Back to records list

Employee Participation in Company Profits, or more simply Employee Profit-Sharing (Participacion de los Trabajadores en las Utilidades de la Empresa, abbreviated PTU in Spanish)

Employees in Mexico, be they citizens of Mexico or foreigners, have the right to share in the net income (profits) of the company, in addition to employee compensation and other benefits.

The primary purpose for the distribution of profits among employees is to increase their income and periodically strike a harmony of interests between capital and labor.

This article will discuss which companies are subject to this obligation as well as the formalities for its payment.

 

Which companies are obliged to pay employee profit sharing (PTU)?

Those that merged, transferred or changed their company name or registered business name, because they are not newly-created businesses;

1. Companies with diverse establishments, branches or agencies, production or distribution plants for goods or services, provided they consolidate their income into one tax return for purposes of paying income tax (Impuesto sobre la Renta¸ abbreviated ISR in Spanish). For distribution purposes (of the profits), what needs to be considered is the fiscal-year tax return and not the revenue generated by each economic unit (or business entity);
2. Decentralized agencies with no humanitarian assistance purposes and state-held companies set up as business corporations;
3. Professional Partnership (Sociedad Civil* in Spanish) or those Non-Profit Organization (Asociación civil **in Spanish) that obtained income by the disposal/sale or otherwise transfer (conveyance of title) of any asset other than fixed assets, or those that provide services to persons other than its members, provided that said earnings exceed 5% (five percent) of their total income; and
4. Cooperatives (sociedad cooperativa in Spanish) with employees, i.e., not having the capacity as partners.[1]

 

Which companies are exempt from paying the PTU?

Pursuant to Article 126 of the Federal Labor Law (Ley Federal del Trabajo, abbreviated LFT in Spanish), the companies excluded from the obligation of sharing profits with their employees are:

1. Newly-created businesses, during the first year of operation;
2. Newly-created businesses dedicated to the manufacturing of a new product during the first two years of operation.  The determination of the newness of the product shall conform to the provisions of the laws for new industry development;
3. Newly-created extractive industry companies (e.g. oil and mining industries), during the period of exploration;  
4. Private assistance institutions that are recognized under the law, that with the use of privately-owned assets perform humanitarian acts of assistance, with no profit-making purposes and without individual designation of the beneficiaries;
5. The Mexican Institute of Social Security and the decentralized public institutions set up for cultural, assistance/aid, or charitable purposes; and
6. The business that may have less capital investment than that set by the Secretary of Labor and Social Welfare (Secretaría del Trabajo y Previsión Social in Spanish) for branches of that industry after consultation with the Secretary of Economy (Secretaría de Economía in Spanish). The resolution can be revised completely or partially, when significant economic circumstances exist justifying same.

 

Who does not participate in the PTU?

1. Directors, administrators and general managers of companies;
2. Domestic employees and  temporary employees, the latter not having a right to profit-sharing if they have worked less than  60 (sixty) days during the year; and
3. Professionals, technicians or engineers, craftsmen and any other person who independently provides services to a company.

 

Do foreign employees have a right to the PTU?

Yes, provided they do not fall under one of the characteristics listed in the foregoing question.

 

When does the profit sharing need to be paid by companies?

The distribution of profits among employees must be made within 60 (sixty) days following the date that the annual taxes are paid (filing of the annual tax return), i.e., May 30 is the deadline for legal entities to effect the profit distribution, and for individuals (sole proprietors) that are not corporations the deadline is June 29 (Art. 122 of the LFT).[2]

 

What is considered the base (percentage) profit distribution?

The National Commission on Employee Participation in the Company Profits, made up of representatives for the employees, employers and the government, in its Fifth Resolution published in the Official Gazette of the Federation (Diario Oficial de la Federación or DOF in Spanish) on February 3, 2009, established 10% (ten percent) as the percentage of company profits that must be shared with employees.

 

What formalities exist for the distribution of profits?

There should be a Joint Commission formed 10 (ten) days subsequent to the delivery of a copy of the annual tax return to the representatives of the employees; said Joint Commission shall be made up of an equal number of representatives of the employees and of the employer, and shall be known as the Joint Commission for the Distribution of Profits which shall be responsible for creating a formula for individual share distribution and posting same in a visible location in the workplace.

Having determined the profit amount to distribute, the Joint Commission shall devise an individual formula for the distributive profit share for each employee, taking into consideration the number of days worked and the amount of wages earned in the year.

 

What obligations does the Joint Commission have with regard to the distribution of profits?

The Joint Commission for the Distribution of Profits is responsible for the following obligations according to Article 125 of the LFT:

1. Establish guidelines as to how the distribution of profits should be realized;
2. Create an individualized distribution formula, based on wages, attendance and payroll lists for all personnel, certificates (as proof) of disabilities and time-off permissions given, list of those employees in positions of trust and their functions,  as well as a list of ex-employees specifying the length of time worked during the distribution year;
3. Place such formula in the business establishments, at least 15 (fifteen) days prior to the payment, making said known to the employees so that with such they can make the observations they are entitled by law;
4. Inform subordinates as to their right to disagree with the individualized formula;
5. Resolve said disagreements within a period of 15 (fifteen) days; and
6. Oversee that payment for the profits is realized under the terms established in the LFT.

 

What documents must the employer deliver to the National Commission for the Distribution of Profits?

The employer should deliver the following documents to the National Commission for the Distribution of Profits:

1. Copy of the Annual Income Tax (ISR) Return;
2. Personnel wages and payroll lists;
3. Attendance cards or lists;
4. Certificates (as proof) of disabilities and  time-off permissions given;
5. List of ex-employees containing names, salaries received and dates of dismissal (from their position);
6. List of employees in positions of trust, describing their functions;
7. List of new personnel;
8. Information concerning the payment of profits from the previous fiscal year and, where applicable, the uncollected amounts; and
9. All other elements necessary to realize its function.[3]

 

What is factored-in when calculating the PTU?

In accordance with Article 124 of the LFT and the criteria/standards of the authority, the daily rate each subordinate receives in cash in exchange for his work should be considered in order to determine the base salary for the PTU; such amount depends on the type of income received, namely:

1. Fixed Salary: The applicable wage is the regular daily wage, i.e. the daily rate the employee receives as payment for services, which is set in the individual or collective labor contract, excluding amounts received as overtime, bonuses, compensations and others referred to in Article 84 of the LFT.
2. Variable Salary: In the case of wages for piece work or commissions, and in general, when compensation is variable, the daily wage will be considered to be the average of the compensation received in the fiscal year at issue for the distribution of profits; and
3. Work Shift and Reduced Week:  According to the labor authorities, hours worked must be added up until reaching an amount equivalent to a conventional legal work shift in order to be considered a day worked. With regard to employees that work a reduced week, they must abide by the general distribution rules as to days and wages actually received.[4]

 

The following are considered as days actually worked:

1. Disability.
2. Pre- and Post-natal.
3. Work-related accidents or injuries, including those en route related.
4. Paid Time Off due to a birth, marriage etc.
5. Holidays, weekly day of rest, vacations.
6. Permission for union committee business, such as for health and safety, for internal regulations, for profit sharing, etc.

Unexcused absences, sick leave and paid time off are not considered days worked, and as such are not calculated in as part of the distribution of profits, because lacking a wage payment, the suspension of labor contract obligations comes into play.

 

What if an employee does not collect the amount for his share of profits?

The employee has one year from the date on which this obligation becomes payable to claim his payment.

 

Is there any kind of sanction imposed for non-compliance?

Pursuant to Articles 992 and 994, Section II of the LFT, companies must keep on top of the compliance with this obligation, because failure to do so could incur a sanction imposed by labor authorities, consisting of a fine equivalent to anywhere from 15 to 315 times the general minimum wage in force in the geographic area corresponding to the place where the offence was committed, i.e., in zone A the fine is anywhere from  $897.30 to $18,843.30; in Zone B the fine is anywhere from $871.95 to $18,310.95; and in Zone C the fine is anywhere from $850.50 to $17,860.50, The municipalities for the State of Yucatan are in Zone C.

 

CONCLUSION

If you are an employer and your company made ​​a profit in the 2011 fiscal year, it is important to comply with all the formalities for effecting the distribution of profits, inasmuch as by not complying with same could give rise to problems with tax and labor authorities.

There are many scenarios for calculating the PTU, but due to lack of space, we cannot include them in this article. We do, however, invite you to contact Yucatan Compass Consulting for clarification of any doubts you may have or so that we may help you with the correct PTU payment.

Need more info? Contact us! We will be happy to assist you.