Wage Costs and Employee Benefits
The Legal definition of an Employee is “a person who is hired by another person or business for a wage or fixed payment in exchange for personal services and who does not provide the services as part of an independent business; Any individual employed by an employer” There are in existence three tax laws that will apply to employees. Under this law, when the person who has employed the individual has any sort of right over his employee, then he can control his working methods in any manner, including the end result expected of him, and the details of how and when and where the job is to be done. “Where the employer does not possess that right, the individual involved is an independent contractor, not an employee”
An employee has the right to expect certain benefits from his employer. In order to deal with any disputes that may arise from this issue, the ‘Employee Benefit Research Institute’ aims to contribute to the creation and the development of good employee benefit programs and employee benefit policies as applicable, which would be based on deep research and education. In their section entitled ‘General Benefits Research’ released in 2003, the Institute states that the general median tenure of the employee with his current employer was 4.7 years in 2002, that the distribution of salaried workers aged above 20, all over the state was evenly distributed across different tenures, and that there was a slight increase in the tenure of female workers at the present time. Again “the median tenure for male workers declined from 5.9 years in 1983 to 4.9 years in 2002” “Private-sector workers’ median tenure held steady from 1983 (3.6 years) to 2002 (3.6 years). By contrast, the median tenure for public-sector workers increased from 1983 (6.0 years) to 1998 (7.5 years) before declining to 6.9 years in 2002.” It is this type of research that employers would find useful in their various dealings with their employees. Research is also conducted on issues like retirement income, health care of the employee, and social security issues.
What are ‘Wage Costs?’ Wage costs must be determined by the employer in relation to the amount of work that the employee is expected to perform during his tenure with the employer. Today, the computer and the calculator do most of this type of time consuming work. “The Wage Calculator allows you to define roster schedules and will automatically calculate associated wage costs by staff, Area, and Department for each day, and the week.” The final wage structure will be determined by using the calculations based on the basic wages as well as at least six additional loadings of average wages, and this can if necessary include wage classifications and staff. The format used in the table is by Department and Area of the organization, and once the framework is established, then the calculations will become easier and the staff can be allocated according to the roster and wages can be calculated with the mere click of a small button, and both the employee as well as the employer would be fully satisfied.
The United States department of Labor periodically issues news about the varying employee conditions, and the issue of wage costs was dealt with in their release on August 2004. Their opinion was that in the month of March 2004, the average wage cost in the private industry employment sector in the South was $20.80/hour, and this was indeed a good wage. In the Northeast it was found to be $26.29 per hour, in the West it was $24.54 per hour, and it was $23.26 in the Midwest. On an average scale, the wage costs amounted to about $23.29 per hour for the U.S. employee employed in a private sector industry. The U.S. Labor Department stated that “among the benefit categories, one of the larger employer costs was legally required benefits, such as Social Security, unemployment insurance, and workers’ compensation”
The method of calculation used by the Department of Labor for the purpose of measuring wages is the “average cost per employee hour worked that employers pay for wages and salaries and benefits.” It is generally referred to as the ECEC or the Employer Costs for Employee Compensation. Those employees who are self-employed or are private workers are not included in this method of calculation. A wage is defined as either the hourly straight time compensation, or as the straight time wages divided by the number of hours that the employee has worked totally. They are also referred to as the ‘total earnings’ of the employee and they generally include incentives and bonuses and any sort of cost of living adjustments.
It is a well-known and acknowledged fact that the Labor Force in Mexico, also known as the ‘Trabajador’ has been steadily growing over the years at the rate of 2.4% per year, and that the agricultural market has, in fact, been decreasing in size steadily because of increased urbanization wherein people from villages move on to bigger cities in search of better employment opportunities, primarily in the manufacturing sector. Skilled and semi-skilled workers make up about one third of the total labor force in Mexico. All the regulations and policies pertaining to labor are based on the laws written in the Mexican Constitution of 1917, and also on the Mexican Federal Labor Laws, also known as MFLL. In comparison with the wages in the U.S.A., the wages are definitely much lower, but safety laws and other laws related to laborers and employees are protected by the MFLL. “The Federal Labor Law regulates labor contracts, minimum wages, employee benefits and union activity within Mexico”
When one desires to set up a small or a medium or a large company in Mexico, what is to be remembered is that at the very outset, the work relationship must be clearly defined and stated so that there can be no disputes later on. “If a work relationship is not specifically defined as temporary from the beginning, there are few circumstances under which you legally can dismiss an employee without incurring compensation responsibilities.” Therefore it is mandatory to describe the working relationship as being for a set time period or for a specific job or as temporary, and so on. Employee discrimination is also protected by the MFLL, and “also, employers cannot discriminate on the basis of race, sex, age, religious or political beliefs, or social standing” complete set of privileges are also granted under the MFLL to the employee, wherein the employer cannot impinge on the employee’s right to safety and on the basic minimum salary and on his work shift. The employer must also be aware of the employee benefits that are a mandatory requirement when a Mexican worker is employed in a medium or large company. Though these benefits tend to add on to the burden of paying compensation and to the ‘labor costs’ of the worker, they must be followed to the letter. Some of the employee benefits that are granted under the MFLL to the employee are: profit sharing, the Christmas Bonus, legal holidays, vacation time, social security, housing for the employee, and retirement plans and benefits. “Federal law requires firms to participate in a profit sharing program in which employees receive 10% of the firm’s annual profits. Executive officers and general managers often do not participate in this program.”
Generally, all the employees of the company will derive the benefits of this plan, but it does happen that sometimes, the General Managers and the Executive Officers of the firm do not find the need to take part in the program. The Christmas bonus to be offered as part of the employee benefit program is also known as the ‘Aguinaldo’. This will be an amount to the tune of a minimum of two weeks’ pay to be paid at the end of the year during Christmas. If the employee has been employed for less than a year, then he will receive a pro-rated bonus from his employer. Further the “Mexican Federal Labor Law establishes 7 legal paid holidays per year. Besides these holidays many businesses and labor contracts observe additional days for religious and national celebrations”
The issue of granting ‘vacation time’ is generally based on the seniority of the employee. Usually, after a period of one year, the employee is granted a six-day paid vacation, and the six days will become eight days the next year and ten the next, and twelve the next. At the end of the completion of five years of service the employee gets the benefit of two weeks of paid vacation time. “After five years of employment, two more days must be added for each five-year block of service” the Mexican Institute of Social Security takes care of the social security of the employees of small and large business establishments in Mexico. Also known as the ‘Instituto Mexicano de Seguro Social’, or IMSS, the Institute is responsible for the social security issues of the worker in the state.
The employer, according to the rules laid out by the IMSS, is expected to contribute at least a minimum amount according to the risk factors involved in the job into the fund, that is, a sum of 17.42% of each worker’s wage. Basic health care, medical facilities, accident care, as well as care for illnesses are all taken care of under the social security fund. In addition, the employer is expected to pay about 5% of a fixed payroll tax into a fund that will help the employee find a home of his own easily. This fund is known as the ‘National Fund for Employee Housing’ or INFONAVIT. “The goal of this federal program is to provide benefits allowing employees to more easily acquire a home”
2% or 25 times the minimum wage, of a worker’s salary must also be paid into the SAR or the Retirement Savings System under which provisions are made for the better-retired life of the employee. The money will be deposited into an account in the employee’s name in a specific Bank, and the worker will be able to avail of it when the time comes.
The Federal Labor Law sets the wage costs and the salaries of the employees. According to the rules, the daily minimum wage must be set at a level that would enable the employee to live a decent lifestyle by which he would be able to acquire the basic minimum of material objects that would make his life easy and comfortable for him. The wage is generally set according to the geographic region, and is altered annually according to the rising standard of living. For example, in the year 1995, the basic minimum daily wage was fixed at N$16.74. “The National Minimum Wage Commission (Comisi n Nacional de Salarios M’nimos) has the authority to modify the minimum wage as needed” in Mexico City, the minimum wage is higher than in other parts of the country, and in certain industries, depending on the risk factors involved, the basic minimum wage is higher or lower than in others. The methods of calculating the wages may be according to the unit of time that the employee uses to complete his work or it may depend on the system to which all the parties involved agree to, like for example, when it is based on a commission, and it may also be a lump sum payment.
The labor laws for the Republic of Mexico vary for each type of employee, and each type of employer” Therefore it is a good idea to be prepared for these differences especially in cases where the employer is unsure of the laws of the state and is confused as to what exactly he must do and what will be the wages to be paid to his employee, and how will it be calculated, and what other benefits must he remember to pay. In essence, a true ‘labor relationship’ must be established between the employer and his employee when both want and desire a good working relationship with each other in which the employer will pay the employee in a manner that he finds adequate and satisfactory. In a labor relationship, there will always exist an inherent feeling of subordination as well as dependency, whether there is a written labor agreement or not.
Here subordination means that the employee will economically depend on the employer to pay his wages in an appropriate fashion, and it also means that the employee must take it upon himself to follow the directions of the person who acts as his employer. Further “commercial agents or sales promoters and other similar agents are considered employees of the company for whom they render their services when their activity is permanent, unless they do not personally perform the work or only participate in isolated operations” When the labor relationship has been established clearly among the parties concerned, then the employer is bound by the terms and the conditions stated in the Labor Law provisions of Mexico. However, while the Labor Laws specify the minimum rights of an employee in a medium or a large establishment, it is the Labor Agreement that will state the rights and the obligations of the employer to the employee and vice versa. This includes the work place specifications, time schedules, the innate scope of the employee’s work, and the confidentiality obligations of the employee to the employer, and so on.
In addition to the minimum daily wages to be paid to an employee, that is the sum of $U.S. 4.50 daily, certain statutory fringe benefits are also guaranteed under the Labor Laws of Mexico. These include the benefits of an annual paid vacation, an annual bonus, profit sharing, and the benefits of social security and housing. Further “Social Security contributions go up to 22.57% based on the payroll salary, and Workers Housing contributions are of 5% on the payroll salary” Severance payments are also based according to the rules under the Labor laws of Mexico. “The concept of salary takes into account any type of premium, bonus, commissions or any other payment that the employee is entitled to receive from the employer, both in Mexico and abroad, derived from his/her labor relation including additional economic benefits provided by the employer, such as, a car, club fees, etc.” For example, when the worker was being paid according to commission basis, the daily wages of that person would have to be derived from the total amount of money that the employee had received as commission from the company over the past 365 days, a year, and divided by 365. If the employee had been working for less than a year, then his severance compensation will be calculated according to the number of days he actually worked for the firm and the commissions that he received during that time, and divided by that number. Further “A termination agreement to be entered into with the employee should be ratified by the local Labor Arbitration Board. If the agreement is not ratified, theoretically such agreement could be open to challenge by the employee arguing unfair dismissal” Finally “foreigners, depending upon their need to have presence and involvement in Mexico from a commercial point-of-view, may opt to do business in Mexico by employing a subordinate agent, establishing a Mexican company or acquiring stock in an existing Mexican company”
The issue of calculating ‘Wage Costs’ for an employee in a company in Mexico is one that must not be taken lightly or ignored. It can be accomplished by using one of the methods of calculation mentioned above, or more effective methods can be used. The method developed by the International Labor Organization offers twenty different indicators that would look at the several different levels and the trends and the structures of the hourly employment costs or wages that must be paid to the employee in the field of production and manufacture in certain selected economies all over the world. Employee rights will be given adequate protection, and there would be no cause for complaint when this method is used. These are some of the indicators listed: the employment to population ratio, status of employment, the issues of part time workers, the hours of work being put in by the employee, unemployment issues concerning youth and long-term unemployment, inactivity rates, labor market flows and labor productivity costs, etc.
Once the levels and the trends in the labor market are assessed, the next step is the creation of a database. This is developed using the data collected on cost levels according to the Indicator. The cost levels are usually written in U.S. Dollars, and any points of comparison will be made according to the figures indicative of U.S. market rates. The relative positions of other economies in relation to the economy of the United States of America will be taken into account “The indicator also shows the amount of non-wage labor costs as a percentage of total compensation costs, as well as the annual percentage change in total compensation costs over the period 1980-2001.” The definition of ‘hourly compensation cost’ or hourly wages could be defined as the following: “Average hourly compensation cost is a wage measure intended to represent employers’ expenditure on the benefits granted to their employees as compensation for an hour of labor.”
The benefits to be paid to the employee would be accrued in different ways. One way is when it is paid to him in the form of gross earnings that will be paid to him directly, and indirectly to him in the form of the employer’s contributions into the various benefits under the Labor law rules. This would include retirement and pension benefits, social security benefits, life insurance plans, housing schemes, and medical and accident and casualty relief plans. While the former is included in the ‘wages’ of the employee, the latter is included under the ‘non-wage benefits’ or where the employer is concerned, the ‘non-wage labor costs’ of employee benefits. “Compensation cost is closely related to labor cost, although it does not entirely correspond to the ILO definition of total labor cost contained in the 1966 resolution concerning statistics of labor cost, adopted by the 11 thInternational Conference of Labor Statisticians (ICLS), in that it does not include all items of labor costs” Labor costs generally do not include the costs of recruitment for the company, the costs of training the chosen employees, the costs incurred in the maintenance of the plant or the place of work, including the various services required by the employees such as a cafeteria, medical clinics, and some welfare service centers.
On an average, it has been proved that these labor costs that have not been included in the total hourly compensation costs make up to 4 to 5% of the total labor costs of the company. “In 2001, hourly compensation costs in five European economies – Belgium, Denmark, Germany, Norway and Switzerland – were higher than that of the United States.” Some other countries like Austria, Japan and Luxembourg were found to be offering rates lower than even that being offered by the U.S.A., with huge disparities between the economies of Mexico which showed about $0.48 per hour and Germany that showed an hourly compensation figure of $U.S. 22.99 in 2000.
Trade and investment liberalization have definitely had a huge impact on the economy and in the wage structure of Mexico in recent years. It is a fact that Mexico carried out and implemented a series of economic reforms since 1980. “Mexico’s policy reforms appear to have raised the demand for skill in the country, reduced rents in industries that prior to reform paid their workers high wages, and raised the premium paid to workers in states along the U.S. border.”
All this was changed for the worse after the economic reforms. However, the advantage is that the phenomenon of ‘wage dispersion’ took place all over the country. “In the last decade, Mexico has experienced rising returns to skill, which mirror closely wage movements in the United States.”
The wage differentials in Mexico have become very widely varied according to the regional differences, and this may be due to the differences found in the regional access to foreign trade within the state of Mexico, and in the investments made towards this event. The implications of Mexico’s economic reforms was widespread and in the event of the writing of a ‘Free Trade Agreement’ of America with Latin America, this experience will be taken into account and analyzed thoroughly and a great many lessons learnt from it.
References
Abbot, Cheryl. “Employer Costs for Employee Compensation South Region: March 2004.” United States Department of Labor. Retrieved at http://www.bls.gov/ro6/ro6ecec.htm. Accessed on 2 December, 2004
Common Law Definition of an Employee.” (2001) Retrieved at http://www.hrtools.com/pops/P99_05_0120_01.asp. Accessed on 2 December, 2004
Definition of Employee.” Lectric Law Library’s Lexicon. Retrieved at http://www.lectlaw.com/def/e009.htm. Accessed on 2 December, 2004
Employee Benefit Research Institute: 2003 Findings.” Retrieved at http://www.ebri.org/findings/gb_findings.htm. Accessed on 2 December, 2004
Employee Benefit Research Institute.” Retrieved at http://www.ebri.org/. Accessed on 2 December, 2004
Excel Wage Calculator: Define Rosters & Schedules.” Retrieved at http://www.ozgrid.com/Services/wage-roster-schedule-screen.htm. Accessed on 2 December, 2004
Flores, Adriana Perez. (2003) “Mexican Labor Relationships.” Retrieved From www.solutionsabroad.com/d_mexicanlaborlaw.asp. Accessed on 2 December, 2004
Key Indicators of the Labor Market.” International Labor Organization. Retrieved at http://www.ilo.org/public/english/employment/strat/kilm/indicats.htm. Accessed on 3 December, 2004
KILM 17 Hourly Compensation Costs.” International Labor Organization. Retrieved at http://www.ilo.org/public/english/employment/strat/kilm/kilm17.htm. Accessed on 3 December, 2004
Know the Law in Mexico.” Retrieved at http://www.mexconnect.com/mex_/travel/KLM/klmlabourlaw1.html. Accessed on 2 December, 2004
Mexico Labor Market and Laws.” The Guide to Mexico for Business. Retrieved at http://www.mexconnect.com/mex_/laborlaw.html. Accessed on 2 December, 2004
What happened to wages since NAFTA?” (March 2003) NBER Working Paper. No. w9563. Retrieved at http://www.nber.org/papers/W9563Accessed on 3 December, 2004
Definition of Employee.” Lectric Law Library’s Lexicon. Retrieved at http://www.lectlaw.com/def/e009.htm. Accessed on 2 December, 2004
Common Law Definition of an Employee.” (2001) Retrieved at http://www.hrtools.com/pops/P99_05_0120_01.asp. Accessed on 2 December, 2004
Employee Benefit Research Institute.” Retrieved at http://www.ebri.org/. Accessed on 2 December, 2004
Employee Benefit Research Institute: 2003 Findings.” Retrieved at http://www.ebri.org/findings/gb_findings.htm. Accessed on 2 December, 2004
Employee Benefit Research Institute: 2003 Findings.”
Excel Wage Calculator: Define Rosters & Schedules.” Retrieved at http://www.ozgrid.com/Services/wage-roster-schedule-screen.htm. Accessed on 2 December, 2004
Abbot, Cheryl. “Employer Costs for Employee Compensation South Region: March 2004.” United States Department of Labor. Retrieved at http://www.bls.gov/ro6/ro6ecec.htm. Accessed on 2 December, 2004
Abbot, Cheryl. “Employer Costs for Employee Compensation South Region: March 2004.”
Abbot, Cheryl. “Employer Costs for Employee Compensation South Region: March 2004.” United States Department of Labor. Retrieved at http://www.bls.gov/ro6/ro6ecec.htm. Accessed on 2 December, 2004
Mexico Labor Market and Laws.” The Guide to Mexico for Business. Retrieved at http://www.mexconnect.com/mex_/laborlaw.html. Accessed on 2 December, 2004
Mexico Labor Market and Laws.” The Guide to Mexico for Business.
Know the Law in Mexico.” Retrieved at http://www.mexconnect.com/mex_/travel/KLM/klmlabourlaw1.html. Accessed on 2 December, 2004
Know the Law in Mexico.”
Adriana Perez, Flores. (2003) “Mexican Labor Relationships.” Retrieved From www.solutionsabroad.com/d_mexicanlaborlaw.asp. Accessed on 2 December, 2004
Adriana Perez, Flores. (2003) “Mexican Labor Relationships.”
Key Indicators of the Labor Market.” International Labor Organization. Retrieved at http://www.ilo.org/public/english/employment/strat/kilm/indicats.htm. Accessed on 3 December, 2004
KILM 17 Hourly Compensation Costsv. International Labor Organization. Retrieved at http://www.ilo.org/public/english/employment/strat/kilm/kilm17.htm. Accessed on 3 December, 2004
KILM 17 Hourly Compensation Costs.” International Labor Organization.
KILM 17 Hourly Compensation Costs.” International Labor Organization. Retrieved at http://www.ilo.org/public/english/employment/strat/kilm/kilm17.htm. Accessed on 3 December, 2004
KILM 17 Hourly Compensation Costs.” International Labor Organization.
What happened to wages since NAFTA?” (March 2003) NBER Working Paper. No. w9563. Retrieved at http://www.nber.org/papers/W9563Accessed on 3 December, 2004
What happened to wages since NAFTA?” NBER Working Paper. No. w9563.
