Employer of Record VS Payroll Outsourcing in Mexico
Compare Employer of Record (EOR) vs payroll outsourcing in Mexico. Learn key differences, compliance risks, costs, and when to choose each model
Many global companies exploring Mexico think about Employer of Record (EOR) or payroll outsourcing as solutions. But there is a key difference: payroll outsourcing in Mexico requires the client to already have a registered legal entity, while an EOR allows hiring without one.
This guide explains the difference between EOR and payroll outsourcing in Mexico, highlighting compliance, costs, and risks. By understanding both models, businesses can decide which approach best supports their operations and protects them from legal exposure in Mexico.
What is an Employer of Record (EOR) in Mexico?
In Mexico, an Employer of Record (EOR) is the official legal employer under the Federal Labor Law. Unlike in the U.S., there is no co-employment model. A PEO in Mexico is the same as an EOR.
An EOR handles every employment obligation, including:
Employment contracts drafted under Mexican law
IMSS registration for social security and healthcare
Payroll processing and tax withholdings
Mandatory benefits like vacation, aguinaldo (Christmas bonus), and PTU profit sharing
Termination and severance management when applicable
Guaranteed employee access to the HR services they need
The client company supervises daily work but is not the legal employer. This model allows foreign businesses to hire in Mexico without creating a local entity while staying fully compliant.
What is Payroll Outsourcing in Mexico?
Payroll outsourcing in Mexico refers to hiring a third-party vendor to process payroll for a company that already has a registered Mexican legal entity. This service supports HR and finance teams by handling payroll administration but does not replace the company as the legal employer.
Typical services include:
Salary calculation and payslip generation
IMSS contributions for social security
INFONAVIT payments for housing fund obligations
Tax withholdings and filings with SAT
However, payroll outsourcing has clear limitations. The vendor only manages payroll tasks; it does not assume employer liability under Mexican law. All compliance responsibilities, such as labor disputes, severance, and employee protections, remain with the local entity. This option is valid only for companies already established in Mexico.
Legal Framework in Mexico
Mexico’s employment system is governed by strict laws that were reinforced by the 2021 outsourcing reform. This reform banned the subcontracting of core business activities and introduced new compliance requirements. Understanding the framework is essential before deciding between EOR and payroll outsourcing.
2021 Outsourcing Reform: Prohibits subcontracting of core activities. Only specialized service providers can operate if registered with REPSE.
EOR Role: Only REPSE-compliant EORs can legally hire employees on behalf of foreign companies without a Mexican entity. The EOR becomes the sole legal employer under the Federal Labor Law.
Payroll Outsourcing: Still permitted, but exclusively for companies that already have a Mexican legal entity. The outsourcing firm processes payroll but does not assume employer liability.
Compliance Obligations (apply across models):
IMSS: Employee registration and social security contributions
SAT: Accurate payroll tax withholdings and filings
INFONAVIT: Housing fund payments for all employees
State Payroll Taxes: Vary by state and must be calculated correctly
Failure to comply with these obligations can result in fines, back payments, or disputes with Mexican labor authorities.
EOR vs Payroll Outsourcing: Key Differences
When comparing Employer of Record (EOR) and payroll outsourcing in Mexico, the differences are significant. Each model serves a different type of company and carries different compliance and risk implications.
Entity Requirement: An EOR allows foreign companies to hire in Mexico without creating a local entity. Payroll outsourcing is only available to companies that already have a registered Mexican entity. This makes the EOR model more flexible for firms entering the market.
Legal Employer: An EOR is the official legal employer under the Federal Labor Law, responsible for contracts, benefits, and severance. With payroll outsourcing, the client company remains the legal employer and carries full employer obligations.
Compliance Responsibility: An EOR assumes full compliance responsibility, including IMSS, SAT, INFONAVIT, and state payroll taxes. Payroll outsourcing providers support compliance tasks but the liability remains with the client company.
Risk Management: An EOR reduces legal and financial risk by shielding the client from direct employer liability. Payroll outsourcing keeps most risks with the client, including disputes, severance claims, or back payments.
Scope of Services: An EOR manages the complete employment lifecycle, covering contracts, benefits, HR administration, and payroll. Payroll outsourcing providers only handle payroll processing and reporting.
Speed of Market Entry: An EOR enables hiring within weeks (sometimes in days, also), making it ideal for quick entry or pilot projects. Payroll outsourcing requires the prior setup of a Mexican entity, which can take months and involve complex legal, tax, and accounting steps.
Cost Comparison
Costs play a decisive role when choosing between EOR and payroll outsourcing in Mexico. While both models involve payroll administration, the financial structures are very different.
Payroll Outsourcing: For companies that already have a Mexican entity, payroll outsourcing can appear cheaper per employee. However, creating and maintaining a local entity adds significant expenses. Costs include incorporation fees, ongoing accounting, tax filings, and legal compliance staff. These overheads often outweigh the savings of lower per-head payroll fees.
Employer of Record (EOR): An EOR generally charges a higher per-employee fee compared to payroll outsourcing. The key advantage is that there are no entity setup costs, no ongoing compliance staff, and no accounting complexity. For new market entry or small teams, EOR is usually the more cost-effective model.
Hidden Costs: Many providers charge onboarding fees, severance deposits, offboarding charges, FX or currency conversion fees, and additional compliance add-ons. Companies also face potential audit costs if compliance is not managed correctly. These hidden charges make true cost comparison difficult.
At Human Resources Mexico, we follow a simple model with one clear markup on taxable compensation. There are no hidden fees for onboarding, severance, benefits administration, or transfers. Our clients know exactly what they will pay, eliminating unexpected costs and compliance risks.
Employee Protections & Benefits in Mexico
Mexican labor law provides some of the strongest employee protections in Latin America. Companies hiring in Mexico must comply with all statutory benefits and termination rules.
Aguinaldo: A mandatory Christmas bonus equal to at least 15 days of salary, paid in December.
Vacations and Vacation Bonus: Employees are entitled to paid vacation starting at six days in the first year, plus a 25% vacation premium. Vacation entitlements increase with seniority.
Profit Sharing (PTU): All eligible employees must receive annual profit sharing, distributed in accordance with the Federal Labor Law.
Social Security: Registration with IMSS is mandatory, covering healthcare, retirement, and workplace injury protection.
Termination Obligations: Employees terminated without cause must receive 90 days of salary plus accrued benefits such as vacation, aguinaldo, and PTU. Termination with cause is legally complex and rarely upheld.
A trusted EOR like Human Resources Mexico ensures compliance with these requirements, as it acts as the legal employer responsible for benefits, severance, and reporting under the Federal Labor Law and NOM standards.
In payroll outsourcing, the responsibility stays with the client’s compliance team, which must ensure accurate calculations and timely payments.
Practical Scenarios: When to Choose Each
The decision between Employer of Record (EOR) and payroll outsourcing in Mexico depends on a company’s structure, goals, and compliance capacity. Each model fits different scenarios.
Choose EOR in Mexico when:
The company does not have a registered legal entity in Mexico but needs to hire employees legally.
Pilot projects or market-entry teams require quick setup with minimal bureaucracy.
Hiring speed is critical, as an EOR can onboard employees within days compared to the months required to create an entity.
Risk reduction is a priority, since the EOR assumes full responsibility for contracts, benefits, and compliance.
Choose Payroll Outsourcing in Mexico when:
The company already has a registered Mexican entity and is operating permanently in the market.
Large or established teams require payroll administration support but the company maintains in-house HR and compliance structures.
The primary need is external vendor support for salary calculations, IMSS, INFONAVIT, and SAT filings, while the company retains full employer liability.
EOR is ideal for foreign companies entering Mexico without a legal entity or those seeking to minimize compliance exposure.
With 16+ years as Mexico’s only dedicated EOR, Human Resources Mexico guarantees compliance, REPSE registration, third-party audits, and transparent pricing. Get a tailored proposal for your Mexico operations today.
FAQs
What is the main difference between EOR and payroll outsourcing in Mexico?
An EOR is the legal employer, handling contracts, IMSS, taxes, benefits, and severance for companies without a local entity. Payroll outsourcing is only for companies with a registered Mexican entity, where the vendor processes payroll but the company remains the legal employer and carries full liability.
Can a foreign company use payroll outsourcing in Mexico without an entity?
No. Payroll outsourcing requires the client to already have a registered Mexican legal entity. Without one, a foreign company cannot outsource payroll directly. In this case, an Employer of Record (EOR) is the legal alternative, allowing compliant hiring without entity setup or direct employer liability.
How does the 2021 outsourcing reform affect EOR and payroll outsourcing?
The 2021 reform banned subcontracting of core activities and required REPSE registration. EOR providers must be REPSE-compliant to hire employees legally for foreign companies. Payroll outsourcing remains valid only for entities already established in Mexico, where the company itself continues as the legal employer responsible for compliance.
What risks exist if employees are hired as independent contractors?
Hiring full-time staff as independent contractors in Mexico is unsafe. If subordination exists, labor authorities will reclassify them as employees. This exposes companies to back pay, social security debts, severance obligations, fines, and audits. An EOR protects against misclassification risks by serving as the official legal employer.
Why choose HRM as an Employer of Record in Mexico?
Human Resources Mexico is the only Mexico-only EOR with 16+ years of experience. HRM offers full compliance, REPSE registration, third-party audits, transparent pricing, and human support. Unlike global competitors, HRM operates exclusively in Mexico, ensuring deep legal expertise and reliable employee management without hidden fees or shortcuts.
