Employment relationships are mainly regulated by the Constitution of the Republic of Panama and the Labour Code. The Constitution provides for the core inalienable rights relating to employment relationships, while the Labour Code regulates in detail such relationships. The Labour Code was enacted through Cabinet Decree No. 252 of 30 December 1972, and since then has undergone only one major reform in 1995.
Labour disputes, depending on the nature of the dispute, may be resolved before the conciliation boards of the Ministry of Labour, in the case of unjustified dismissals or claims for up to US$1,500; or before the sectional labour courts, in the case of claims relating to vested rights. Cases brought before the conciliation boards of the Ministry of Labour may be appealed before the superior labour courts; cases brought before the sectional labour courts may also be appealed before the superior labour courts, and after that, an extraordinary action may be brought before the Third Chamber of the Supreme Court.
Other employment matters, such as authorisation for mass dismissals, are handled by the General Directorate of Employment of the Ministry of Labour.
II YEAR IN REVIEW
Labour regulations in Panama are not prone to changes. As mentioned in Section I, in 40 years, labour regulations have undergone only one major reform, which took place in 1995. As a general rule, employment relationships may only be terminated based on a justified cause, explicitly established in the Labour Code. However, since 1995, employers have been able to terminate employees without cause, but only during the first two years of employment.
Since 1995, minor changes have been introduced, with the aim of protecting employees in certain lines of business. For example, as of 2010, private security companies are obliged to provide free and complete uniforms to their employees, and life and accident insurance coverage of a minimum of US$25,000 per employee.
Other minor changes introduced between 2017 and 2018 are the approval of three days of paid paternity leave, and the employers' obligation to have an internal procedure to attend complaints filed resulting from discriminatory actions in the work place.
III SIGNIFICANT CASES
Even though labour claims are filed daily before the courts, there has not been any recent case law dealing with relevant topics such as restrictive covenants or payment in kind. This may be the result of negotiated terminations. In Panama, most relevant or contentious matters never get to be discussed before the courts because of the common tendency to settle all disputes. Both parties benefit from the settlement of disputes. For example, while the employee achieves acknowledgement of his or her rights and consequently receives payment in a short period of time, employers incur fewer costs by not having to pay court expenses.
IV BASICS OF ENTERING AN EMPLOYMENT RELATIONSHIP
i Employment relationship
Under Panamanian law an employment relationship is formed by the rendering of services by one person to another, provided that the former is subordinated to or economically dependent on the latter. An employment relationship may exist, therefore, regardless of whether there is a written agreement.
Subordination consists of the authority to command, exercised, or that is susceptible to being exercised, by the employer or its representatives with regard to execution of the work.
A state of economic dependence will be deemed to exist when the amount received by the individual who performs the service or executes the work constitutes his or her only or main source of income.
In the absence of a written contract, facts and circumstances alleged by the employee and that should appear in a written contract will be presumed to be true. These presumptions may be rebutted by evidence that proves otherwise beyond a reasonable doubt.
Employment contracts must be executed in writing and must contain at least the following information:
- the personal information of the employee;
- names of the employee's dependants;
- the work to be performed and method of performing it;
- the place of work;
- the term of the agreement;
- the duration of the workday;
- wages; and
- the place and date of signing.
The parties to the contract shall sign three copies, one of which shall be kept by the employer, one shall be delivered to the employee and one shall be submitted for registration with the Ministry of Labour.
Employment contracts may be executed for an indefinite period, for a specified period of time or for a specified piece of work.
Contracts for a specified period of time may not be used with the purpose of temporarily filling a job that is permanent in nature, excluding certain exceptions contained in the Labour Code. The duration of the employment contract for a specified period of time shall not be more than one year. In the case of services that require special technical skills, the duration of the contract may be stipulated up to a maximum of three years.
ii Probationary periods
In cases where the services to be rendered require certain special skills or dexterity, it shall be valid to stipulate in writing a clause whereby the employment relationship will be subject to a probationary period of up to three months. During this period, any of the parties can put an end to the labour relationship without liability and without the need to give notice.
iii Establishing a presence
For a foreign company to be able to hire employees, it must officially register to carry on business in Panama, either as a branch or through a local subsidiary. Foreign companies that do not wish to officially register in Panama usually use agencies or payroll services providers to engage employees locally.
On the other hand, depending on the nature of the services, foreign companies not officially registered in Panama may acquire the services of independent contractors. In these cases it is important to verify that the services provided are not provided under conditions of subordination or economic dependency to avoid the relationship being considered as an employment relationship.
If the contractor is in fact an independent contractor acting in the ordinary course of their business, then a permanent establishment would not be created for the foreign company. If that is not the case and the person is a dependent agent, a permanent establishment would be created if the person has the power to execute contracts on behalf of the foreign company and exercises such power habitually. In that case, a permanent establishment would be created with regard to the activities of such contractors in Panama.
If a permanent establishment is created, the company would be subject to income tax in Panama as a regular Panamanian company on the taxable income attributable to the permanent establishment. The current corporate income tax rate in Panama is 25 per cent. If a permanent establishment is created, it would be advisable to consider incorporating an entity in Panama or registering a branch of the foreign company to facilitate all compliance and reporting processes.
In employment relationships, employees are entitled to social security coverage. The benefits offered by the Social Security System include the following: medical, dental and hospitalisation benefits; disability subsidy; maternity leave; retirement pension; death benefits; funeral subsidy; and occupational hazards (workmen's compensation). In this system, both employers and employees must contribute a percentage of the employee's salary to the system. Currently, the employer's contribution is equivalent to 12.25 per cent of the employee's salary and the employee's contribution is equivalent to 9.75 per cent of the salary received.
Employers also pay a rate between 0.98 per cent and 5.6 per cent of the salaries paid, to cover workers' compensation. The rate will be determined by the Social Security Administration, depending on the activities carried on by the employer.
The law provides that the granting of benefits provided for under the Social Security system, by the system's administration, releases the employer from liability with regard to occupational illness or accident suffered by the employee, except in those cases where the occupational hazard has occurred owing to negligence or fault on the part of the employer, in which case additional tort liabilities may arise.
The disability of an employee because of an accident or occupational illness, provided it is not of an absolute and permanent nature, suspends the employment contract.
The employee's social security contribution, as well as the income tax generated must be withheld, declared and paid by the employer monthly to the Social Security System.
V RESTRICTIVE COVENANTS
Even though restrictive covenants are not regulated by Panamanian law, and there is no jurisprudence discussing their enforceability, more and more international companies are proposing to include these types of covenants in employment contracts. Given that there is uncertainty as to the enforceability of restrictive covenants, and some argue that they may violate the constitutional right to employment, they are included in separate private agreements, rather than the employment contract.
i Working time
The day is divided into the following shifts or working periods:
- day work: from 6am to 6pm; and
- night work: from 6pm to 6am.
Hours of work within the above-mentioned working periods shall be classified as day shift (day work) and night shift (night work) respectively. A mixed shift is one made up of hours in both periods of work, provided that the period of night service shall be less than three hours. A shift including more than three hours within the night working period will be considered a night shift.
The maximum daily hours of work shall be eight hours and the corresponding maximum working week will be 48 hours. The maximum night shift shall be seven hours and the corresponding work week will be a maximum of 42 hours. The maximum duration of a mixed shift is seven-and-a-half hours, and the corresponding work week is a maximum of 45 hours.
Working time exceeding the limits set forth in the preceding section, or exceeding the lower time limits as provided by contract or special legally prescribed limits, constitutes overtime and has the following surcharges on top of the employee's hourly wage:
- 25 per cent of ordinary wages when work is performed during the daytime;
- 50 per cent of ordinary wages when work is performed during the night period or when mixed shifts, which had started in the daytime, are prolonged; and
- 75 per cent of ordinary wages when the overtime work shift is an extension of the night shift or of the mixed shift that had started during the night period.
In addition, there are the following limitations:
- overtime will not be permitted in work that, owing to its nature, is dangerous or unhealthy;
- persons under the age of 16 cannot work overtime;
- the employer is obliged to employ as many teams made up of different workers as may be necessary to carry out the work in shifts that do not exceed the ordinary limits described in this chapter; and
- a maximum of three hours' overtime is permitted in one day, and a maximum of nine hours in one week.
When for any reason the employee renders services in an overtime period in excess of the limits stated in point (d) above, the excess shall be paid with an additional 75 per cent surcharge, apart from other penalties prescribed by law.
VII FOREIGN WORKERS
As a general rule, all employers must contract Panamanian employees or foreigners married to Panamanian citizens or who have resided for at least 10 years in the country, so as to make up at least 90 per cent of the ordinary employees, and may engage expert or technical foreign personnel not exceeding 15 per cent of the total number of workers. These are the general restrictions on the employment of foreign personnel. There are certain exceptions to these restrictions; for example, foreign employees that hold certain special immigration statuses are exempted from complying with these restrictions. Some of these employees with special immigration statuses are residents under the Marrakech Treaty, foreign professionals that do not require licences to practise said professions or nationals of certain nationalities considered friendly to Panama.
Employers who need to contract foreign personnel must obtain an authorisation issued by the Ministry of Labour. This authorisation or work permit will be given for renewable one-year periods, except for nationals of certain nationalities friendly to Panama who may obtain a permanent work permit. Employees under the Marrakech Treaty may only renew their resident permits and work permits for a maximum of six years.
The determination of the best employment option available depends on the case.
All foreign employees providing services in Panama are subject to local employment laws and their salaries are subject to income tax and social security withholdings, at the same rates as Panamanian employees. Executives of companies holding a multinational headquarter licence or that have a special temporary residency permit are exempted from the payment of income tax and social security contributions.
VIII GLOBAL POLICIES
The Labour Code provides that every company that has 10 or more employees must have approved internal work regulations. These have to be previously approved by the Ministry of Labour, and, even though the employees' consent is not required, they have 30 days to comment on the proposed internal work regulations.
The Ministry of Labour has provided certain guidelines on the minimum provisions that must be included in internal work regulations. These include employment applications and contracts; work schedules; wages; work of women and minors; safety and hygiene measures; employees' obligations and prohibitions; employer's obligations and prohibitions; disciplinary measures; and company committees. Among the employees' and employers' obligations and prohibitions, discrimination and sexual harassment provisions are covered.
The internal work regulations must be drafted in Spanish and posted for the employees' general knowledge, either on the company's intranet or in a place of unrestricted access. In addition to employment contracts, internal work regulations regulate the particularities of employment relationships in every workplace.
As a general rule, all documents related to employment relationships must be drafted in Spanish. Exceptionally, instructions relating to the performance of the work may be written in the language in which the employee has shown proficiency.
What is usually recommended to international companies is that documents are drafted in a two-column style, showing Spanish and English versions of the document. This has been accepted by labour authorities.
X EMPLOYEE REPRESENTATION
Both the Constitution and the Labour Code recognise the right of employees to form or join unions. In order to organise a union, the law requires a minimum of 40 members.
The Labour Code contemplates the following types of workers' unions:
- trade unions, if they are comprised of persons of the same profession, occupation or speciality;
- company unions, if they are comprised of persons of several professions, occupations or specialities, who work for the same company;
- industrial unions, if they are comprised of persons of several professions, occupations or specialities, who work for two or more companies of the same kind; and
- mixed or multi-occupational unions, if they comprise persons of diverse professions, occupations or specialities, who work for diverse or unrelated companies. These unions may be established only when, in a specific city, district, province or region, there are fewer than 50 employees of the same trade.
The election and terms of union representatives and the frequency of their meetings are governed by the union's statutes. The union may establish ordinary and extraordinary contributions for its members. The employer has the obligation to withhold the contributions established by the union from the employees' salaries. In addition, the employer has the obligation to deliver those contributions to the union. Employees who are not members of the union may be subject to contributions in case they receive benefits from the collective agreement entered into between the union and the employer.
Any employer with employees who are members of a union has the obligation to execute with the latter a collective bargaining agreement when the union so requests. If an employer refuses to enter into a collective employment agreement, its employees may, after termination of conciliation proceedings, exercise the right to strike.
Workers have the right to strike to protect their working conditions or to improve them. Collective disputes may be submitted totally or partially to arbitration.
The Labour Code contains certain provisions aimed at protecting unions. Among them, it is important to mention the union immunity that is granted to certain employees in specific situations, namely:
- the members of unions in formation;
- the members of the directing council of the unions, federations, confederations or workers' centres;
- the substitute members of the directing council, even if they are not active; and
- the union representatives.
Employees protected by union immunity cannot be dismissed without the prior authorisation of the labour court based on a justified cause provided in the law.
In addition to unions, in every workplace, company or establishment that employs 20 or more employees, a company committee must be established, comprising two representatives of the employer and two employees of the union. The union members shall be appointed annually by the union and the committee shall be established in such a way that its members may meet on equal terms. Where a union does not exist, the employees shall elect their representatives.
The employer or its representatives and the union or employees may place before the company committee questions relating to production, productivity and its improvement, the qualifications of employees and other matters.
The company committee, upon the request of an interested party, shall have the power of conciliation in controversies arising from breach by an employee or an employer of their obligations.
Xi DATA PROTECTION
i Requirements for registration
Panama does not have a government body that oversees data protection matters, and except for medical and credit or financial information, there is little regulation on the subject. Moreover, particularly, the Labour Code does not contain provisions regulating the protection or privacy of the employees' data. In fact, in recent years there has been a trend for payroll services that deal with employees' salary payments to be outsourced to third-party service providers. There are no restrictions imposed on this practice, and the employees' consent is not required.
Employees' information may be kept or transferred outside the workplace and on servers managed by third-party service providers.
ii Cross-border data transfers
Given that there is a lack of regulation on this subject, there are no restrictions on the transferability of the employees' personal data outside Panama.
iii Sensitive data
Only medical information is considered sensitive and the employee is not obliged to disclose this information to the employer, except – and only if authorised by the employee – for purposes of obtaining private medical or life coverage. This information must be treated with strict confidentiality.
iv Background checks
As a general rule, background checks are allowed. It is customary that potential employers independently verify the information provided by potential employees on work applications relating to former employment, personal references and academic background, for which the employees' consent is not required. In addition, credit and criminal record checks are also allowed; however, both require the applicant's written authorisation.
XII DISCONTINUING EMPLOYMENT
Employees who have served continuously for less than two years can be dismissed without cause. In this case, the employer must give notice of the unjustified dismissal to the employee 30 days in advance or pay a sum equivalent to 30 days' salary and, in addition, pay the employee severance for unjust dismissal that is equivalent to 3.4 weeks of salary for each year of service, assessed pro rata. The salary for this purpose will be the average monthly salary of the last six months of employment.
On the other hand, employees who have served continuously for more than two years can only be dismissed based on just cause as provided by law. If an employer decides to terminate the contract of an employee who has served for more than two years, without cause, he or she will normally try to negotiate a mutual termination agreement, in which compensation similar to that applicable to unjust termination will be offered to the employee.
There are three types of justified causes that empower an employer to terminate the employment relationship without severance.
First, the Labour Code sets forth 16 causes of a disciplinary nature, including the following:
- if the employee engages, while on duty, in acts of violence, threats or ill treatment against the employer, his or her family, or members of the management of the undertaking or his or her fellow workmen and women, except in cases of self-defence;
- if the employee, without the authorisation of his or her employer, discloses technical, commercial or industrial secrets or other information of a confidential nature that may cause damage to the employer;
- if the employee, while on duty, performs serious dishonest or dishonourable actions or criminal actions against property to the detriment of the employer; and
- if the employee fails to arrive for work, without permission from the employer or without justified cause, on two Mondays during the course of a given month, six in a given year, or three consecutive days or alternate days in any one-month period.
The second group of just causes for termination by the employer contemplates situations of a non-imputable nature, notably the following:
- a properly verified mental or physical disability of the employee that makes it impossible for him or her to perform the work;
- the expiration of one year, starting from the date of suspension of the contract, owing to the employee's illness or non-employment-related accidents; and
- force majeure or acts of God that provoke as a necessary, immediate and direct consequence, the definitive stoppage of the employer's activities.
The third group consists of causes of an economic nature, namely the following:
- the insolvency or bankruptcy of the employer;
- the closing of the enterprise or definite reduction of work because of the evident unprofitability of the enterprise;
- the definitive suppression of the work inherent to the worker's contract; and
- an evident reduction of the employers' activities owing, for instance, to a serious economic crisis, partial failure to meet operating costs because of a properly established decrease in production, innovations in the industrial process or revocation or lapse of an administrative concession, cancellation or decrease in sales orders, or any other similar cause duly verified by the competent authority.
Notice of termination must be always in writing and it must specify the reasons for termination. In case of termination for economic reasons, the employer must obtain authorisation from the Labour Ministry authorities and prove prima facie the valid economic reasons for termination. If upon the passing of 60 calendar days from the date when the authorisation is requested, the labour authorities have not ruled on the petition, the employer can proceed to execute the dismissals. In this instance, the employer shall nevertheless pay the dismissed employees severance as provided in the first paragraph of this subsection.
The employment relationship may also be terminated by mutual consent provided it is expressed in writing and does not involve the waiver of acquired rights; by expiration of the term of the contract, provided the employment relationship has been validly stipulated for a definite period; and by the resignation of the employee, provided that the same is in writing and has been ratified before an administrative labour authority.
Employees protected by union immunity, as described in Section X, or maternity immunity cannot be dismissed without the prior authorisation of a labour court based on a justified cause provided in the law. Maternity immunity is granted to female employees during pregnancy and for one year from the date the employee returns from maternity leave.
Collective dismissals are regulated under the Labour Code and are considered justified based on economic reasons, as set out in subsection i, above. For an employer to be able to dismiss its workforce collectively, it requires previous authorisation from the Ministry of Labour, as it must prove that the company is facing at least one of the economic situations described above. In the event of dismissals based on economic reasons, the following rules shall be applied:
- dismissals shall begin with employees of the lowest seniority within the various labour categories;
- after application of the previous provision, Panamanian employees shall be given preference in determining the retention of those who are not Panamanian, unionised employees over those who are not unionised and the most efficient over those who are less efficient;
- pregnant employees, even if they are not given preference under the previous provisions, shall be the last to be dismissed and only if their dismissal is absolutely necessary and after compliance with legal formalities; and
- after the previous provisions are applied, under equal circumstances, employees with union immunity shall have preference over others for retention of employment.
Even though the cause for the dismissal is justified under the Labour Code, given that the dismissal is not attributable to the employee, it must be compensated with a severance payment that is equivalent to 3.4 weeks of salary per each year of service, calculated pro rata. The salary for this purpose will be the average monthly salary of the last six months of employment.
Other than the notification to the Ministry of Labour, no other notifications are required, and there is no requirement to provide prior notice to the employees.
Mutual termination agreements may be used for collective dismissals; however, it is most likely that the employee will demand the payment of severance, three months' salary and a 25 per cent surcharge on the severance.
Individual redundancies are not regarded as justified under the Labour Code, but the employer may try to terminate the employment relationship by offering the employee a mutual termination agreement offering the payment of severance, unless the employee has less than two years of service, in which case they may be dismissed with the payment of severance and 30 days' prior notice or payment in lieu.
XIII TRANSFER OF BUSINESS
The Labour Code provides the rules that must be followed upon any change in the legal or economic structure of a company, or the substitution of an employer, which are:
- The change or substitution shall not affect existing employment relationships in a manner that would prejudice the employees.
- Without prejudice to legal obligations between an employer and an employee under the civil law, the replaced employer shall always be jointly and severally liable with the new employer for obligations existing under an agreement or imposed by law that arose before the date of the substitution for one year, counting from the date of the notice in point (c). After the end of this period, the new employer will have sole liability for these obligations.
- Notice of the substitution of an employer shall be given in writing to employees and their respective unions, no later than 15 days after the date of the substitution.
- Failure to give notice of substitution shall maintain the joint and several liability of the former employer and the new employer until notice is given.
- In no case shall the division of a company into units in which employees work or the making of contracts, commercial arrangements or combinations with the intent of diminishing or making other persons liable for the responsibilities of the employer affect the rights and claims of employees.
- When all or substantially all of the assets of a company have been transferred to a third party pursuant to a judicial or other action that is later declared unlawful or unconstitutional, the transfer will not be effected and the transferee shall be the only person liable for the legal consequences arising from actions that occur, agreements that are entered into or laws that are adopted between the date on which the aforesaid assets were transferred and the date on which they were returned to their lawful owner, except in the event that the transferor benefited from a transfer of assets that was not genuine or that was fraudulent in a manner that benefited the transferor.
- The beneficiary of an action that is declared unlawful or unconstitutional shall be jointly and severally liable with its shareholders and directors, if any, for the payment of liabilities that arose during the period of its management of the assets that it acquired or produced.
Moreover, an employee who is owed money for their work may demand payment for that work from the transferee of the property of the establishment, business or company, if the transfer was not genuine or was made through fraudulent acts.
In addition, if agreements for the lease of an establishment or business are not genuine or are fraudulent, the lessor shall be jointly and severally liable with the lessee for all obligations in respect of labour arising during the term of the lease, without prejudice to the application of provisions respecting substitution of employer to the extent that they are more favourable to employees. Agreements for the lease of an establishment or business shall be deemed not to be genuine or to be fraudulent when they cause non-fulfilment of obligations in respect of compensation for labour.
Given that the current administration will leave office in July 2019, we do not foresee that any changes to the Labour Code or any other labour-related regulations will be introduced, other than the applicable minimum wage rates.
Minimum wage rates are revised every two years, and the current term ends on 31 December 2019. During the months prior to December 2019, the government will meet with both employees' and employers' representatives to discuss the new minimum wage rates that will apply for 2020–2021.
1 Vivian Holness is a senior associate at Arias, Fábrega & Fábrega.