Panama is home to the most lucrative employment opportunities, especially in banking and finance, tourism, real estate, and the service sector. Due to the skilled workforce in these industries, the economy has seen a stable increase in global businesses employing in the growing sectors of Panama.
Therefore, when looking at hiring and employing Panamian employees, employers need to understand the Panamanian labor law, its key provisions, applicability, and the penalties for non-compliance. This article talks extensively about the labor code in Panama so that you understand how to make your employment process more compliant.
Applicability of the Act
The labor code in Panama came into effect in April 1972, with some changes in the past few years. The law regulates the relationship between an employer and its workforce.
The provisions of the Labor Code are of public order, and the law binds all persons, natural or legal, undertakings, enterprises, and all businesses registered under the Panamian corporate law and/or established within the national territory.
Employment Contract
As laid down in the Panamian labor law, all businesses hiring Panamian employees must offer a written employment contract. Both parties must sign the employment contract, which must be sealed before the Ministry of Labor.
The general rule of offering employment contracts is for an indefinite period. The exceptions are employees hired for temporary positions, independent contractors, and freelancers.
Therefore, there are two types of employment contracts in Panama, which include:
- Fixed-term contracts: An employer offers employment through a fixed-term contract for a fixed period. A fixed-term contract has a start date and end date for employment. It is commonly used for independent contractors, freelancers, and/or employees temporarily working.
- Indefinite-term contracts: Employers commonly offer an indefinite employment contract when employing full-time employees, outlining a start date. In such cases, employees enjoy benefits outlined in the Panamian labor laws.
The employment contract should preferably be in Spanish; however, it is not mandated by law. Panamanian employers commonly offer employment contracts in Spanish and English.
Key Provisions of the Act
When employing someone in Panama, it is essential to understand the key provisions of the Panamian labor laws. Keeping up with the changing provisions helps ensure you better ensure you comply with the changing provisions and avoid any unnecessary fines and penalties.
Minimum age
The legal employable age for all individuals in Panama is 18 years. However, the labor code in Panama allows businesses to hire individuals below 18 under certain circumstances, which include:
- Minors under 14 years of age cannot be employed
- Minors up to 15 years of age without a primary school education cannot be employed.
- The employment of individuals between 14–17 cannot be employed under hazardous working conditions, especially in the following areas:
- Businesses where alcoholic beverages are retailed, such as bars, clubs, etc.
- Businesses that rely on the generation, transmission, and transformation of electrical power
- Businesses that deal with the transportation of goods and passengers using railways, roadways, airplanes, highways, and inland waterways
- Companies requiring minors to handle flammable substances and explosives
- Companies requiring minors for underground work, which include tunnels/sewers, mines, and/or stone queries
- Work during night time is not permitted, which is 6p.m to 8a.m and on public holidays and weekends.
- Individuals between 14–17 must have their parents or legal guardians when entering employment.
Minimum wages and other mandatory compensation
As laid down in the Panamian labor law, the minimum wage is the lowest amount an employee is entitled to and can be legally paid for their work. The minimum wages in Panama depend on
- The type of occupation
- The economic activity of the business
- The business size
Due to these reasons, the national minimum wages range from USD 326.56 to USD 971.35 monthly.
Employers also must offer 13th-month pay to their Panamian employees. The 13th-month pay is equivalent to an additional month’s salary, which must be paid in three equal installments (in April, August, and December).
Working hours and overtime pay
The standard working hours in Panama per labor law for a full-time employee is 8 hours a day spread across a five-day workweek (which is 48 hours a month). However, employees between the ages of fourteen to seventeen are restricted to 36 hours work week.
The standard work week in Panama is from Monday to Friday.
An employee working any additional hours is entitled to overtime pay. The overtime pay is regulated by a collective agreement/employment contract and the Panamian labor laws. The maximum overtime hours that an employee can work is three hours per day and nine hours per week.
Any work that is deemed hazardous must not have overtime hours.
The overtime compensation rate in Panama includes:
- Any additional hours between 6:00 am and 6:00 pm: 125% of an employee’s gross pay
- Any additional hours between 6:00 pm and 6:00 am, on a rest day, and/or holidays: 150% of an employee’s gross pay
- Any additional hours for employees working during the night shift: 175% of an employee’s gross salary
A key factor to note is that Panama follows two currencies, the United States Dollar (USD) and Panamanian Balboa (PNB). It is essential to ensure you offer salaries in the same currency to all your employees and outline the currency you will pay salaries.
Leave entitlement
The labor regulations in Panama mandate employers to offer their Panamian employees leave. These leaves are alternatively known as statutory leaves.
Leave Type | Additional Notes | Leave Entitlement |
Annual leaves | All full-time employees in Panama are entitled to paid annual leaves.
Employees can take annual leaves based on their employment tenure and must be employed for a minimum of 12 months.
Employers must offer to pay for the leaves taken at least three days before the leaves begin. | 30 days |
Public holidays | All part-time and full-time employees are entitled to public holidays.
Any employee requested to work on public holidays must be offered overtime pay. | 11 days |
Sick leaves | All full-time employees are entitled to paid sick leaves.
The employer must pay for sick leaves at 100% of an employee’s gross salary.
To avail of sick leaves, all employees must provide a medical certificate from a registered medical practitioner. | 18 days |
Maternity leaves | All full-time employees are entitled to paid maternity leaves.
Maternity leaves start six weeks before the expected due date and end eight weeks after delivery.
Maternity pay is offered by Panamian social security. However, the employee must have a minimum of nine months’ contribution toward the social security before the ninth month of pregnancy.
If the employee does not fulfill the contribution, the employer must contribute the balance amount, calculated as the last salary or the salary average of 180 days.
In cases where there is a complicated delivery or multiple births, employees can extend the leave entitlement based on the certificate provided by a registered medical practitioner. | Maternity leave entitlement is 14 weeks
Adoptive parents are entitled to 28 days of paid leave. |
Paternity leaves | All full-time employees are entitled to paid paternity leaves.
The employer pays for the paternity leaves. | 3 days |
Probationary period
The standard probationary period is three months. However, businesses must ensure that they outline the probation period in the employment contract.
Termination, notice period, and severance pay
The employment law in Panama on termination of employment differs based on the employment contract. The termination process varies based on:
- The type of employment contract
- Collective bargaining agreement
- Reason for termination
All termination must be provided by both parties in writing and must also comply with the provisions in the Panama labor law. Any unjustified termination of employment must be trialed in the local labor court.
Employers can terminate employees during their probation period without notice. However, a minimum of 30 days’ notice is mandatory if an employee is dismissed after probation. The maximum notice period is three months.
The severance pay in Panama is not mandatory unless the employee is dismissed due to redundancy. The severance pay in such cases is based on employment tenure.
Employment Tenure (of the employee) | Severance Pay |
Six months | 0.5 month’s pay |
Nine months | 0.75-month pay |
One year | 1 month’s pay |
Two years | 3 month’s pay |
Four years | 4.5 months pay |
Five years | 5.2 month’s pay |
Ten years | 9.75 months pay |
Twenty years | 14.8 month’s pay |
Penalties
Several penalties exist for non-compliance with the Panamian labor laws, which include:
- Employers requiring their employees to work more than the predetermined overtime hours (nine hours weekly) will require to pay 75% of an employee’s gross salary in addition to an additional penalty
- In cases of unjustified dismissal of employees, employers must pay claims of payments for accrued rights for up to $2,000.00 or higher
Compliance Strategies for Employers
To avoid penalties, it is essential to stay compliant with the Panamian labor laws. Therefore, you can follow certain compliance strategies that help you understand and keep up with the dynamic labor code in Panama:
- Hiring a compliance team to ensure employees are effectively managed and compliantly processing their payroll can be a great way of handling operations. A compliance team can ensure they keep up with the changing Panamian labor laws.
- Outsourcing compliance and HR responsibilities to a global EOR can help you focus on your core business operations. Multiplier is a global EOR solution that will help you compliantly onboard employees, generate employment contracts within minutes, ensure you offer a competitive employee benefits package, and process employee payroll on time.
How Can Multiplier Help?
Hiring and employing in new markets can be relatively complex due to the changing employment laws.
With Panama being one of the most sought-after countries to hire a skilled workforce, it requires businesses to be well-versed with the Panamian labor law and have an internal recruiting and compliance team. Also, to hire in Panama, the local laws mandate employers to set up an entity in Panama, such as a subsidiary or a sole proprietorship.
You can now employ Panamian employees by working with a global PEO platform such as Multiplier and focusing on your core business operations.
Multiplier helps businesses, onboard employees, offer employee benefits, and process payroll while complying with labor regulations in Panama.
Get in touch with our professionals to understand better how we help in compliantly employing in Panama.