Tuesday March 31, 2020 is the deadline for legal entities for filing the annual tax return, and therefore, the commencement of employment obligations. We will focus on sharing this important information with you that is related to Employee Profit-Sharing [in Spanish: Participación de los Trabajadores en las Utilidades] (subsequently referred to as EPS), its definition, employees who are entitled to receive this share, companies that are not obligated to share their profits, and other important aspects covered that go beyond its calculation.

What is Employee Profit-Sharing?

Employee Profit-Sharing in companies is a right of the employees that is established in Section IX, sub-paragraph A of Article 123 of the Political Constitution of the United Mexican States [in Spanish: la Constitución Política de los Estados Unidos Mexicanos], and in Article 117 of the Federal Labor Law [in Spanish: la Ley Federal del Trabajo].

Article 122 of the Federal Labor Law (subsequently referred to as FLL), establishes that distribution of EPS must be carried out within 60 days following the date in which annual taxes must be paid.  

Who must receive profit sharing?

All employees that work in the service of an employer, including:

• Working parents that are on temporary disability. 

• Contract workers, provided that their period of work has been at least 60 days during the year. 

• Former employees who had worked during the previous fiscal year for a term of no fewer than 60 days. 

In accordance with Article 127 of the FLL, the following employees are those who are NOT ENTITLED to receive EPS payments:

• Directors, administrators, and general managers.

• Partners and shareholders.

• Contract workers who have worked fewer than 60 days.

• Qualified workers who have been contracted under a payment scheme for professional fees, since there is no subordinate employment relationship. 

• Domestic workers.

Which companies are not obligated to pay EPS?

In accordance with Article 126 of the FLL, companies that are exempt from paying EPS are those that:

• Are newly formed and have been operating for one year.

• Are new and are engaged in creating a new product. This measure is applicable during the first two years of the lifespan of the organization.

• Are new companies that belonged to the extractive industry during the exploration period. 

• Are private assistance institutions that perform activities for humanitarian purposes and are non-profit.

• Are decentralized institutions for cultural, assistance, or charitable purposes, such as the Mexican Social Security Institute [in Spanish: el Instituto Mexicano del Seguro Social].

• Are organizations with capital less than that set by the Department of Labor and Social Services [in Spanish: la Secretaría de Trabajo y Previsión Social], according to the related industry.

What is the Joint Commission on Profit-Sharing?

The Joint Commission on Profit-Sharing [in Spanish: La Comisión Mixta de Reparto de Utilidades] is a right of the employees and an obligation of the employers to create a personal profit-sharing plan for each worker.

It is recommended that this task be integrated over 10 days subsequent to the date in which the employer delivers to the workers a copy of the cover page of its Income Tax return. The employer is obligated to notify in writing to the workers the names of the individuals that are appointed as its representatives, and those, in turn, will advise the employer of the names of those who will represent them.

This commission, that is formed by the company and the employees, will create a plan that determines the personal distribution of each worker. The agreements adopted by the Joint Commission for determining personal distribution must be recorded in the prepared registries, which in turn must be signed by each person.

Distribution

The distributable profit will be divided into two equal parts: the first will be divided equally among all employees, taking into consideration the number of days worked by each in the year, and independently of the salary amount. The second will be divided in proportion to the amount of accrued wages for the work performed during the year.

Important points to consider before creating a profit-sharing plan

• Non-union employees ARE candidates for receiving EPS, but if the salary they earn is greater than that which corresponds to the higher salaried unionized employee in the company, or in the absence of this, a permanent worker with the same characteristics, this salary will be increased by twenty percent which will be considered as a maximum salary.

• Mothers who are in pre and post-natal periods will be taken into consideration, the same as those employees who were victims of a workplace accident such as active employees.  

• The years relating to loss of profits will not be offset with those of earnings.

• The payment of the EPS must not be considered as part of salary. 

• In order to determine the distribution, it is understood as the amount of salary earned by each employee at a daily rate. Neither income nor other benefits as referred to in Article 84 of the FLL, as well as the amounts earned by the employee as consideration for extra work will be considered as part of the bonuses.

An in-depth review of staff positions is recommended based on their main roles, most notably those positions of directors, administrators, and general managers, in order to exclude them from the distribution, and to not create legal risks of a labor-related matter, if such be the case.

Please contact us if you hace any question on this matter and we will be pleased to assist you.