April 11 2022
Employee Profit Sharing (EPS) APPLICABLE RULES FOR 2021
Derived from the labor reform that was approved in 2021, it is necessary to consider the following rules in labor matters, specifically on Employee Profit Sharing (hereinafter “EPS”).
- EPS.
EPS is a legal provision available to all employees of the company, acquired from the profits obtained by the employer during the fiscal year. EPS is a worker’s right found on article 123, section IX, paragraph A, of the Mexican Constitution (hereinafter “MC“) and on article 120 of the Federal Labor Law (hereinafter “FLL”).
- Beneficiaries.
Available to all workers that provide an individual or legal entity (hereinafter “Employer“) with subordinate personal work, through the payment of a salary, and who have the constitutional right to participate in the Employer’s EPS.
- Annual Tax Return.
For employees to know if their Employer declared profits, the Employers are required to deliver to the employees’ representatives (their union or to the majority of the employees) a legible copy of the annual tax return within 10 days from the filing date. If the amount distributed was less than 10% of the taxable profit (see the term “Distribution Limits” below), the Employers must declare it as distributable income for the year in their Annual Tax Return.
- Determination and distribution.
The EPS to be distributed is calculated by taking 10% of the taxable earnings from the fiscal year, however, it does not constitute the effective rate of EPS to be distributed (hereinafter “Reference Value“). The distributable profit is divided in two equal parts, considering the following:
- Days Worked. First, distribution will be equally among all employees, taking into account the number of days each employee worked during the fiscal year, regardless of their salaries. Employees that worked less than 365 days will be entitled to EPS based on the number of days they worked. In other words, their profit sharing will be proportional to the fraction of the year they worked. Those who worked more days will receive a higher proportion, and those who worked fewer days will receive a lower proportion (e.g., absences, suspensions, or people hired mid-year).
- Salary. The second part will be distributed in proportion to the salary (hereinafter “AW”) accrued for the work rendered during the year. The higher the salary, the higher the EPS.
Once the above is taken into consideration for the calculation of EPS, the result must be paid in full to the employee, without limitations under reasoning of proportionality for days worked.
- Date of payment.
The EPS payment must be made within 60 (sixty) days after the date on which the annual tax must be paid (March 31 for companies; April 30 for individuals); that is, from April 1 to May 30 for companies under the General Tax Regime, and from May 1 to June 29 for individuals with Business and Professional Activities, as well as individuals under the Tax Incorporation Regime or the recently added, Simplified Trust Regime.
- Acumulation.
Unclaimed profits for the previous year, in the year in which they become due, must be added to the distributable profit for the following year.
- Statute of Limitations.
The employees will have the right to collect the EPS that they are entitled to, for a term of 1 (one) year from the day following the date on which the obligation arises. The statute of limitations to claim the EPS begins to run the day after the Joint Commission for profit sharing notifies the employees of the individualized EPS distribution project.
- Limits.
For Employers that have previously distributed profits, the EPS for 2021 must be capped at the greater amount between: (i) the equivalent of 3 (three) months of the employee’s ordinary salary; or, (ii) the average of the profits distributed in the last 3 (three) fiscal years (hereinafter “Distribution Limits“).
In the case of trusted employees (hereinafter “TE“), if their regular salary is higher than the highest salary assigned to base employees (hereinafter “BE“), a reference value will be obtained consisting of a 20% increase in the highest salary of the employee considered as BP.
For the TE, the EPS limit (3 months of salary) only takes into account the base salary, without considering bonuses, extraordinary compensation, or other additional benefits such as the integrated salary as provided for in article 124 of the FLL. The reference value used to determine the percentage of participation of such employee’s category (the distribution of the second half of EPS that considers the amount of the salary) is excluded.
- Guide issued by the Ministry of Labor and Social Welfare on March 27, 2022 (hereinafter “MLSW Guide“).
Employers that have been distributing EPS to their employees for at least three (3) fiscal years will be subject to the provisions of the MLSW Guide regarding the limitations that must be applied to employees that worked for two fiscal years or less. Such limitation will be the average of the EPS granted to the position occupied by such employee.
- Excess of 10% of taxable income.
Once the Distribution Limits are applied, if the EPS to be distributed is less than 10% of the taxable income, the excess will not be considered as part of the EPS and will not be accrued for subsequent years. Payments that correspond to more than the Distribution Limits are not considered as EPS, but as bonuses in accordance with Article 84 of the FLL, this means, the FLL itself considers it as part of the employee’s salary, who received such excess.
- Employer substitutions during 2021.
The substitute employer and the substituted employer must distribute the EPS generated for each of them in the 2021 fiscal year.
- Mergers during 2021.
For the irregular fiscal year of the merged Employer, the EPS should have been paid within 60 (sixty) days following the termination of the irregular fiscal year. The merging employer must distribute the corresponding profits of the regular fiscal year. In this case, the employee could receive two profit sharing payments corresponding to the merging and the merged employer.
- Fines and penalties.
Employers that don’t comply with the distribution of the EPS, or break the rules for its determination, may be subject to a fine of up to $481,100.00 pesos. (approximately US $24,006.98 dollars).
[1] To be classified as a TE depends on the attributions, roles and responsibilities exercised by the employee in the assigned position. Employees in positions of trust (TEs) are those who perform general management, inspection, supervision and oversight activities. They are people with a level of autonomy and with administrative decision-making powers in accordance with their attributions. They normally determine the form and terms under which their subordinates must perform their work, establishing their activities, roles, substitutions, vacations, among others.
[2] BE: unionized employees, or employees that don’t belong to a union and don’t occupy a position of trust.
[3] This interpretation is debatable, article 127 of the FLL (section VIII) establishes individual criteria to set the EPS limit, and establishes that the salary of the employee in question will be taken into account, not the applicable position or tabulator, based on seniority, it must be considered on an individual basis and consequently, with respect to employees who have only worked in two fiscal years, the rule should be applied in accordance to the seniority of 1 fiscal year worked. The maximum should always be 3 months of the base salary. Seniority of 2 fiscal years worked. The cap should be the greater of 3 months of the employee’s salary and the EPS paid in the first year of services. Neither the above interpretation, nor the one formulated in the MLSW Guide have been confirmed by a binding judicial decision; therefore, the authority, in case of review, may differ from both interpretations.
