Jeremy Schwartz wrote an interesting story today in his Uncovering Mexico blog about the wave of Mexican migrant workers in the U.S. expected to return to Mexico because of the U.S. financial crisis.  

For U.S. businesses operating in Mexico, the exodus of migrant workers could result in a greater number of available workers for Mexican plants and projects, perhaps including a greater number of bilingual workers.

The general counsel of one of our U.S. clients called me yesterday seeking urgent advice after it discovered that certain employees of its newly acquired Mexican subsidiary were looting the subsidiary and had been doing so for at least 5 years prior to the acquisition.  The client had acquired the Mexican company, which is located in a border city, indirectly (by purchase of another U.S. company), and had not performed any due diligence on the employees or labor matters relating to the company.

It turns out the Controller and the Managing Director of the Mexican company had orchestrated the looting by "hiring" a half dozen or so managing-level employees and paying them salaries and other bonuses even though they never appeared for work.  (Lesson #1: if the number of managers of a Mexican company set forth on the company’s payroll records is high relative to the number of employees, the company may have phantom employees.)

The Managing Director, who was seconded to the Mexican subsidiary by the U.S. parent, alleged that the Mexican Mafia had carjacked him and required him to pay the phantom employees.  He said he feared for his life.  The Managing Director may or may not have been telling the truth, but our U.S. client assumed (I think appropriately under the circumstances) that he was.  The Controller apologized in a detailed written confession. 

Since the Managing Director was both an employee of the U.S. parent who was paid by the U.S. parent and a employee of the Mexican subsidiary (because Mexican law deems any person who provides services to another person an employee), we prepared release and termination agreements for him under both U.S. and Mexican law in conjunction with Mexican labor counsel. 

(Our client elected not to require the Managing Director to sign U.S. and Mexican resignations, but rather to cause the U.S. parent to pay the Managing Director a very limited severance under Mexican law in exchange for his signature of the release and termination agreements, principally because of concerns that the Managing Director could have made an argument in a post-termination lawsuit in Mexico that he was forced to resign based on the specific circumstances of the resignation, among other reasons.)

The severance payment also served as consideration for the termination and release agreement under U.S. law.  We then had Mexican labor counsel prepare terminations/resignation agreements under Mexican law for the Controller.  Our client decided (again, I think appropriately) that it would have been imprudent to require the Managing Director to obtain resignations from the phantom employees because of the possible Mexican Mafia involvement.

Lesson #2:  With the help of competent Mexican labor counsel, perform extensive labor and employment due diligence on all Mexican companies prior to any acquisition.  In most cases, problems like phantom employees can be discovered and remedied prior to closing.  Even in the absence of corrupt employees, labor and employment liabilities of Mexican companies are often extensive because of Mexico’s paternalistic labor laws and should be rooted out prior to closing.  Sometimes the extent of the liabilities merits adjustment to the purchase price of the acquisition.