Hiring software developers in a different country opens up opportunities for a new and diverse talent pool. Offshore outsourcing and nearshoring have become commonplace in the tech world, especially with the rise of remote teams. This possibility has helped companies grow by expanding their teams and operations to new arenas. But what about the legal implications of hiring in other countries? How do Mexico’s pay structures differ from the U.S.?
For U.S. companies, for example, hiring developers in Mexico is made easier due to trade agreements and amicable relations between the two nations. The Mexico tech industry has proven a viable nearshoring destination for team expansions and global remote teams.
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A Brief Overview of Offshore Outsourcing
For many decades, outsourcing has been a common practice among U.S. companies. The model really took off around the 1970s, when companies sought to increase efficiency by hiring outside firms to manage certain business tasks. Since then, outsourcing has shifted and adapted to changing work models and evolving industries. In a recent statistic, Zippia reported that 66% of U.S. companies that have more than 50 employees outsource some type of service.
It was not long after outsourcing became a common tactic for big companies, that the idea of offshoring followed suit. The two went hand-in-hand. Companies could strategically relocate part of their business operations overseas to lower cost countries. This too has changed in the last few years, as some of these offshoring destinations have lost their appeal given the changing economic, geopolitical, and cultural circumstances.
What are Payment Structures or Payment Schemes?
Every country has different payment schemes or payment structures. This refers to a set of rules that pertain to an employee’s salary or compensation strategy between an employer and an employee. Payment schemes have to, of course, take legal implications and legal restrictions and requirements into consideration.
If a company chooses to outsource software development to a different country, it is valuable to be informed on the different types of payment structures in the country in which they are hiring. This can vary significantly from place to place.
Payment Structures in Mexico
There are several salary payment schemes in Mexico, which we have written about previously in our blog. Let’s review here:
- Salaries and remunerations (nómina, sueldos y salarios)
- Salaries Assimilated to wages (Sueldos asimilados a salarios)
- Professional fees/Contractors (Honorarios)
- Salaries and remunerations mixed (Mixto)
Mandatory Employee Benefits in Mexico
Similar to the U.S., Mexico imposes mandatory benefits on employers. In Mexico these include:
- Vacation days and bonuses
- Paid public holidays
- Sunday premium
- Maternity leave
- Christmas bonus
- Seniority premium
- Retirement and housing fund
Preferred Payment Structures in Mexico in 2023
In our recent IT salary guide, research suggested that the most popular payment structure in Mexico is the Nomina or Salaries and remunerations. According to our data, the nomina pay structure continues to be the most widely used payment structure in Mexico among tech professionals.
This pay structure is something like the equivalent of an employee receiving a W-2. It means that either the employer is contributing or the proper amount is deducted from the pay to the required taxes and social services.
When Hiring a Remote Worker in Mexico, What Structure is Best?
This really depends on the employer and the employee. In many cases, the employee might seek a nomina pay structure because they get to make contributions to social programs they may need in the future. For example, contributions into the housing fund that might help them with a house purchase later.
However, other pay structures like contracts can also be attractive to workers looking to make a good income and expand their skills working on exciting new projects for startups or growing companies that may not be able to offer the nomina pay structure.
Payment Structures in Asian Countries
Another outsourcing destination for software development is Asia. This large continent comprises several countries, each with its own very different and unique payment structures. It would be difficult to look at every Asian country, so let’s look at a few examples.
Quick Overview of Pay Structures in China
A salary in China is composed of the base salary, net salary, bonuses, and overtime pay. Employers can also provide their employees with several allowances.
In China, like other countries, there are different types of contracts that employers and employees can engage in. China requires a written contract agreed upon by both parties. These can be either a fixed-term or non-fixed-term employment contract. The former refers to a contract in which both parties agree on the expiration of the contract. The latter type of contract (non-fixed) is when both employer and employee stipulate that there is no certain time of expiration.
Like in most countries, there are mandatory contributions that must be deducted from an employee’s salary. In China, these regulations vary significantly by region and can be very different from one city or town to another. However, some of the mandatory deductions include:
- Contributions to the Individual Housing Fund: Both employees and employers must contribute to this fund, as it helps employees save for future home purchases.
- Social Insurance: This includes things like pension/retirement insurance, occupational insurance, maternity insurance, medical insurance, and unemployment insurance.
- Chinese Holidays and Leave: Sick leave, maternity leave, funeral leave, marriage leave. Employees should be granted anywhere from 5 to 15 days of annual leave.
- Tax considerations: Like their wages, the tax considerations vary considerably depending on the region.
According to PapayaGlobal, Employer Pension is 16.0%, Employer Unemployment Insurance is .50%, and Employer Medical Insurances are capped at 9.00%.
Hiring remote developers in China and other Asian countries has been a popular choice in the past, but hiring in China can present some complications given their strict regulations and deductions.
Overview of Payment Structures in India
India is another historically popular spot for outsourcing. In the 1990’s, many U.S. companies outsourced call centers or customer service centers to India. The country experienced a massive IT boom and trained a lot of tech professionals. Yet, in recent years, the structure and dynamics of tech operations changed considerably. The demands of remote teams and software engineering projects change and require a much more tight-knit operation.
At the same time, India is known to have a confusing system of labor codes and laws. This made hiring there complicated and difficult when it came to IP protections and other legal issues. It was only recently, in 2019, that the country moved to simplify their labor codes. In India, there are two categories: employees and workers. This is similar to the distinction in the U.S. of a salary worker and a contractor.
India has four labor codes:
- Code of Wages
- Industrial relation code
- Occupational safety, health, and working code
- Code on Social Security
The pay structures are divided into the following categories:
- Fixed compensation: This is the base salary or the gross salary. An employer must set a salary range. This compensation includes the basic pay and the fixed allowance.
- Fixed comp+: These are additional allowances that an employee or worker may be afforded including company vehicles, bonuses, and severance payments.
- Salary deductions: These include typical social funds such as labor welfare fund or the employee’s state insurance corporation.
Decreased Offshoring in Asia
A Gartner survey in 2021 showed that 33% of supply chain leaders plan to move some (or all) of their manufacturing out of China by 2023. This is just one indicator of the many signs that the go-to destination for many offshoring operations is changing. .
One of the main factors for this was the supply chain ruptures that happened during Covid. The pandemic put a real strain on the supply chains and exposed their fragility and, in many instances, unreliability, when things go south. This has really made companies wonder about taking operations to such distant lands.
At the same time, the trading relationship between the U.S. and China has become somewhat combative, according to Forbes, as increasing tariffs and other aspects of an ongoing tradewar have made it difficult for people doing business in China to see the profits they once did. In essence, the pre-pandemic world was very different and that, along with other cascading geopolitical factors, have made the face of offshore outsourcing look very different.
Having a smaller and more focused supply chain is a proven benefit to companies, as it reduces risk, turn around times, and a myriad of other complications that are more likely to happen with a supply chain that is stretched out across the globe.
In the tech world, of course, supply chains are a little different than in manufacturing. In the remote team world, having team members overseas presents similar challenges and compilations. Not only does it make communication more difficult, but it makes team collaboration more complex given the cultural differences and the vastly different time zones.
Learn How Nearshoring Can Benefit Growing Tech Companies and Startups
In recent years, nearshoring has gained traction as the preferred model for companies looking to expand operations or open up shop in another country. Latin America has seen a record amount of investment in the past few years as companies in the U.S. learn the benefits of keeping their remote teams and operations closer to home, and Mexico is the gateway to this lucrative and growing region.
Mexico’s tech industry has a lot to offer companies. Learn more about how you can build your team in a legal and efficient way.