Mandatory Severance in Mexico | Guide for Employers

What Is Mandatory Severance in Mexico?

Mandatory severance in Mexico refers to the legally required payment employers must provide when an employee is terminated without justified cause.

Unlike other countries that allow “at-will” termination, Mexico protects employees strongly, and unjustified dismissal triggers a severance package defined by the Federal Labor Law.

This severance is different from the finiquito, which covers basic earned items like proportional vacation, bonuses, and unpaid wages.

• Clear definition of mandatory severance
  It is the compensation owed to an employee when the employer ends the relationship without legal cause. It includes 90 days of daily integrated salary, seniority premium, and other statutory payments.
  
  

• Severance vs. finiquito
  Finiquito covers accrued benefits. Severance is an additional payment required only in an unjustified termination.
  
  

• No at-will employment in Mexico
  Employers cannot terminate freely. When an employment relationship ends without a legally proven cause, Mexican law requires the payment of mandatory severance.
  
  

• Applies to local and remote employees
  Any employee performing work in Mexico under an employment relationship, including remote and hybrid staff, is entitled to the same severance rights under Mexican labor law.
  
  

These rules ensure strong employee protection and require precise compliance under Mexican labor law.

Legal Basis for Severance (LFT Articles 47, 48, 50, 51)

Mexico’s Federal Labor Law provides a detailed legal framework that governs how termination must be handled and what severance an employee is entitled to.

These rules are designed to protect employees from unfair dismissal and ensure employers follow strict procedures when ending an employment relationship.

The key articles explain when termination is justified, what happens if the employer cannot prove cause, and how severance must be calculated in unjustified cases.

• Article 47: Legal causes for termination
  Article 47 lists the limited situations where an employer may terminate without paying severance, such as dishonesty, harassment, or repeated violations. The employer must document and prove these causes clearly.
  
  

• Article 48: Reinstatement or severance choice
  If the employer cannot prove cause, the employee may demand reinstatement or severance. In specific cases, when a labor authority orders reinstatement and the employer refuses to reinstate, the law provides for an additional payment of 20 days of salary per year of service.
  
  

• Article 50: Severance components
  Article 50 defines mandatory severance for unjustified dismissal, including 90 days of daily integrated salary, 20 days per year (if applicable), seniority premium, and all earned benefits.
  
  

• Article 51: Employee rights
  Employees may terminate the employment relationship due to serious employer misconduct. When such causes are proven, the employee is entitled to the same indemnities applicable to an unjustified dismissal under Mexican labor law.
  
  

Together, these articles ensure strong labor protection and require employers to follow strict compliance to avoid legal risk.

When Does Mandatory Severance Apply?

Mandatory severance applies whenever an employer ends an employment relationship without legally valid cause. Because Mexico does not recognize at-will termination, employers must prove a lawful reason under Article 47. If they fail to do so, severance becomes automatic.

The employee also receives severance if the employer mishandles the termination process, fails to document the dismissal correctly, or creates conditions that force the employee to resign.

• Unjustified dismissal
  When an employer terminates without a valid cause listed in Article 47, severance is mandatory. Lack of evidence or weak documentation automatically turns the dismissal into unjustified.
  
  

• Failure to provide a written termination notice when alleging cause
  When an employer claims a justified cause for termination, Mexican labor law requires a written notice specifying the conduct and dates supporting the rescission. If this notice is not delivered, the dismissal may be presumed unjustified by labor authorities, unless the employer proves the cause through other admissible evidence.
  
  

• The employer cannot prove cause
  Even if the employer claims misconduct, they must prove it before the labor authorities. If they cannot, severance applies.
  
  

• Constructive dismissal
  When an employer creates serious, harmful conditions such as nonpayment of wages, harassment, or other legally recognized breaches, the employee may terminate the employment relationship. If the cause is proven, the employee is entitled to the same indemnities applicable to an unjustified dismissal under Mexican labor law.
  
  

• Indefinite vs. fixed-term contracts
  For indefinite contracts, full severance applies. For fixed-term contracts, severance depends on whether the employer ended the contract early without cause.
  
  

Understanding these scenarios helps prevent costly disputes and ensures compliance with Mexican labor law.

Components of Mandatory Severance in Mexico

Mandatory severance in Mexico is made up of several legally required payments that apply when an employee is terminated without justified cause. These components are defined in Articles 48 and 50 of the Federal Labor Law and must be calculated using the correct daily salary.

Each part of the severance package protects the employee’s income and seniority, making accurate calculation essential for full compliance.

• 90 days of salary (constitutional indemnity)
  This is the core severance payment owed in every unjustified dismissal. It equals three full months of the employee’s daily integrated salary.
  
  

• 20 days of salary per year of service
  This severance applies when a labor authority orders reinstatement and the employer chooses not to reinstate the employee. In such cases, Articles 49 and 50 of the Federal Labor Law require the employer to pay 20 days of salary per year of service to be released from the reinstatement obligation.
  
  

• Seniority premium
  Employees receive 12 days of salary per completed year, capped at twice the daily minimum wage. This premium applies in most terminations.
  
  

• Accrued benefits
  Employers must also pay all earned amounts, including unpaid wages, unused vacation, vacation premium, proportional Christmas bonus (aguinaldo), and any outstanding benefits such as commissions or bonuses.
  
  

• Daily salary used for calculations
  The daily salary used for severance calculations is the employee’s Daily Integrated Salary (SDI). It includes regular fixed pay and recurring variable compensation that reflects the employee’s actual earnings.
  
  

Understanding each severance component ensures correct payouts and reduces the risk of disputes under Mexican labor law.

How To Calculate Mandatory Severance in Mexico (Step-By-Step)

Mandatory severance in Mexico follows strict formulas defined by the Mexican Constitution and the Federal Labor Law.

Every unjustified termination requires calculating the employee’s Daily Integrated Salary (Salario Diario Integrado or SDI), because this value reflects the employee’s real earnings, including salary, benefits, and recurring allowances.

Once the SDI is established, each severance component is calculated separately and added together to form the final payment.

1. Calculate the Daily Integrated Salary (SDI)

SDI represents the employee’s true daily compensation. It includes:

• Base salary
  
  

• Recurring payments (commissions, auto allowance, food vouchers, regular or fixed work-related bonuses)
  
  

• The proportional daily value of statutory benefits, calculated through the legally required integration factor, including vacation days, vacation premium, and Christmas bonus (aguinaldo)
  
  

• Variable income converted to daily values
  
  

SDI is calculated using the legally required integration factor and includes recurring variable compensation related to the employee’s work, ensuring severance reflects regular earnings.

2. 90-Day Constitutional Indemnity

All unjustified dismissals require the employer to pay 90 days of SDI.

Formula:
SDI × 90

This is the core of mandatory severance and applies universally unless the employer proves legally valid cause.

3. 20 Days of Salary Per Year of Service

When the employee disputes the termination or reaches a settlement under standard labor-court criteria, they are also entitled to:

Formula:
SDI × 20 × years of service

Years of service are calculated as total days employed divided by 365.

4. Seniority Bonus (Prima de Antigüedad)

The seniority bonus is a separate statutory benefit that must be paid in every unjustified termination. It compensates employees for their years of service and is calculated using a legally defined formula.

Unlike severance, the seniority bonus follows its own rules and is capped to protect employers from excessive payouts.

Formula:
Daily rate (capped at 2× the minimum wage) × 12 × years of service

This means the daily rate used for the seniority bonus must always be the lower of:

• The employee’s Daily Integrated Salary (SDI), or
  
  

• Twice the applicable minimum wage in the employee’s region
  
  

If an employee’s SDI is higher than the cap, the law requires using the capped value. If their SDI is lower, the SDI itself is used. This ensures fairness for both low-income and high-income employees while keeping the calculation consistent for all termination cases.

Example Calculation (Using Realistic SDI Logic)

Using the correct formulas ensures compliant, accurate severance payments and reduces the risk of disputes during termination.

Severance in Resignation, Mutual Separation, and Justified Termination

Mandatory severance does not apply in every termination scenario. Mexico’s labor law distinguishes clearly between resignation, mutual separation, justified termination, and unjustified dismissal.

Understanding these differences helps employers avoid overpayment, underpayment, or legal disputes. The key issue is whether the employer can prove a legally valid cause for ending the relationship under Article 47.

• When severance does not apply
  Severance is not owed when the employee resigns voluntarily, when the employer proves a legally valid cause for termination, or when the employment relationship ends through a ratified agreement before the labor authority, provided the termination is not declared a dismissal and all statutory rights are properly settled.
  
  

• What employees receive in resignation
  In resignation cases, employees receive only their finiquito, which includes unpaid wages, proportional vacation, vacation premium, and proportional Christmas bonus (aguinaldo). No 90-day indemnity or 20-days/year applies.
  
  

• Employer burden of proof for just cause
  Employers must prove just cause with clear documentation and deliver a written termination notice stating the specific conduct and dates. If the employer fails to provide notice or cannot prove the cause, the dismissal is presumed unjustified and mandatory severance applies.
  
  

• If “cause” is partially invalid
  If the employer alleges multiple grounds for termination and fails to prove the asserted causes, labor authorities generally treat the dismissal as unjustified. In practice, weak, inconsistent, or insufficient evidence usually results in a ruling in favor of the employee and the payment of full severance.
  
  

• Special cases
  During probationary periods or fixed-term contracts, severance applies only if the employer ends the contract early without cause.
  
  

Correct handling of each scenario ensures compliance and reduces termination-related risks in Mexico.

Special Cases: Collective Dismissals & Company Closures

Collective dismissals and company closures follow specific rules under Mexican labor law. Even when a business faces financial stress or shutdown, employee protections remain strong.

Terminations must comply with procedures set by the Federal Labor Law, and employers cannot avoid severance unless the labor authority formally authorizes the collective redundancy.

Without this approval, dismissals are treated as unjustified, triggering full severance obligations.

• When collective redundancy is authorized
  Employers must request approval from the competent Labor Court. Authorization is granted only in situations such as bankruptcy, technological changes, or reduced operations.
  
  

• Whether 20-days/year applies
  If the authority approves the collective dismissal, employees generally receive 20 days of salary per year of service, in addition to accrued benefits. The 90-day indemnity may not apply if the redundancy is formally authorized.
  
  

• Required notifications and approvals
  Employers must file documentation, notify employees, and follow all procedural steps. Skipping any step may invalidate the process.
  
  

• Payment obligations in unjustified cases
  If the employer closes operations without approval or dismisses staff incorrectly, all terminations are considered unjustified, and full severance applies.
  
  

Following the proper legal path protects both the employer and employees in complex closure scenarios.

Taxation and Payroll Treatment of Severance

Severance payments in Mexico have specific tax and payroll rules that employers must follow carefully. Different components of severance are either fully exempt, partially exempt, or fully taxable. These rules affect income tax (ISR), IMSS calculations, and the final amount the employee receives.

Understanding these distinctions is essential for accurate payroll processing, especially for foreign employers operating in Mexico.

• Exempt vs. taxable portions
  The 90-day constitutional severance is fully exempt from income tax. Other components, such as the 20 days per year and accrued benefits, may be taxable depending on UMA-based limits.
  
  

• Impact on ISR (income tax)
  Income tax applies only to the taxable portion of severance. Severance is partially exempt from ISR up to 90 times the applicable general minimum wage per year of service. Any amount above this exemption is subject to income tax.
  
  

• Impact on IMSS (social security)
  Severance payments do not integrate into the employee’s IMSS salary base. IMSS contributions do not increase because severance is not considered regular income.
  
  

• UMA-based exemption limits
  The exemption for severance uses the UMA value for the year. Amounts exceeding the UMA threshold become taxable.
  
  

• Currency conversion for foreign employers
  Payments made in foreign currency must be converted to pesos using the official exchange rate from Banco de México for proper tax reporting.
  
  

Proper tax treatment ensures compliant settlements and prevents SAT or IMSS discrepancies. Clear calculations protect both the employer and the employee during termination.

Documentation Required for Legal Termination

Proper documentation is essential for any legal termination in Mexico. Because employers carry the full burden of proof, any dismissal must be supported with clear evidence and proper records.

Missing or weak documentation significantly increases the risk that a termination will be classified as unjustified, triggering mandatory severance under the Federal Labor Law. Following the correct procedures helps protect the employer and ensures legal validity.

• Written termination letter
  When termination is based on just cause, employers must issue a written notice clearly stating the conduct and dates that justify the dismissal. Failure to deliver this notice creates a legal presumption of unjustified dismissal, unless the employer can prove the cause before the labor authorities.
  
  

• Evidence of misconduct
  If the employer claims cause under Article 47, they must present documentation such as warnings, emails, attendance records, or witness statements. Verbal claims are not accepted.
  
  

• Burden of proof
  In labor disputes, the employer must prove the cause. If the employer cannot demonstrate evidence, the employee is entitled to full severance.
  
  

• Settlement agreement (Convenio)
  When both parties agree to end the employment relationship, a settlement agreement (Convenio) may be executed. To ensure it is fully enforceable and binding, and to reduce the risk of future claims, it is advisable for the agreement to be ratified before the labor authority or conciliation center.
  
  

• Risks of missing documentation
  Without proper evidence, labor courts will classify the dismissal as unjustified, exposing the employer to significant financial liability.
  
  

Clear documentation protects the employer during termination and ensures every step aligns with Mexican labor law. Without it, even minor gaps can turn a dismissal into an unjustified termination with full severance liability.

Risks of Not Paying Mandatory Severance Correctly

Failing to pay mandatory severance correctly exposes employers to significant financial and legal consequences in Mexico.

Because the country has strict protections against unjustified dismissal, even small errors in severance calculation or documentation can escalate into formal claims.

These risks apply to both local and foreign employers, including those managing remote teams in Mexico.

• Lawsuits before the Labour Board
  Employees can file claims with the Labor Board or Conciliation Center if severance is missing or miscalculated. These cases almost always favor the employee when documentation is weak.
  
  

• Reinstatement order risk
  If the employer cannot prove cause, the employee may request reinstatement. Courts can order the employer to rehire the worker with full back pay.
  
  

• Continuing wage liability
  During litigation, employers may owe ongoing wages until the case is resolved. This significantly increases financial exposure.
  
  

• Penalties and retroactive payments
  Employers may be required to pay full severance, accrued benefits, legal fees, and potential penalties for non-compliance.
  
  

• High risk for foreign companies
  Misclassification of employees as contractors or incorrect severance calculation is common among foreign employers, leading to major liabilities.
  
  

Accurate severance handling prevents costly disputes and ensures full compliance with Mexican labor law.

Common Employer Mistakes in Mexico’s Severance Process

Many employers unintentionally put themselves at legal risk by mishandling the severance process in Mexico. Because termination rules are strict and heavily employee-protective, even simple administrative mistakes can convert a lawful separation into an unjustified dismissal.

Understanding these common errors helps employers avoid costly disputes and ensure full compliance.

• Not issuing a termination letter
  When termination is based on just cause, the employer must issue a written notice explaining the cause. Failure to do so creates a legal presumption of unjustified dismissal, unless the employer can prove the cause before the labor authorities. Verbal communication alone is not sufficient under Mexican labor law.
  
  

• Miscalculating the wage base
  Using the wrong daily salary, forgetting variable income, or applying incorrect averages can lead to underpayments that trigger legal claims.
  
  

• Ignoring seniority premium cap rules
  Employers often miscalculate the 12-day seniority premium by failing to apply the cap of twice the daily minimum wage.
  
  

• Confusing resignation with termination
  A resignation must be voluntary, documented, and signed. If not handled correctly, it may be treated as termination.
  
  

• Underpaying accrued benefits
  Errors in proportional vacation, Christmas bonus, or commissions result in incomplete finiquito payments.
  
  

• Strict probationary period rules
  Probation can only be used under specific conditions. Incorrect application leads to unjustified dismissal.
  
  

• Misclassifying contractors
  Terminating a “contractor” who works like an employee creates full severance liability.
  
  

Avoiding these mistakes ensures smoother terminations and reduces compliance risks for employers in Mexico.

How HRM Ensures Correct Severance Compliance

Human Resources Mexico (HRM) ensures full severance compliance by operating as a real, REPSE-registered legal employer with more than 16 years of physical presence in Mexico.

As the official Employer of Record, HRM manages every part of the termination process, from calculating severance to preparing documentation and ensuring all actions follow the Federal Labor Law.

This removes guesswork for client companies and protects them from legal and financial risk.

Proper Wage Basis for Severance (SDI vs. SBC)

For severance and labor indemnification, HRM applies the Daily Integrated Salary (SDI), as required by the Federal Labor Law. SDI reflects the employee’s real integrated daily compensation, including legally integrated benefits and recurring work-related income, ensuring severance is calculated on the correct legal basis.

The Contribution Base Salary (Salario Base de Cotización – SBC) is used only for IMSS reporting and social security contributions and is subject to different rules and legal caps. Because these concepts serve different legal purposes, the severance base may differ from the IMSS-registered salary. 

At Human Resources Mexico (HRM), we ensure accurate compliance by correctly applying SDI for severance and SBC for IMSS obligations.

This compliance approach is supported by HRM’s role as a legally established EOR in Mexico, reflected in the following points.

• REPSE-registered, real Mexican employer
  HRM is not a shell entity or third-party partner. We operate legally and physically in Mexico, which allows us to apply termination rules correctly and consistently.
  
  

• HRM manages all calculations, documentation, and compliance
  We calculate mandatory severance, prepare termination letters, and ensure all procedures follow Articles 47, 48, 50, and 51. The client company reimburses the severance amount, and HRM handles the payment to the employee.
  
  

• Avoids misclassification and liability
  We prevent errors common among global platforms, including misclassifying employees as contractors or miscalculating severance components.
  
  

• Accurate settlements for global teams
  HRM ensures remote, hybrid, and onsite employees all receive legally correct finiquito and severance settlements.
  
  

These safeguards protect companies from disputes and ensure every termination complies with Mexican labor law.

Ready to hire in Mexico compliantly? Reach out today to get a custom proposal for your hiring needs.

FAQs About Mandatory Severance in Mexico

What triggers mandatory severance in Mexico?

Mandatory severance is triggered when an employer terminates an employee without proving a legally valid cause under Article 47. It also applies when the employer fails to provide written notice, cannot justify misconduct, or creates conditions that force the employee to resign (constructive dismissal).

How much severance is legally required?

Mandatory severance typically includes 90 days of  daily integrated salary, 20 days of salary per year of service (in certain cases), the seniority premium, and all accrued benefits. The exact amount depends on the employee’s daily wage, years of service, and whether the termination was fully or partially unjustified.

What is included in the seniority bonus?

The seniority bonus, or seniority premium, includes 12 days of salary per completed year of service. However, the daily salary used must be capped at twice the minimum wage. This benefit applies in most termination scenarios, including unjustified dismissal and resignation after 15 years of service.

Can an employer avoid severance by proving cause?

Yes, but only if the employer proves cause with solid evidence and provides a written termination letter. Without documentation, the dismissal becomes unjustified. Labor authorities rarely accept cause unless the employer presents strong, clear proof that aligns with Article 47 requirements.

Do remote employees get mandatory severance?

Yes. Remote and hybrid employees in Mexico have the same rights as onsite staff. Severance rules apply based on where the employee performs the work, not where the employer is located. Any employee working in Mexico is protected by the Federal Labor Law.

Is severance taxable in Mexico?

Part of the severance is tax-exempt, including the 90-day constitutional indemnity. Amounts exceeding the limits established by Mexican tax law may be subject to income tax (ISR). Accrued benefits paid in the finiquito may also be partially taxable. Severance payments do not integrate into the IMSS contribution base and do not increase social security contributions.

How is severance different from finiquito?

Severance is paid only in unjustified termination and includes 90 days of daily integrated salary, 20 days per year, and seniority premium. Finiquito is the basic final settlement owed in all terminations, covering unpaid wages, vacation, vacation premium, proportional aguinaldo, and other accrued benefits. They are separate payments.

What happens if an employer refuses to pay severance?

The employee may file a claim with the Conciliation Center and, if no agreement is reached, before the Labor Court. The employer risks lawsuits, reinstatement orders, continuing wage liability, penalties, and full retroactive payments. In cases where proper documentation is missing or weak, labor authorities frequently rule in favor of the employee, significantly increasing total liability.