Wage Commission (the "Commission"), as further explained in this document. Moreover, this is the time of the year when collective bargaining revisions usually take place in many companies, and salaried employee wages are often revised as well. Therefore, we find it prudent to submit the following analysis for your consideration, which gives a brief example of the cost an employee represents for a company, considering the wage, benefits and contributions that have to be paid.

The following calculation shows four ordinary positions in the three most important cities in the country, as well as the amounts that are annually paid for minimum wages, benefits, and fees under the current legislation, plus some extralegal benefits that we consider to be the most common ones. The calculation is also performed according to the updated minimum wage for 2005 per geographic area; the latter being just a reference, since in most of the cases wages paid by employers are higher than the minimum established.

It is important to mention here that the higher or lower payments the employer makes for payroll contributions depend to a great extent upon the benefit plan that is being granted to the employees. For this reason, we are offering you to perform an analysis of the benefits granted by your company, in order to design the ideal payroll that allows you to make the lowest contribution expense possible. Such analysis can also be very useful anticipating the decision that employees will have to make between the application of the general $76,000 pesos exclusion or the sum of the exempted benefits, for the withholding of the Federal Income Tax starting in 2006. Since the choice of one or the other option for the
exemption has to be made directly by the employees, we are also available for supporting the negotiation of the most convenient option with such employees or their union, as the case may be.

(1) Position: Production Line Operator / Location: Monterrey / Job description: Responsible for performing all kind of tasks in the production line, mainly the assembling and operation of machinery and tools that are necessary to obtain the final product out of the raw materials. Source: Baker & McKenzie.

(2) Position: Quality Control Technician / Location: Monterrey / Job description: Ensures that the raw materials used are those specified for the production process. Evaluates production processes and materials. Inspects incoming raw materials taking into account their weight, specifications, and the state in which they were received. Ensures that the specifications for materials and production processes meet set standards. Inspects both work in progress and finished products, comparing them with established specifications. Source: Survey on Salaries 2005. American Chamber Mexico.

(3) Position: Head of Production / Location: Guadalajara / Job description: Responsible for the company´s daily production. Meets production schedules within established parameters of cost and time. Source: Survey of Salaries 2005. American Chamber Mexico.

(4) Position: Administrative Manager / Location: Mexico City / Job description: Supervises the establishment, development and refinement of systems, procedures and methods to increase the consistency and efficiency of the various levels of management. Controls activities of an administrative nature, maintaining contact with the other departments. Responsible for personnel management, recruiting and selection. In charge of tracking company´s management-related expenses. Source: Survey on Salaries 2005. American Chamber Mexico.

(5) Basic wage according to the basic compensation that the employee receives for his/her work.

(6) Mexican Peso-US Dollar exchange rate´s average according to the one published by Mexico´s Central Bank in the Federal Official Gazette.

(7) 25% premium of a six-day vacation period, according to the Federal Labor Law ("FLL") for a one-year seniority employee.

(8) Fifteen daily wages according to the FLL.

(9) Includes the Illness and maternity, Disability and life, Work Risks (Class III, 2.59840%), and Nursery insurance.

(10) 2% of the Basic Wage for Quotation (“BWQ”). The contributions are transferred to the employee´s retirement savings fund, which is administrated by the AFORE (Retirement fund administration entity) of his/her choice.

(11) 5% of the BWQ contribution.

(12) Rate of 2% for Mexico City, Guadalajara and Monterrey, may vary slightly in other States.

(13) Minimum legal cost for the employer according to the benefits and contributions established by the FLL, the Social Security Law ("SSL") and the Federal Housing Fund Law.

(14) Most common benefits granted by companies to their employees, which do not integrate the BWQ according to the SSL; therefore, they do not increase the basis for the calculation of the social security and housing fund contributions.

(15) 40% of the general minimum daily wage for Mexico City.

Increase minimum wages. As you may know, on December 16, 2004, the Commission approved an increase in the general minimum wages for the three geographic areas into which Mexico is divided for such purposes.
The resolution issued by the Commission was published in the Federal Official Gazette on December 22, 2004 and became effective on January 1, 2005.
Consequently, the new daily general minimum wages for the three geographic areas are as follows:

1 Geographic Área A: Ciudad Juárez, Baja California, Mexico City, Sonora border, Tamaulipas border, Oil Gulf Region

2 Geographic Área B: Guadalajara Metropolitan Area, Monterrey Metropolitan Area, Sonora, Tamaulipas, Veracruz.

3 Geographic Área C: all other cities in the country.

In connection with the foregoing, it is relevant to mention that the Commission informed in its press bulletin of December 16, 2004 that the weighted average percentage of increase was 4.5%. However, the real general percentage of increase was 4%, all three areas considered.

This difference is due to the fact that the weighted average percentage was obtained by considering the number of employees earning minimum wages in the country, and the higher number of them is located in the geographic area C, which obtained the higher percentage of raise. Although the percentage for each region may serve as a general parameter for collective bargaining revisions, the evaluation of the company´s particular situation and background is highly recommended.

According to the resolution issued by the Commission, the geographic division remains unmodified with respect to 2004. However, the Commission continued with the project of reducing the gap among the minimum wages for the three geographic areas. To such end, it was agreed to reduce the differences between areas A and B from 3.45 to 3.20% and between areas A and C from 7.43 to 6.24%.

Final Remarks

As you can see from the discussion above, an important percentage of the cost of the workforce is composed by the benefits and contributions the employer pays for its employees.

Although they are not very noticeable when analyzing the basic daily wages for every employee, these concepts are relevant since they may constitute more than 50% of the basic wage. The examples used for the four positions and their wages allow a more realistic basis, regardless of the reference to the minimum wage increase, which is also convenient in view of the fact that it is a factor to determine such cost.

The amounts used herein should not be considered as definitive for a company´s specific case, since they could vary due to diverse factors. As a result, a particularized analysis for each company is highly recommendable to determine its current workforce cost and the most convenient benefit plan to be granted, in order to reduce its labor cost as much as possible.