In the dynamic world of freelancing, understanding your financial rights and obligations is crucial, especially when concluding a work contract in Mexico. If you're a freelancer looking to effectively calculate your severance pay, this article is for you. 

Here, we'll break down the severance pay calculation process, providing clear steps and practical examples tailored to various employment situations.

From legal regulations to specific formulas, we'll guide you through each aspect so you can manage your finances accurately. Whether your collaboration has been short or long-term, having the right knowledge on how to calculate severance pay is essential.

How to calculate severance pay: Step-by-step guide and examples

Severance Pay: Definition and Situations for Granting

Severance pay is a financial compensation that an employer provides to an employee when their employment relationship ends. This involves a monetary portion of the benefits that the employee is entitled to receive in cases like:

• Voluntary resignation.

• Termination of a temporary contract without renewal.

• Dismissal of the employee, whether justified or not.

• Termination due to a fault committed by the employer, according to Article 51 of the Federal Labor Law (FLL).

• Disability due to illness.

• Death of the employee.

What is Included in Severance Pay?

If you're a freelancer in Mexico and about to receive severance pay, you should know about the accrued remunerations and compensation, if applicable. The main remunerations included are:

• Salary corresponding to the last month or weeks worked.

• Pending extraordinary payments, depending on whether they are distributed or not.

• Unused vacation days for the current year, calculated from January 1st until the end of the employment relationship.

• Other pending payments, whether overtime, productivity bonuses, pluses, or benefits, as long as they are contemplated by the company.

The severance pay must accurately reflect all outstanding remunerations to ensure you are receiving fair compensation at the end of your contract.

Steps to Calculate Severance Pay

To calculate severance pay, follow these steps:

1. Unpaid Worked Days:

• Multiply the unpaid worked days by the daily salary.

2. Proportional Christmas Bonus:

• Multiply the daily salary by 15 days (or the number of days according to the company).

• Divide the result by 365.

• Multiply by the days worked in the current year.

3. Unused Vacation Days:

• Multiply the daily salary by the remaining vacation days.

• Divide the result by 365.

• Multiply by the days worked in the current year.

• Multiply again by the daily salary.

4. Vacation Premium:

• Take the result from the unused vacation calculation.

• Multiply by 0.25 to obtain the vacation premium.

5. Sum All Amounts:

• Add up the outstanding salaries, proportional Christmas bonus, unused vacation, and vacation premium for the total severance pay amount.

From there, deductions are made for ISR (Income Tax), Fonacot credit, personal loans, IMSS (Mexican Social Security Institute) quotas, Infonavit debts, and any other payroll loan.

The resulting figure will be the final amount of severance pay you receive from the employer.

How Much Severance Pay is Due Per Year Worked?

There is no fixed amount of severance pay per year worked, as this will depend on the components mentioned, such as vacation and vacation premium, Christmas bonus, and any other outstanding salary or extra payments.

For illustration, if a freelancer has worked for a full year (under contract), they would receive:

• the entirety of their proportional Christmas bonus (15 days),

• plus the vacation days for the year (12 days),

• plus the vacation premium on those days (25%).

The sum of these components, along with any outstanding salary, constitutes the severance pay.

How to Calculate Severance Pay at the End of a Contract?

Step-by-step to calculate severance pay at the end of a contract:

• Identify the start and end date of the contract. This determines the period during which proportional payments will be calculated.

• Calculate outstanding salaries. Add any salary that has not been paid until the termination date.

• Unused vacations. Calculate the vacations not taken. By law, the worker accumulates a minimum of 12 vacation days for the first year, increasing 2 additional days for each subsequent year up to 30 days.

• Vacation premium. This additional payment on the unused vacation days is 25% on the corresponding days.

• Christmas bonus. The proportional part of the Christmas bonus must be paid, which corresponds to 15 days of salary, divided by the 365 days of the year and multiplied by the number of days worked in the year. You should know how to calculate the Christmas bonus at this point. 

Example of Calculation:

Suppose you have worked from January 1st to December 31st of one year, with a daily salary of MXN 500.

• Outstanding salaries: MXN 0 (assuming all payments are up to date).

• Vacations: 12 days x MXN 500 = MXN 6,000.

• Vacation premium: 25% of MXN 6,000 = MXN 1,500.

• Proportional Christmas bonus: MXN 500 x 15 days = MXN 7,500 / 365 days = 20.54. Multiply this figure by the days you worked in the year, suppose you work fully, 255 days. Then, the proportional Christmas bonus would be; MXN 5,237.70 (255 x 20.54).

• Total Calculation of Severance Pay: MXN 0 (outstanding salaries) + MXN 6,000 (vacations) + MXN 1,500 (vacation premium) + MXN 5,237.70 (Christmas bonus) = MXN 12,737.70.

This would be the total amount of severance pay due at the end of your employment contract, assuming there are no other additional concepts to consider.

How to calculate severance pay (settlement)

In Mexico, wrongful dismissal compensation is calculated using the Integrated Daily Salary (SDI). This salary includes not only the base salary but also benefits such as vacation premium and Christmas bonus. Here’s how to calculate it:

Calculation of the Integrated Daily Salary (SDI):

• Daily base salary: MXN $500.

• Vacation premium: The law establishes a vacation premium of 25% on annual vacations. For an employee with 12 vacation days, the premium is calculated as follows: MXN $500 x 12 days = MXN $6,000; 25% of MXN $6,000 = MXN $1,500 per year, which divided by 365 days gives approximately MXN $4.11 per day.

• Christmas bonus: Corresponds to 15 days of work. MXN $500 x 15 days = MXN $7,500; divided by 365 days results in MXN $20.55 per day.

Sum of components for the SDI:

• SDI = Daily base salary + Daily vacation premium + Daily Christmas bonus.

• SDI = MXN $500 + MXN $4.11 + MXN $20.55 = MXN $524.66 per day.

Calculation of the Integrated Monthly Salary (SMI):

• SMI = SDI x 30 days = MXN $524.66 x 30 = MXN $15,739.80.

Components of the compensation:

• Three months of salary: MXN $15,739.80 x 3 = MXN $47,219.40.

• Twenty days of salary for each year worked: As the employee has worked for one year, calculate 20 days x MXN $524.66 = MXN $10,493.20.

• Seniority premium: 12 days of salary for each year worked, using the minimum wage as a base if necessary, but in this case, we will use the SDI limited to double the minimum wage: MXN $524.66 x 12 days = MXN $6,295.92.

Total compensation for dismissal:

MXN $47,219.40 (three months of salary) + MXN $10,493.20 (20 days per year) + MXN $6,295.92 (seniority premium) = MXN $64,008.52.

Is it mandatory to accept the severance package calculated by the company?

If you have doubts about the proposal described in the severance package, you are not obligated to accept it. On the contrary, you have the right to read the details and even request that the document be reviewed. From this perspective, three things can happen:

• The employee refuses to sign.

• The employee accepts by signing the document.

• The employee signs but adds a note stating, for example, “Not Conforme” or “Pending Review”.

In this last case, the employee is affirming that they have received the severance package but are not accepting it, thus indicating the possibility of a relevant claim.

How is a claim for severance made?

Any labor judicial process begins with the filing of a claim with the Local Conciliation and Arbitration Board, which reviews and determines if it proceeds. If conciliation is achieved, an agreement with the same value as a judgment will be established. If not, a conciliation hearing, lawsuit, and exceptions proceed, for which the parties are summoned with 10 days' notice.

The defendant must respond to the lawsuit, either accepting or denying the facts, or they may choose to counter-sue. Subsequently, both parties present and dispute evidence; the Board decides which to accept. After a hearing to relieve evidence and listen to the arguments, the Board will issue and notify a final resolution.

• Note: If you are working for a foreign company, contractual jurisdiction and international agreements must be considered.

Tips before signing a severance package:

Before signing a severance package, it is crucial to take some precautions to protect your worker rights. Here are some essential recommendations:

1. Request a copy of the severance package and other signed documents. Make sure to obtain a sealed or signed copy from the company, and verify that the content is identical to the original.

2. Review the concepts and amounts detailed in the severance package. The document should clearly display all paid concepts and corresponding amounts. If you notice the absence of any concept, such as the Christmas bonus, note it on the document.

3. Verify the date on the document. The date is crucial, as it determines the deadlines for undertaking legal actions related to the severance package.

A severance package, whether due to the end of a contract, resignation, or dismissal, signifies the end of the employment relationship. Therefore, it's important to calculate the amount of money you are entitled to based on your time with the company.

Remember, if you work as a freelancer for a foreign company and need a bank account in the United States, DolarApp is the solution. We offer you an account in your name so you can receive your dollars and exchange them at the best rate in Mexico.