PANAMA LABOR LAW

Panama Labor Law - F.A.Q.'s

Q: Is it legal to freely negotiate the labor conditions with my employees?

A: Yes. It is legal for you to negotiate specific labor conditions with your employees, however, there are limits established by the Panamanian Constitution, the labor laws, and by-Laws, in regards to collective bargaining agreements. Also, there may be internal labor by-laws of the company, which should be respected. The employee's or the collective bargaining agreement's consent is required to amend the previously agreed upon labor conditions as long as no legal rights are waived.

Q: Under what circumstances are labor agreements required to be in writing? Are verbal labor agreements legally valid?

A: Labor agreements should always be in writing with 3 duplicate copies (1 copy for each party and 1 copy for the Ministry of Labor). The only exceptions to this, by law, are in the following activities: agricultural activities, domestic services (maid or home cleaning services), random (occasional) labor services not exceeding three months, specific labor services not exceeding an amount of US$200, and labor services in districts (or townships) with less than 1,500 residents (except in cases where the labor service value is more than US$5000, or in cases where the employer regularly requires more than 10 employees). As an employer, it is crucial that you understand that without a written labor agreement, all facts and circumstances claimed by the employee (for example, in regards to any mandatory provisions that had to be expressed in the labor agreement), are presumed. However, you will certainly have the possibility to file proof whereby you demonstrate that the employee's allegations are not true. Nevertheless, it is not always easy for the employer to produce such proof in which case those allegations submitted by the employee shall be deemed as true against your interests.

Q: What are the restrictions in hiring a foreign (non-Panamanian) individual to work as an employee for my company?

A: Panamanian laws establish that only 10% of a companies work force can be foreign (non-Panamanian). Therefore, to hire a foreign (non-Panamanian) employee you are required to obtain a work permit issued by the Ministry of Labor. The law establishes that 90% of employees must be Panamanian citizens or a foreign individual married to a Panamanian, or foreign individuals that have resided in the country for ten or more years. However, there are exceptions to the 10% rule. For example, under circumstances where the company requires specialized staff that is not readily available in the labor force in Panama, it is permitted to hire technical or specialized staff not exceeding 15% of all the company's employees. Also, under certain conditions, the Ministry of Labor can authorize a higher percentage of technical and specialized foreign (non-Panamanian) employees. Panamanian companies with under 10 employees are permitted to have at least 1 foreign (non-Panamanian) employee. Please note that these percentages mentioned herein do not include employees with duties of responsibility in companies whose corporate purpose is solely to handle and manage, from Panama, transactions that will perfect, complete or yield their legal effects abroad (outside of Panama), with the prior authorization of the Ministry of Labor.

Q: Am I allowed to amend my employees labor conditions without the employees consent?

A: The law establishes that employers cannot amend an employees labor agreement without the consent of the employee. In prior cases, based on issues of functional mobility, employers have modified the duties of the employee. These cases are primarily based on the employers organizational necessities, or production, due to changes in the market, or due to technical innovations. In addition, this is seen in cases provided for in a collective bargaining agreement, or in situations that are agreed upon with the labor union. Please note that these amendments are subject to the following limitations:

1) the amendments must be in accordance with the position, including the category, abilities, capacity, training and experience of the employee;

2) the amendments cannot result in lowering of salary or payment;

3) the amendments cannot affect the dignity or self-respect of the employee;

4) the amendments cannot result in higher risk in the duties of the employee;

5) the amendments to the employees duties cannot result in interference with the performance of any other position, within the labor union; and

6) the amendments cannot affect the maternity privileges or rights of the female employee.

Q: Is it legal to extend a labor agreement with a fixed term?

A: The law establishes that you cannot extend a fixed-term labor agreement, even with your employee's consent because, otherwise, it would be considered to be an indefinite-term labor agreement. When the employees' duties require special technical training and the employer bears the costs (total or partial) of that training, then the fixed-term labor agreement may have as many as 2 extensions. On the other hand, continuing fixed-term labor agreements, in general, are not possible. Please note that there are some exceptions for continuing fixed-term labor agreements without causing them to convert into indefinite-term labor agreements. These exceptions apply specifically to the Export Processing Zones during the first three years of the labor relationship as well as to the construction business. For example: in cases of permanent positions required for developing a new activity (the activity may be for a maximum of 2 years).

Q: How do a labor agreement and a professional services agreement differ? How do my employer's rights and obligations vary in each case? Am I permitted to decide which type of agreement is best for my company?

A: In a labor (employment) agreement, the individual provides personal services under legal subordination to another individual or to a company. The laborers' (employees) services are rendered by becoming part of and being under the authority and umbrella of a company in a manner that the employer is entitled to exercise authority and direction powers. The laborer (employee) must meet a daily schedule and perform the services at a given location. Laborers (employees) may be subject to sanctions by the employer in the event that the employee does not duly comply with the assigned duties. In professional services agreements, such services are rendered independently with no submission to the direction and authority of the company. The individual providing services within a labor (employee) relationship is better protected than the individual hired for professional services since, in this case, it all depends on what was agreed upon in the professional services agreement, and labor law benefits do not apply, nor do benefits of the Social Security system. You cannot freely choose what option suits you best since, if you wish to hire an employee under your direction and authority, then the execution of a labor agreement is mandatory.

Q: Is it legal for me to force my employees to work overtime? What is the legally permitted maximum for overtime work? and, am I allowed to compensate overtime with time-off instead of higher pay?

A: The law establishes that employers cannot demand employees to work overtime, except in the following cases;

- Companies that export all of their production.
- Agricultural workers.
- Domestic help during holidays and national mourning.
- In the event of fire or imminent risk that poses a danger to the lives of the individuals, the existence of the company or workplace or the work being performed.
- In those events involving a collective bargaining agreement as long as the employee also commits to the individual hiring.
- In work performed in the Special Economic Area Panama-Pacific, the law number 41 of the year 2004, demands overtime when the employee's replacement has not been made.

The law does not allow employers to compensate overtime with time-off except in the case of fishing craft and coastal navigation activities where the nature of the job requires it.

The law permits up to 3 hours of overtime per day and a maximum of 9 hours per week.

Q: Does the law allow the employer to define what weekdays the employees can take their day off?

A: The law establishes that the employer and employee can select the weekly rest day, either as a fixed, pre-determined day of the week, or in a rotating fashion. However, the law also establishes that the weekly rest day should be on Sundays, except in the following activities:

- public services centers,
- agricultural and cattle-raising activities,
- drug stores,
- hotels,
- restaurants,
- soft drink places,
- public amusement or tourism businesses,
- grocery stores,
- commercial facilities in places or small towns that given their location act as service centers to agricultural areas, and those that, given their nature, interruption of the work during those days may cause serious harm to the interests of public health or to the national economy, which shall be previously authorized by the General or Regional Labor Direction,
- export processing zones.

Other than the above cases, the weekly rest day must be on Sundays.

Q: Does the law require employers to grant employees an additional rest day in the event that a holiday or a national mourning day falls upon the employee's rest day?

A: The law establishes that if a holiday or a national mourning day (previously established in the law) falls on a Sunday, then the following Monday is considered as a mandatory weekly and paid rest day for all those employees that normally schedule their rest day on Sundays. If a holiday or national mourning day falls upon any other day than Sunday, and that day happens to be the employee's rest day, then the employee is entitled to an additional compensatory rest day during any day of the corresponding week.

Q: How do a national holiday and a regular holiday differ? If requested by employers, are employees required to work on a national or mourning holiday?

A: In a national holiday (or national mourning day), it is mandatory that all public and private businesses must close down (employees are not required to work by law). In a regular holiday, only public offices are required to close.

During national holidays or national mourning you may require your employees to come to work but only under the occurrence of some of the following premises - that are likewise applicable to mandatory overtime:

Small business concerns.

- Companies that export all of their production.
- Agricultural workers.
- Domestic help during national holidays and mourning.
- In the event of fire or imminent risk that could endanger the lives of persons, the existence of the company or workplaces or the work for which employees were hired.
- In the cases provided for in the collective bargaining agreement as long as the employee commits to the individual hiring.
- In the work regarding the Special Economic Area Panama-Pacific, law number 41 of the year 2004, requires extraordinary work when the replacement of the employee has not been made.

In addition to the above cases, you may require that your employees to work during national and mourning days assuming that employees have been particularly hired to work during those days under ordinary terms or if they work on a rotating schedule.

Q: Does the law allow the employer to compensate the employee (if the employee accepts) with cash payment for the vacation time that an employee is entitled to, so to avoid suspension of the employee's duties to the employer?

A: The law does not permit this, even if the employee accepts this offer, the law establishes that the employer cannot compensate an employee's vacation time with cash money. The law establishes that vacation time must be taken in a timely fashion since what the law seeks is ensuring the employee's rest and recovery of physical and mental energy.

Q: Does the law permit the employer to fraction the employee's vacation time?

A: The law establishes that the employer may fraction vacation time to employees into two equal periods of time, contingent upon a previous arrangement with the employee. In each case, as long as the collective bargaining agreement so authorizes. In the Export Processing Zones, the law allows the employer to always resort to fraction vacation time split into two equal periods of time.

Q: What does the labor law consider to be salary in-kind? For example, if an employer pays an employee extra for travel and communication expenses, are these benefits considered as salary in-kind?

A: The law establishes that in-kind salary is solely comprised of what is delivered to the employee as board and lodging and clothing for their immediate and personal use and enjoyment. For this reason, if the transportation expenses are considered as extraordinary transportation expenses (for example, gasoline or car rental, etc.), then it is not deemed as salary. Similarly, communication expenses (such as a mobile or cellular telephone) used for work do not qualify as salary.

Q: Does the law have any contingencies regarding what currency an employer can pay their employee in? Can an employer pay employees in foreign currency?

A: The law establishes that employers may pay salaries in cash money or part cash money and part in in-kind payments. However, in the case of paying in-kind payments, the minimum salary must be fully honored in cash money. The portion of the salary must be paid in US Dollars.

Q: What are the employers' obligations in the event that an employee gets sick and overspends the employee's sickness leave fund?

A: In this case, the law establishes that the employer is not required to pay the employee's salary or pay any additional amounts to the employee.

Q: If an employer ends a labor relationship without just cause, what is the employer legally required to pay the employee?

A: The law establishes that the employer can end an indefinite-term labor agreement if:

- The employee has served less than 2 years of continuous labor services.
- The employee's work activity is for the purpose of domestic help.
- The employee is a permanent or plant employee of small business concerns such as agricultural, cattle-raising, agro-industrial or manufacturing outfits. (agricultural or cattle-raising businesses comprised of 10 or less employees, agro-industrial activities with 20 or less employees, and manufacturing outfits with fifteen or less employees).
- The employees is working in maritime vessels providing international services.
- The employee is an apprentice.
- The employee works for retail stores and companies with 5 or less employees, with the exception of financial, insurance and real estate activities.

In the cases of the above mentioned business activities, in addition to paying employees with the indemnification as established in article 225 (indemnification for dismissal), the employer must notify the employee of the dismissal with a 30 day prior notice or pay the employee the corresponding amount for such pre-notice period. The pre-notice term will come into effect as of the date of the following payment period from the date of the notice. In addition, the employer must honor the proportional payment for vacation, year-end bonus and seniority bonus.

In the cases of the other indefinite-term labor relationships, the labor law prohibits dismissals for unjustified causes and, if it happens anyway, the employee will be entitled to reinstatement or to the indemnification for dismissal as established in article 225 of the Labor Code. If the employer does not wish to reinstate the employee, the employer is required to pay the employee the corresponding amount for three months of lapsed salaries or five months (if this latter case deals with an employee hired as of August 14, 2005), and pay the indemnification for dismissal increased by 50% if the employee was hired before August 14, 1995 and an increase of 25% if employee was hired as of August 14, 1995 or after that date), if you are not current with the dismissal fund. In addition, you must pay employee in full or proportionally, the corresponding amount for vacations, the year-end bonus and the seniority bonus.

In the event that the employee's activities are domestic help, maritime workers, navigable routes workers or apprentices, then a special indemnification chart exists. For first-time workers with less than 3 months of work time, no indemnification payment is required in the event of dismissal.

Q: When is professional risk insurance required to be provided by the employer to cover the employee?

A: Employers must provide professional risks insurance to cover all employees starting as of the first day of the labor relationship.

Q: Can an employer purchase a private insurance policy to cover professional risks, instead of using the insurance policy established by the Social Security Agency?

A: The law establishes that insurance coverage for professional risks is centralized within the Social Security institution, and employers cannot substitute it with a private insurance policy. However, employers may purchase complementary insurance with private insurance companies at their own will.

Q: How does the law treat cases where an employee suffers a work accident immediately after the employee starts working and the employer has not registered the employee in the Social Security System?

A: The law is very clear that in such event, the Social Security System will hold the employer responsible for the consequences of the professional risk and therefore making the employer responsible as well for the costs of the medical attention provided to the employee.

Q: What are the employers responsibilities with regard to employee illnesses that are not covered by the professional risks insurance?

A: The law establishes that the following are not considered as professional risks:

- Injuries intentionally caused by the employee.
- Risks induced through serious faults by the employee, consisting of;
* proven disobedience of specific orders,
* gross or evident breach of the manual of the Professional Risks by-laws,
* Security and Industrial Hygiene or voluntary drunkenness (except that in the event that the employer or its representative allowed employee to carry out employee's functions knowing this condition or any other form of intoxications).

In the above cases, the employee will be held responsible for the consequences of the professional risk and the employer will not be responsible for any costs associated with this.

Q: What would be the sanctions if underage persons (who do not meet hiring requirements) were hired by an employer?

A: The law establishes that the employer would be subjected to fines ranging from US$50 to US$700, imposed by the administrative or jurisdictional labor authorities.

Q: What are the employers' responsibilities when hiring a pregnant employee?

A: The law establishes that when hiring a pregnant employee, the employer is responsible for granting her maternity leave (14 weeks). Please note, however, that if the Social Security payments are not current, then the Social Security Agency does not pay for the maternity leave, and the employer must assume all costs thereof.

Q: What obligations does the employer have in regards to allowing interference of the labor unions in the labor relationships with employees?

A: The law establishes that, while employers must respect and accept labor unions' activities, employers are not legally required to allow interference in the execution of the corresponding work tasks without affecting the legal rules and/or the applicable collective bargaining agreements regarding labor union's permits.

Q: Are employers required to allow labor union meetings within the work schedule? How do labor unions help the employer?

A: The law establishes that employers are not required to allow labor union meetings within the employees' work schedule. There is one exception, however, for labor union meetings as established in the collective bargaining agreements and the permits authorized by sub-paragraph 26 of article 128 of the labor law, towards holding a special labor union committee.

The employer benefits from labor unions that provide for a specific dialoguing representative to handle labor issues and labor relationships and to adopt resolutions that require the union's participation (for example; fractioning vacation time, functional mobility, commitment to overtime work, payment by bank checks, extending the concept of employees with high responsibilities, adoption, prevention and rehabilitation rules in cases of alcoholism and use of prohibited drugs).

Q: If an employer acquires another company, therefore becoming the new employer of the employees of acquired company - Does the new employer continue applying the collective bargaining agreement that was previously used?

A: Yes. The law establishes that if a company acquires another company that executed a collective bargaining agreement with its employees, then the acquiring company becomes part of said collective agreement and therefore assumes all obligations therein.

Q: What does an employer do if some employees in the company go on strike? What if those employees do not constitute a majority group?

A: The law establishes that if employees declare a strike on the company, the company must close down immediately after receiving notice of the strike, from the Ministry of Labor. If those employees who go on strike, do not constitute a majority group, then the employer may request from the Ministry of Labor (within a term of 24 hours as of the reception of the notice), to carry out a provisional count so as to avoid closing the company down, and within a term of 3 days as of the start of the strike, the company may file a petition before a Sectional Labor Court asking to declare the strike as illegal.

Q: Can an employer resort to a private arbitration proceeding regarding collective labor conflicts?

The law establishes that employers cannot resort to a private arbitration proceeding regarding collective labor conflicts. Employers may agree with the labor union in submitting the conflict to arbitration proceedings via the procedure followed before the Ministry of Labor.

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