Q: Is it
legal to freely negotiate the labor conditions with my
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 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). Employer
must 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 employeeâ€™s allegations are not true.
Q: What are the restrictions in hiring a foreign
(non-Panamanian) individual to work as an employee for the
A: Panamanian laws establish that only 10% of a company's 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
3) the amendments cannot affect the dignity or self-respect of
4) the amendments cannot result in higher risk in the duties of
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 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
employee must meet a daily schedule and perform the services at
a given location. 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
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
Q: Is it legal for me to force 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
A: The law establishes that employers cannot demand employees to
work overtime, except in the following cases;
Companies that export all of
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,
soft drink places,
public amusement or tourism
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 holiday or national
mourning day falls upon the employee's rest day?
A: The law establishes that if holiday or national mourning day
(previously established by the law) falls on Sunday, then the
following Monday is considered as mandatory weekly and paid rest
day for all those employees that normally schedule their rest
day on Sundays. If holiday or national mourning day falls
upon any other day than Sunday, and that day happens to be the
employeeâ€™s rest day, then the employee is entitled to an
additional compensatory rest day during any day of the
Q: How do national holiday and regular holiday differ? If
requested by employers, are employees required to work on a
national or mourning holiday?
A: In 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
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
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
A: In this case, the law establishes that the employer is not
required to pay the employeeâ€™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
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
The employee works for retail
stores and companies with 5 or less employees, with the
exception of financial, insurance and real estate
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
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
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
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
A: The law establishes that the following are not considered as
Injuries intentionally caused
by the employee.
Risks induced through serious
faults by the employee, consisting of;
disobedience of specific orders,
* gross or evident breach of the manual of the Professional
* 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
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
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 employeesâ€™ 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
â€“ 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
Q: What does an employer do if some employees in the company
go on strike? What if those employees do not constitute a
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.
Q: What are Panama's Social Security Tax Rates?
The social security payable rates in Panama are all based on the
employee salary as follows:
Social Security Employee:
Social Security Employer:
Professional Risk Security
Employer: 2.10% (This varies depending on the business
Employee Income Tax: To be
withheld by employer and paid to the government according to
the salary tax table.
It is also
important to know that the law in Panama allows employees to
receive a bonus by law called the â€œXIII Monthâ€ which is the
salary split by 3 payments due on April, august and December;
this is only subject to social security 7.25% employee and
10.75% employer on each of the 3 payments.
Now, that is what the law stated until it changed by law 51 of
December 27, 2005 which modifies the organic law of the Social
Security in Panama. It makes progressive rates applied by the
Social Security to both employees and employers as follows:
1. The amount to be paid by the employees will be:
2. The amount
to be paid by the employers:
3. The amount
that will be paid by independent workers will be:
Starting January 1, 2013
13.50% of their annual fees considered the base for the
social security tax.
The contribution for the
XIII Months will remain 7.25% employee and 10.75%
Note that the social security tax does not stop at any
range the way it does in the U.S. It applies to the salary
concept all the way. But there are other ways to show this
to the government and the social security that the law allows
you to use so you avoid paying too much Social Security Tax.
This can all be part of the Tax Package that we at Panama Tax
Advisors can offer as the solution to minimize your taxes.