Hiring employees in Mexico can be complex for foreign companies. Strict labor laws, mandatory benefits, and compliance with social security and tax regulations make the process challenging. Setting up a legal entity is often costly and time-consuming, creating barriers for businesses that want to expand quickly.

Many companies look for solutions that allow them to hire local talent without facing these administrative and legal hurdles. This is where an Employer of Record (EOR) becomes valuable. An EOR acts as the official employer in Mexico, handling payroll, benefits, and compliance while the client company manages day-to-day work.

What is an Employer of Record (EOR) in Mexico?

An Employer of Record (EOR) in Mexico is a service provider that acts as the sole legal employer of workers on behalf of a foreign company. Unlike in countries like the US, Mexico does not allow co-employment or shared responsibility between two employers. Instead, the EOR takes on all legal duties, ensuring employees are properly registered and protected under Mexican labor law.

The EOR model exists in Mexico because:

• Strict labor laws require a single recognized employer for each worker

• Anti-outsourcing reforms (2021) restrict the subcontracting of core business activities

• Compliance needs make it risky for foreign companies to hire directly without a local entity

This system allows businesses to operate in Mexico without setting up their own legal entity  while still staying fully compliant with national regulations.

Legal Framework in Mexico

Hiring in Mexico is governed by strict labor laws designed to protect workers and prevent misuse of subcontracting. In 2021, the Mexican government introduced a major outsourcing reform that banned most forms of subcontracting. Companies can no longer outsource core business activities, which makes the EOR model the only compliant option for foreign firms without a local entity.

Key legal requirements include:

• Mexican Constitution: Addresses employer and employee relation.

• Federal Labor Law: Regulates employment contracts, benefits, and worker rights

• Social Security Law: Requires registration of all employees with IMSS for healthcare and pensions

• STPS registration: Specialized service providers must be registered with the Ministry of Labor

Because of these rules, co-employment structures like US-style PEOs are illegal in Mexico. Only a single, legally recognized employer can exist, which is why the EOR functions as the official employer.

How an EOR Works for Foreign Companies

When a foreign company wants to hire employees in Mexico but does not have a legal entity, an Employer of Record (EOR) makes it possible. The EOR becomes the official employer of record, while the client company supervises the employee’s daily tasks and performance. This division allows businesses to focus on operations without being slowed down by complex compliance processes.

The workflow generally looks like this:

• Employment contracts: The EOR drafts and signs contracts fully aligned with Mexican labor law.
  
  

• Payroll management: Salaries are calculated and paid through the EOR’s registered payroll system.
  
  

• Tax and social security: All deductions, contributions, and IMSS registrations are handled by the EOR.
  
  

• Employee benefits: The EOR ensures workers receive statutory benefits such as paid leave, Christmas bonus, and profit-sharing.
  
  

• Human Resources: The EOR oversees the HR lifecycle, including onboarding, maintaining employee records, tracking seniority and leave, implementing disciplinary measures, and ensuring lawful offboarding procedures.
  
  

This structure ensures employees are legally protected, while the client maintains control over work responsibilities. It offers a balance between operational flexibility for the business and legal security for the employee.

When Should a Company Use an EOR in Mexico?

An Employer of Record (EOR) is ideal for foreign companies that want to operate in Mexico but are not ready to open a local entity. Forming a local presence requires legal registration, tax filings, and ongoing compliance, which can delay expansion. An EOR solves this by becoming the official employer, letting the company focus on business strategy while avoiding heavy administration.

Some common situations include:

• No legal entity in Mexico: Companies without a registered entity can still hire staff legally. The EOR takes on employer obligations, including contracts, payroll, hr and benefits.
  
  

• Market testing and pilot projects: Businesses exploring Mexico can hire a small team through an EOR, allowing them to test the market without long-term commitments.
  
  

• Temporary projects or contract-based work: For projects lasting only months, creating a full entity is inefficient. The EOR provides flexibility by supporting limited-term employment.
  
  

• Hiring small teams: Maintaining a corporate structure for only a few employees is costly. An EOR is more efficient for lean teams.
  
  

• Faster market entry: With an EOR, onboarding can happen in weeks, compared to the months required for company incorporation.
  
  

This approach gives companies agility while ensuring compliance with Mexican labor laws.

Services an EOR Provides in Mexico

An Employer of Record (EOR) in Mexico is responsible for the full employment cycle, taking over every legal and administrative duty required under Mexican labor law. This structure allows foreign companies to concentrate on business strategy and team management, while the EOR ensures compliance with all regulations.

The main services include:

• Employment contracts: The EOR prepares contracts that fully comply with the Federal Labor Law. These agreements define working conditions, benefits, and termination terms, protecting both the employee and the employer.
  
  

• Payroll administration and taxation: EORs manage payroll calculations, withhold income tax (ISR), and pay local payroll taxes. They also provide accurate reporting to authorities, reducing financial risks for the client.
  
  

• Social security and housing contributions: Employees are registered with IMSS for healthcare and pensions, while INFONAVIT contributions are handled for housing support. This guarantees employees receive mandatory protections.
  
  

• Employee benefits: Statutory entitlements like vacation days, vacation premium, the Christmas bonus (aguinaldo), and health coverage are administered directly by the EOR.
  
  

• Retirement savings and employer contributions: The EOR ensures that mandatory retirement savings deposits and other employer contributions are paid on time.
  
  

• Onboarding support: From documentation to registration, the EOR smooths the integration of new employees into the company.
  
  

• Termination and severance: If employment ends, the EOR manages severance payments and legal compliance, avoiding disputes.
  
  

• Regulatory compliance: EORs safeguard adherence to the Federal Labor Law, outsourcing reform of 2021, and STPS registration rules.
  
  

By handling these responsibilities, an EOR ensures compliance, reduces risks, and provides employees with all legal protections.

Benefits of Using an EOR in Mexico

Choosing an Employer of Record (EOR) offers several advantages for foreign companies that want to operate in Mexico without facing the complexity of incorporation and compliance. This model creates a smoother and safer entry into the market.

• Full compliance with strict labor laws: Mexico has detailed regulations covering contracts, social security, benefits, and severance. An EOR ensures all requirements are met, protecting both the employee’s rights and the company’s reputation.
  
  

• Faster market entry: Setting up a legal entity may take months and involve significant legal costs. With an EOR, companies can hire staff within days, enabling them to seize business opportunities without delays.
  
  

• Reduced liability for the client: Since the EOR is the legal employer, it assumes responsibility for payroll, taxes, and legal obligations. This reduces the client’s exposure to fines, disputes, or penalties for non-compliance.
  
  

• No need for a local entity: For companies that want to test the market, run pilot projects, or manage small teams, the EOR eliminates the need to create a legal entity or branch office, saving time and resources.
  
  

Overall, an EOR allows companies to focus on growth while ensuring their workforce is fully protected under Mexican law.

Cost of EOR vs Setting Up a Legal Entity

When expanding into Mexico, companies often weigh the cost of using an Employer of Record (EOR) against establishing a local entity. While an EOR may seem more expensive on a monthly basis, it can be far more cost-effective in the short to medium term.

• EOR fee structure: Most EORs in Mexico charge either a flat monthly fee per employee or a percentage of the employee’s gross salary. This covers contracts, payroll, taxes, benefits, and compliance, providing a predictable cost without hidden legal or administrative expenses.
  
  

• Cost and time of incorporation: Creating a legal entity in Mexico requires legal registration, tax identification, bank accounts, complex accounting requirements and labor authority filings. The process may take several months and involve legal fees, notaries, and ongoing accounting costs. Employers must also maintain in-house compliance teams to manage payroll, taxes, and benefits, adding to operational expenses.
  
  

In practice, EORs are ideal for rapid entry, small teams, and pilot projects, while a legal entity is better suited for large-scale, permanent operations.

Real-Life Scenarios of EOR Use in Mexico

The Employer of Record (EOR) model in Mexico is especially valuable for companies across industries that need a trusted partner to manage compliance, payroll, and HR. Human Resources Mexico has worked with a wide range of clients, showing how versatile the EOR model can be.

• Global financial services provider: An Australian company offering financial crime prevention solutions relies on HRM’s payroll services to employ staff in Mexico. By using an EOR, the company ensures compliance with labor and tax laws while focusing on its core mission of protecting clients worldwide.
  
  

• Technology and software companies: For a U.S.-based software business, HRM manages sourcing, payroll, and HR support for its Mexico team. According to their VP of Operations, HRM makes cross-border employment seamless by handling everything from hiring to travel logistics. This allows the company to scale its team without the burden of managing a local entity.
  
  

• Corporate operations and people teams: HR leaders, such as Directors of People Operations and Finance, highlight how HRM ensures compliance with labor law, payroll accuracy, and employee benefits. For companies without in-house expertise in Mexican employment law, an EOR provides the necessary structure to support teams effectively.
  
  

These real-world uses show that EORs are essential for financial, technology, and multinational firms entering Mexico.

Conclusion

An Employer of Record (EOR) is the most practical solution for companies that want to hire in Mexico without opening a legal entity. It acts as the legal employer, ensuring compliance with strict labor laws while the client company directs daily operations. The biggest advantages of using an EOR are speed, reduced risk, and full compliance with regulations like the Federal Labor Law and the 2021 outsourcing reform.

Risks only appear if the model is misused, such as attempting to bypass restrictions on outsourcing core activities. When applied correctly, an EOR serves as a reliable bridge, helping businesses test the Mexican market, build small teams, and grow before moving toward incorporation.

To explore how this works for your company, visit Human Resources Mexico or request a custom proposal.

FAQs

Is EOR legal in Mexico?

Yes, EOR is legal in Mexico when structured correctly. The EOR acts as the sole legal employer, complying with the Federal Labor Law, Social Security Law, and the 2021 outsourcing reform. In Mexico, what many call “PEO” is actually EOR. This model provides a fully compliant way for foreign companies to hire without setting up a local entity.

What services does an EOR provide in Mexico?

An EOR in Mexico manages contracts, payroll, tax withholdings, IMSS and INFONAVIT contributions, employee benefits, human resources management, profit-sharing (PTU), and severance when needed. They ensure compliance with Mexican labor laws, giving companies peace of mind while allowing employees to receive all their statutory protections. This covers the full legal and administrative side of employment.

Who should use an EOR in Mexico?

Companies without a legal entity in Mexico benefit most from EOR services. It is ideal for market entry, pilot projects, temporary teams, or small-scale hiring. Businesses looking to test the Mexican market before investing in a legal entity often use an EOR as a bridge, ensuring compliance while maintaining flexibility in their expansion plans.

How much does an EOR cost in Mexico?

EOR pricing usually depends on the employee’s salary. Providers often charge a flat monthly fee or a percentage of payroll, covering compliance, taxes, and benefits. While initially more costly per employee than direct hiring, EORs eliminate the significant expenses of incorporation, accounting, and in-house compliance, making them cost-effective for small or new teams.

What are the risks of using an EOR in Mexico?

The main risk comes from misuse, such as trying to outsource core activities illegally or working with unregistered providers. If the EOR is not compliant with STPS rules or labor regulations, both employer and employee may face penalties. Choosing a reputable provider like Human Resources Mexico ensures safe, lawful operations and reduces these risks.