In this country focus we talk about all the business opportunities in Panama for foreign investors and businessmen. We are proud to say that we can offer all the financial, immigration, corporate and banking services available in Panama. However, we can´t miss the fact that most, if not all businesses, require employees, which leads us to considering the labor legislation as well. 

Panama labor law basics

Although it is possible to hire employees without a contract, we highly recommend signing one. Usually, under Panamanian legislation, if the employer should be subject to legal claims from an employee, the employee will be considered to be right. Unless the employer can present clear evidence against these claims, the law will always protect the employee. 

With a well drafted work contract, designed with the help of experienced local lawyers, you can protect yourself from unfair claims. The work contract should be signed in three versions, one for the employee, another one for the employer and the third one will be filed with the Ministry of Labor.

A person can be hired as an employee or as an independent contractor. When you hire someone as independent then it is not mandatory to pay for social security, education or withholding taxes. 

Hiring someone as an employee implies, under Panamanian law, that the person is financially dependent on the employer and has a regular working relationship in which there are regular payments, mandatory work schedule and regular supervision. An independent contractor has little supervision and can complete his work at any hour or amount of hours until the correspondent task is fulfilled. 

Wages, working hours, holidays, and government contributions 

The minimum salary varies across the county. Panama City, the country´s capital, is the most expensive city in the country, therefore the minimum salary is higher here. The minimum wage in Panama is 2 USD per hour and the payments are made twice a month, the 15th and 30th.

Panama labor law stipulates that the workers are employed from 6 am to 6 pm for the day shift and from 6 pm to 6 am for night shifts. If a person works for more than three hours during the night, he is legally considered to work in the night shift and he has the right to receive a higher salary for this. 

Under Panamanian law the maximum workday is 8 hours a day (48 hours a week) in a day shift and seven hours a day in the night shift. Overtime is considered to be the extra hours that the employee works outside this time frame, which is remunerated with a 25% over the hourly wage for day shifts and 75% for night shifts. 

Wages are subject to income tax, social security, and an education fund. The employers must withhold these taxes from the salaries and the withholdings from the prior month must be paid to the government by the 15th of each month. 

In Panama there are nine national holidays that are off days in which the employee is still remunerated and working on a holiday implies a 150% increase on the usual payment. These holidays include, Labor Day, martyrs day, carnival, Christmas, New Year and the national holidays.

Also, the employee receives what is called the “13th month”. This is the equivalent to a month´s salary divided into three different payments that must be done on April 15th, August 15th and December 15th.

Workers compensation and other social benefits

The Panamanian social security system compensates for all accidents or sicknesses happening or originated at the workplace. 

The employer must pay a contribution between 98% and 5.6 % depending on the salary and the work risks. This compensation contribution is vital for the employer since it protects from potential lawsuits by employees if they should be injured in their workplace. The only exception for this is if the injury was caused due to employer´s negligence or if an occupational hazard was created for the employee resulting in an injury. 

All individuals who are working under an employment contract in Panama, no matter whether they are Panamanian or foreigners, must contribute to the social security system. Employers contribute 12,25% of the salary and employees contribute 9.75% of the salary. In exchange for this contribution, employees have the following benefits:

1. Dental, medical and hospital coverage
2. Disability pay
3. Maternity leave
4. Worker’s comp
5. Retirement pensions;
6. Death benefits
7. Funeral funding

Female employees are protected under Panama labor law. Pregnant women cannot be fired unless there is a good reason, and this is approved by a court. The paid maternity leave ranges from 6 weeks before birth and 8 weeks afterwards and there is a minimum rest period of 14 weeks. After giving birth, a woman cannot be fired for a 1-year period, and if she is fired there must be an ascertainable good reason and a court approval. 

For employees who have been working for an indefinite period there is a benefit called seniority bonus which is calculated at one-week salary for every year of employment. This is what is known as “seniority bonus”. For the purposes of paying this bonus, the employer must contribute to a severance fund and it’s mandatory for everyone. Those who have five or less than five employees are exempted from participating in this fund except for those working in the areas of insurance, financial or real estate. 

Foreign employees

90% of the work force of any business or company must consist of Panamanian, foreigners who are married to Panamanian and foreign individuals who have a legal residency in Panama. This means that each company can have a maximum of 10% of foreign employees. An exemption can be obtained from the Ministry of Labor for a 15% of the work force to be foreigners for a period of five years, as long as they are technical experts or have a special ability or profession. 

There is a special visa called “Temporary Visitor Visa” that is aimed to foreign executives who are not paid from Panama sources. In these cases, these professionals are exempt from social security contributions and income taxes. 

Termination of Employment

There are four methods to legally terminate a work contract in Panama:

1. The employee quits
2. The time stipulated in the contract comes to an end
3. By mutual agreement of employer and employee
4. The employer fires the employee

During the fist two years of employment firing an employee is not overly complicated but some conditions must be met according to the labor law. The employer must give a written dismissal notice at least 30 days before firing or pay at least 30 days of salary plus indemnification for unjust dismissal. This indemnification is equivalent to 3.4 weeks salary for every year of employment. 

All the employees who have worked over two years in a company can´t be fired at least it´s for a “just cause” and indemnification is not required. For the Panamanian law, just cause is defined by 16 different clauses. 

This means that, if one of these conditions apply, the employer is not obliged to pay indemnification after dismissal. These just causes are 16 and are divided into three different categories: 

1-Situational: The employee suffers form a physical or mental condition that prevents him or her from working. An illness or accident that didn’t occur in the workplace and that renders the employee unable to work for a 1-year period is considered a just cause that allows for termination of the contract. 

2-Bad actions: bad actions committed by the employee including violence, threats or mistreating of an employer, co worker or superior, except if it is in self defense. If the employee discloses corporate or personal secrets or confidential information without authorization. If the employee engages in disloyal actions or if he or she commits a crime against property. If the employee acts in a way that is harmful for the company or the employer. If the employee does not arrive for work without permission or without a reasonable cause or notice for two Mondays in a month, six in a year or any three days in one month. 

3. Economic Conditions. If the employer becomes insolvent, bankrupted, or closes the business. If the employer reduces the work load because of profit loss, if he is unable to pay operating costs due to an economic crisis, decrease in production, losing costumers or clients or any such conditions that can be verified by the official organisms.

In these cases, a written dismissal letter must be sent specifying the reasons. In order for the employer to terminate a contract under economic conditions, he or she needs to get authorizations from the Ministry of Labor proving that the reasons for termination are real. If the Ministry fails to make a ruling on the case after 60 days, then the employer can fire the employee subject to the correspondent indemnification. 

These are the basics of the Panama labor law, thanks to which a foreign investor can have an idea of the conditions for setting up their business here. If you want more detailed information, you are welcomed to contact us and ask for a consultation with our Panama lawyers, experts in labor, real estate, and financial law.