Terminating an Employee in Mexico: The Steps and How Severance Is Calculated

The single most important thing to understand about ending an employment relationship in Mexico is that there is no cheap, quiet way to let someone go without cause. Mexican severance is statutory, it combines several components, and the amounts are large: a manager with ten years of service, dismissed without a proven cause, can be owed well over half a million pesos. That is not a penalty for doing something wrong; it is the baseline cost of an unjustified dismissal. So the first job for anyone running payroll in Mexico is to know which kind of exit they are dealing with, because the number changes enormously depending on the answer.

Two different payments: finiquito and liquidación

Every separation in Mexico produces a finiquito. Only some produce a liquidación. Which of the two applies decides whether an exit costs a few weeks of accrued pay or many months of salary.

The finiquito is the settlement of what the worker has already earned, and it is owed on every exit, whether the person resigns, leaves by mutual agreement, reaches the end of a fixed term, or is dismissed. It is made up of outstanding salary up to the last day, the proportional part of the year's aguinaldo (the year-end bonus, a minimum of 15 days' pay), any accrued but unused vacation, and the 25% vacation premium on that vacation.

The liquidación, or indemnización, is different. It is the compensation owed on top of the finiquito when a dismissal is unjustified, when a worker successfully argues they were forced out (constructive dismissal), or when the employer loses a labor dispute the worker brings. The liquidación is the expensive part, and an employer avoids it only by having a real, provable cause. A resignation produces a finiquito alone. An unjustified dismissal produces a finiquito plus a liquidación. The difference between those two totals is what is at stake in every exit.

Dismissal for cause requires an exact procedure

Mexican law lets an employer dismiss without severance for just cause, but the list of causes is closed. The Federal Labor Law (Ley Federal del Trabajo, Art. 47) enumerates them: dishonesty, violence, more than three unexcused absences in thirty days, disclosing trade secrets, showing up intoxicated, and so on. "Poor performance," which is what employers most often want to rely on, is not on the list.

Even with a real cause, the dismissal holds up only if the employer follows the statutory procedure, which centers on a written dismissal notice. The employer has to give the worker a written notice of dismissal (aviso de rescisión) that states the specific conduct and the dates, and must act within thirty days of learning of the cause. If the worker refuses to accept the notice, the employer has to file it with the labor tribunal within five business days, giving the worker's address. Skip the notice and the law presumes the separation was unjustified. The presumption can be rebutted, but the employer is then fighting uphill, and the cost of losing is the full liquidación plus back wages. The documentation is the real work of a for-cause dismissal, because in a dispute the paperwork is the case.

How an unjustified-dismissal severance is built

When a dismissal is unjustified, the worker can choose reinstatement or compensation. If they take compensation, here is what it adds up to, and the components use different salary bases, which is exactly where calculations go wrong.

The constitutional indemnity of three months' salary: 90 days paid on the integrated daily salary (the SDI, which like the IMSS contribution base bundles in benefits), uncapped.

Twenty days per year of service: 20 days for each year worked, again on the integrated daily salary, uncapped, with partial years rounded up.

The seniority premium (prima de antigüedad): 12 days per year of service, but this one is paid on the bare daily wage capped at twice the minimum wage, not on the integrated salary. Mexico sets two minimum wages, a general national rate and a higher rate along the northern border, so the cap depends on where the worker is: at the general 2026 rate the cap is MXN$630.08 a day, and along the border it is MXN$881.74. This is the component employers miscalculate most, because they apply the wrong salary base to it.

Back wages (salarios caídos): the salary the worker would have earned from the dismissal date, which since the 2012 reform is capped at 12 months, after which interest accrues rather than more months of salary. Before 2012 this figure was uncapped until a case resolved, which could mean years; the cap is the single biggest thing that made Mexican dismissal liability predictable.

To see how it adds up, consider a worked example: a marketing manager on MXN$45,000 a month, ten years of service, dismissed without cause. The finiquito comes to about MXN$69,755. On top of that, the three-month indemnity is about MXN$142,587, the 20-days-per-year component is MXN$316,860, and the seniority premium is MXN$75,610. The liquidación additions alone are roughly MXN$535,057, for a total near MXN$604,812. The manager's monthly salary was MXN$45,000; the exit cost more than thirteen months of it. A company weighing a without-cause dismissal should budget that full figure up front, not the monthly salary.

Reinstatement, and when a payment is not enough

An employer often assumes that paying severance ends the matter. Usually it does, because most workers take the money. But on an unjustified dismissal the choice belongs to the worker, and some can demand reinstatement. There are categories where reinstatement is effectively mandatory and the employer cannot substitute a payment, including certain protected workers. There are also cases (Art. 49) where an employer may refuse reinstatement and pay indemnification instead, such as workers with less than a year of service or roles of trust. The practical point is that the employer does not always control whether the outcome is a payment or a returning employee, so a dismissal the employer is unsure about is an open-ended risk, not a cost that can be pinned down in advance.

Tax: a per-year-of-service exemption, applied once

Severance is partly tax-free, and the rule is specific. Separation payments are exempt from income tax up to 90 UMA per year of service (the UMA being MXN$117.31 a day in 2026, so about MXN$10,558 of exemption for each year worked). The exemption that trips people up is that it applies to the aggregate of all the severance components combined, not separately to each one, and the excess is taxable at a rate derived from the worker's last ordinary monthly salary. Within the finiquito, the aguinaldo is exempt up to 30 UMA and the vacation premium up to 15 UMA, while ordinary unpaid salary and vacation pay are fully taxable.

Sign the settlement in front of the authority

One procedural change from the 2019 labor reform is easy to miss and expensive to get wrong: a settlement (convenio) is only enforceable if it is ratified before the conciliation authority, the Centro de Conciliación (federal or state). A finiquito the worker signs at the office, without that ratification, does not close the door; the worker can still sue for the full liquidación. Disputes now go through mandatory conciliation before they reach a labor court. So the settlement is not done when the worker signs the paper; it is done when the authority ratifies it. There is also a tight clock on the worker's side: a claim for unjustified dismissal must be filed within two months of the dismissal date.

What this means for anyone running Mexican payroll

Every exit needs a correct finiquito, calculated on the right bases and paid promptly, because interest accrues from the separation date. An unjustified dismissal adds a liquidación built from three components with three different salary bases and caps, and because it can reach many months of salary, an employer should price it before deciding to dismiss. A for-cause dismissal only holds if the notice and the evidence are in order. And a settlement only protects the employer once it is ratified before the conciliation center.

None of this is unpredictable, which is the good news. The formulas are fixed, the caps are known, and the exemption is a clean per-year figure. The work is in applying the right base to each component, tracking the minimum wage and UMA that set the caps and exemptions each year, and producing a defensible finiquito and settlement every time. Flux runs exactly this calculation: we apply each component, the SDI and the capped bases, the 12-month back-wage limit, and the current UMA and minimum wage per worker, so a termination produces the right number and the paperwork that stands behind it.