Employees Profit Sharing in Mexico

By Carlos Ferrán Martínez, Cuesta Campos y Asociados

In the month of May, there is utter certainty of two facts in Mexico: Mother's Day is celebrated in all families on the 10th, and that the 31st is the last day for companies to share their profits among all employees. The second claim has been subject to substantial criticism for quite a while and, with international circumstances as they are in our times, said discussion shifts towards tad more urgent matters.

In order to have a complete understanding of how things work, one must analyze the course it has taken throughout the years; so that, when criticizing the institution of Profit Sharing in Mexico (PTU), in a conscious and well informed method, we should refer to the year of 1963.

Said year, would witness the first gathering of the National Commission for the employee's participation in the company's utilities ("The Commission"). The Commission would, among other things, define: the percentage of the profits to be shared among the employees for every company. To give our readers some background on what Mexico looked like in said year, it is fundamental to comment that the country was not a part of any international trade agreement and depreciation of the Mexican peso made the headlines week after week.

After picturing that scenario, does the existence of an institution as PTU make sense? This institution which, on paper pretended, just as the Mexican Labor Law (LFT), to protect the employee on every angle, ignoring both the macroeconomic and productivity implications such a figure could unleash through the years.

Almost two decades later, in 1985, at the third gathering of the Commission, the current percentage to be shared with the employees was fixated to 10% before taxes. The apparent news turned both interesting and alarming when we present that this percentage has not been modified in a little over thirty years. Nevertheless, a lot has happened since then, just to paint a comparison, inflation back in 1985 averaged 57% a year, nowadays, it roughly reaches 5%. The population´s purchasing power had nothing to do with the one we witness today, this is demonstrated with the "CETES" indicator of interest rate. As a result, it is fair to conclude that the circumstances under which PTU was created, no longer reflect on the nation´s economic environment.

We refer to the institution as Profit Sharing in Mexico for one simple reason, the institution as regulated in Mexico, has its origin from such a country as the appeal for constitutional protection (amparo). The original concept, and how it operates through similar institutions in Latin-American systems, has a crystal-clear purpose. It serves as an incentive to increase the employee´s productivity in the company, which, as demonstrated throughout several studies, has a direct correlation in favorable circumstances for a country's macroeconomic indicators.

Having said that, and as it is known for everyone, the employer´s obligation to share the company´s profits among the employees consists on the equivalent to 10% of the company's fiscal utility before taxes. Now, to calculate said amount for each employee, PTU takes into consideration two variables: the employee's salary and the number of days in the year which the employee rendered his/her services to the employer. Neither of these elements analyzes the employee´s productivity throughout the year. This should not appear as a shocking statement considering that the concept of productivity appeared only on three occasions in the LFT before its reform in 2012.

The LFT states that all members of the company will be entitled to receive a share of the company´s profits except for the General Manager, Directors and Administrators. This serves as another point of criticism towards PTU, since it is not clear whether its referring exclusively to the General Manager, or to every employee with directional or managing positions. The few legal precedents in the subject indicate that the LFT is referring exclusively to the person with the highest hierarchy in the company, as the exception to being entitled to a share of the company´s profits.

Nonetheless, there are some who argue the righteousness of PTU, due to the idea that the institution is giving back to the employee. With his/her contribution, produced by the company´s utility, in juridical argumentative logic, this is commonly known as a fallacy. The company´s profits could have absolutely nothing to do with the employee's work and productivity. Said utility could be a result of an acquisition or a merger, for example.

Thus, we cannot overlook that, even if it is a fact that we live in an everyday changing society, institutions are created on certain bases or principles and with a purpose; to deviate from those, could result in a separation from what a society in fact needs. This is precisely the case of the PTU, an institution with such a noble endeavor, as it is to incentivize the employee´s productivity in a company, that has embodied into a never-ending punishment for businesses of all kinds in Mexico, which are the ones who truly serve as sources of employment for this nation.

Consequently, this has distanced PTU from its purpose; to the point of inflection in which it causes exactly the opposite, it generates an incentive for employees to stall in the "law of least effort" which this nation so desperately endures.

For example, figures such as outsourcing in Mexico, were in fact created as a direct result of the consequences of PTU in the businesses economy, allowing companies to cope with the social burden that PTU represented.

It is paramount to mention that, the failure to comply with the employer's obligation to share the company´s profits among employees would grant a fine or penalty which may vary from $922 USD to $18,447 USD¹, with the possibility to be multiplied for each employee. This could, without a speck of a doubt, represent an immense liability for any company in Mexico.

We must take into consideration the international circumstances which our country embraces, such as the unpredictability towards the future of the North America Free Trade Agreement (NAFTA), and the volatility of the price of oil and fossil fuels around the world, there has never existed a better opportunity to turn the idea of investing in Mexico into an attractive one.

Even if the Commission is not scheduled to gather until 2019, there is an exception which allows for an extraordinary meeting if the economic circumstances demanded so. It appears to exist a sort of consensus, which is harder to achieve than imagined, between the doctrine and the employers regarding the necessity to modify the percentage instated of PTU, or in any case, to modify the composition of the percentage, taking into consideration the productivity of the employee throughout the year.

If PTU´s true calling is to serve as an incentive to increase the employee's productivity in the company, shouldn't we allow for a portion of the 10% to be determined by indicators which refer to the employee's performance or achievements in the year? PTU is for many doctrinaires, not only the single most controversial institution in Individual Labor Legislation, but an urgent reality which we simply cannot continue to ignore. It demands an immediate update; an update which includes the productivity of the employees as a variable of calculation in the PTU.

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¹Average exchange rate of 19.5 Mexican Pesos per USD