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Understanding Labor Laws in Panama

Understanding labor laws in Panama is crucial as an expanding company looking to hire staff. The country offers competitive conditions for doing business – it leads in economic growth in Central America, drawing much attention from foreign investors. The country has increased GDP per capita dramatically and has a reported GDP per capita (PPP) of USD$42,738. Furthermore, Panama is expected to continue experiencing stable growth for the future.

The Panama Canal strongly supports international commerce activities, and the country has developed a set of incentives that favor foreign investment. As an employer entering this market, you must comply with all current labor laws in Panama when hiring staff. While most regulations are similar to neighboring countries, there are some peculiarities in the country.

Biz Latin Hub is a specialist in Latin America and the Caribbean and can help you navigate the labor laws in Panama or indeed anywhere else in the region. We know the system and regulations inside out, so out array of back-office services can help you stay compliant and thrive in this part of the world. If you want to register a company in Panama, we can help you.

Labor laws in Panama: Know the labor code

Labor and employment in Panama is governed by the Labor Code. This code was adopted through Cabinet Decree N. 152 of March 1971, reformed by Law N. 44 of August 1995 and it specifies norms to regularize labor.

What is the minimum wage in Panama?

Opportunities for investment in Panama are scattered in a variety of industries, each with certain recruitment needs. To hire talent for your business, it’s important to know the different minimum wages applicable for each industry or economic zone.

There is no such thing as an equal minimum wage for all economic activities in this Central American country.

According to labor laws in Panama, the minimum wage depends on the type of activity and size of the business. There are 37 different classifications for minimum wages between regions. 

The most common commercial activities and their respective wages include:

Commercial activity

Minimum wage (US$ per hour)

Agriculture and animal breeding

US$1.91

Construction

US$3.24

Wholesale and retail for small- to medium-sized enterprises(SME)

US$2.27

Wholesale and retail for big companies

US$2.81

Supermarkets with 5 or more branches

US$2.88

Colon Free Trade Zone

US$3.20

Small-sized Hotels

US$2.28

Big-sized hotels

US$2.75

Resort with franchises

US$2.88

Small-sized restaurants

US$2.22

Big-sized restaurants

US$2.88

Labor laws in Panama specify different minimum wages by area and sector

Employing foreign workers

Under Panamanian labor law, only 10% of your business workforce can be filled by foreign workers. If foreign individuals are considered specialized, technicians or trusted individuals, the percentage increases to 15%.

Note that foreigners married to or dependent on a Panamanian national are not included in the above foreign workforce percentage. 

Benefits to workers

Labor laws in Panama also define an employee’s benefit(s), which include the following: 

Biz Latin Hub’s Snapshot of Employment Law in Panama


WORKING HOURS
An average working day is eight (8) hours long. The working week is divided into five (5) or six (6) consecutive working days, with a standard working week being between 40 and 48 hours. 

TYPES OF EMPLOYMENT CONTRACT

There are three (3) types of labor contracts in Panama

Fixed-term employment contract:

Can be for a period of days, weeks, months, or years. The general rule is that these types of contracts cannot exceed one (1) year. Exceptionally, they can last up to two (2) years for people with professional or technical qualifications. This type of contract can only be renewed once. 

Indefinite-term employment contract:

These contracts will only terminate when both parties agree or when one can legally act unilaterally, such as in the case of a resignation or termination by just cause.

Specific task or project employment contract:

This is regarded as an “undetermined contract” as there is no specific or clear date for when the task or project will be completed. It is key to determine a priori clear objective markers or thresholds so there are no ambiguities regarding when the project will be completed.

Termination and severance

Under Panamanian law, an employee must provide 15 days of advance notice of their intention to vacate their role, or 60 days of notice in the event that they are a technical worker undertaking a highly-specialized role. In the event of failure to provide adequate notice, the employer can deduct an amount equal to one week of salary from any seniority payment the employee is entitled to upon leaving.

In the event that the employer wishes to terminate the contract of the employee, they must pay them any outstanding salary and compensate them for unused vacation and public holiday allowance. The employee is also entitled to a proportion of their annual bonus (thirteenth salary) based on how much of the year they have worked. 

Based on length of service, the employee is also entitled to a seniority payment equal to one week of salary for every year worked. Where that service exceeds two years, they are also eligible for additional compensation.

Only during an employee's probation period, or in the event of them being guilty of misconduct or any other behavior prohibited under the terms of their contract can an employee have their contract terminated without compensation.



VACATIONS, LEAVE, AND OTHER ABSENCES
Statutory vacation allowance / paid time off (PTO)
Thirty (30) PTO days are accrued per 11 worked months (at the rate of one day for every eleven days in service). PTO days can only be accrued for up to two (2) periods, e.g. 60 days accrued over a two (2) year period.

Under Article 59 of Panama’s labor code, vacations are granted for the worker to enjoy rest, therefore it cannot be renounced in exchange for remuneration or compensation.

Maternity and paternity leave: 

Maternity leave allowance is six (6) weeks prior to the due date and eight (8) weeks after the child is born. This is paid by the employer. Fathers are entitled to three (3) days of paid paternity leave.

Sick leave: 
Each worker is entitled to 18 days of sick leave per year. The employee is obliged to present a certificate issued by a licensed doctor or clinic to demonstrate the validity of a sick leave claim. If such proof of inability to work is not presented, the employer has the right to discount from the salary the days that the employee didn’t work. 

Bereavement:
Panama’s labor code does not specify any type of permission for the death of family members. Therefore, the granting of leave in case of bereavement must be negotiated with the employer.

v. STATUTORY CONTRIBUTIONS
Employee Deductions:
The employer will have the obligation to deduct from the employee: 
Social Security contributions must be paid  to the “Caja del Seguro Social” (CSS) at a rate of 9.75% of the gross salary. 
Educational insurance is also paid to the CSS at a rate of 1.25% of the gross salary. 
Income Tax is deducted at a rate of 15% of the gross salary, however the first $11,000 are exempt from this tax.
Employer Contributions:

Social Security contributions must be paid by the employer to the CSS at a rate of 12.25% of the employee’s gross salary.

Educational insurance is paid by the employer to the CSS at a rate of 1.5% of the employees gross salary. 

Risk or accident insurance is paid by the employer to the CSS at a general rate of 0.98%, however that percentage can be adjusted according to the level of risk associated with the job role being undertaken.
Snapshot of the labor laws in Panama.
  • Vacations: According to article 177 of the Labor Code, workers are entitled to 30 days of paid vacations per year.
  • Bonus salary: Employees are entitled to a bonus equal to one month of salary each year. This bonus is split into 3 parts and is paid on April 15, August 15 and December 15.
  • Social Security: Companies in Panama must comply with social security obligations. They must make contributions towards employee health insurance to the social security authority, Caja de Seguro Social, (Social Security Fund), as well as applicable pension and unemployment support. 
  • Maternity Leave: During pregnancy, female employees may receive a paid maternity leave of up to 6 weeks before birth, and a paid leave for up to 8 weeks afterwards.

Contracts

According to labor laws in Panama, periods for employment contracts can be indefinite, definite (fixed-term), and specified for the time the employee takes to complete a determined project.

The definite contract must always be in a written form. The timeframe cannot be longer than a year, unless the project requires specialized technical preparation. In this case, the contract can be signed for a period of 3 years. 

Under labor laws in Panama, It is also possible to hire an employee for a probation period – this period has a maximum time limit of 3 months. If the employer isn’t satisfied with the employee’s performance or work during this time, there is no obligation to hire them. Similarly, employees have no obligation to the company if they choose not to continue working within the specified period.

What are the working hours in Panama?

The workday is divided into 2 periods: 

  • Daytime, from 6:00 until 18:00 
  • Nighttime, from 18:00 until 6:00

If an employee’s day shift includes more than 3 hours during the nighttime schedule, it is considered nighttime work. In addition, if the person’s working hours include both daytime and nighttime working hours, it is considered a mixed schedule (noting that more than 3 hours’ work during the night schedule classifies as a night shift).

The maximum daytime working hours is 8 hours and the working week cannot exceed 48 hours. The maximum night-time working hours is 7 hours, which corresponds to 42 weekly hours. 

Labor laws in Panama mean software developers earn well

Panama’s regulation regarding labor unions

The Labor Code recognizes that employees have the right to organize in unions. Employees can choose from any union registered with the government. The employer is obligated to negotiate with the union that represents their staff. In addition, labor laws in Panama recognize workers’ right to strike and establishes prior negotiation procedures between the employer and the union before the employer suspends an employee.

In order to protect your business and comply with all relevant employment regulations, it’s strongly recommended you engage with a labor law expert in Panama for advice and guidance.

FAQs about labor laws in Panama

In our experience, these are the most common questions that our clients ask us.

1. What are the labor laws in Panama?

Panama labor law states that there are specific working hours for day time and night time employees. Day time workers are employed between 6 a.m. to 6 p.m., while night employees work between 6 p.m. to 6 a.m. If an employee works for 3 or more hours during the night shift, they are considered a night time employee and will earn a higher wage.

2. What are the working conditions in Panama?

The maximum hours for a day shift employee in Panama is 8 hours, while a night time worker is allowed to work for seven hours. The day time work week maximum is 48 hours, with most employees working a 44 hour week. On the other hand, the night shift workers are allowed to work a maximum of 42 hours per week. Overtime is charged for any hours worked beyond the maximum daily or weekly hours.

3. How many hours are in a standard work day in Panama?

A standard work day in Panama typically consists of 8 hours, totaling to 40 hours per week. However, it is common for Panama shifts to extend to an average of 12 hours per day or 42 hours per week. It is important to note that certain regional laws enforce a maximum of 8 hours per day and 40 hours per week.

4. What is the minimum salary in Panama?

The minimum wage refers to the lowest amount a worker can legally be paid for their work in Panama. It ranges from 1.22 to 2.36 Panamanian balboas per hour, depending on the region and sector.

5. How is overtime paid in Panama?

Overtime in Panama is calculated for hours worked beyond the maximum daily or weekly limit. Day workers receive an extra 25% of their hourly wage for overtime, while night workers receive 75% more. It is important to note that wages in Panama are subject to income tax, social security tax, and an education fund.

6. What are the laws regarding employment termination in Panama?

Termination of employment in Panama does not require a mandatory notice period if it is with cause or a negotiated termination. However, if the employee has less than two years of service, a 30-day notice or payment in lieu of notice is required.

7. What are the requirements for terminating an employee in Panama?

To terminate an employee in Panama, the employer must either provide a written dismissal notice at least 30 days in advance or pay the employee at least 30 days’ salary plus an “indemnification for unjust dismissal”. This indemnification is equivalent to 3.4 weeks’ pay for every year of employment.

– The employer must give the employee a written dismissal notice at least 30 days prior to termination.
– If the employer fails to provide the required notice, they must pay the employee at least 30 days’ salary plus an “indemnification for unjust dismissal”.
– The indemnification for unjust dismissal is equivalent to 3.4 weeks’ pay for every year of employment.

8. What happens when an employee quits in Panama?

When an employee decides to quit their job in Panama, they are required to provide their employer with a minimum of 15 days’ notice. Failure to do so will result in the employee having to compensate the employer with the amount equivalent to one week’s salary, which can be deducted from their seniority premium. Additionally, when an employee’s contract is terminated, they are entitled to receive severance pay, which includes the accumulated 13th salary and vacation pay. Furthermore, employees who have worked for less than two years are also entitled to receive an advance notice payment equivalent to one month’s salary. Lastly, employers are obligated to pay any outstanding wages and compensation that the employee has earned but has not yet been paid. This payment must be made no later than the employee’s regular payday or within 7 days after they have resigned, whichever comes first.

Biz Latin Hub can help you with labor laws in Panama

Panama is an attractive destination for investment. The country’s fiscal policies represent a great advantage for expanding companies of all sizes. Panama also offers significant ease of access to international markets. 

Foreign businesses expanding to the country should hire employees in compliance with labor laws in Panama. Seek assistance from trusted, experienced employment law professionals so as to avoid any unnecessary penalties from local authorities. 

At Biz Latin Hub, we specialize in supporting multinational companies from all around the world enter Panama. Our team of multilingual lawyers and accountants offers customized market entry and back-office solutions in areas such as company incorporation, recruitment and hiring, PEO services, commercial representation, and visa services. 

Contact us now for more information and personalized advice.  Learn more about our team and expert authors.

Biz Latin Hub can help you with labor laws in Panama

The information provided here within should not be construed as formal guidance or advice. Please consult a professional for your specific situation. Information provided is for informative purposes only and may not capture all pertinent laws, standards, and best practices. The regulatory landscape is continually evolving; information mentioned may be outdated and/or could undergo changes. The interpretations presented are not official. Some sections are based on the interpretations or views of relevant authorities, but we cannot ensure that these perspectives will be supported in all professional settings.
Legal Team Panama
Legal Team Panama

Legal Team Panama is the Biz Latin Hub leading experts on doing business in Panama The Team writes on the news, doing business, law, and changing regulations. The team are experts in corporate law, Administrative law, Employment law, Immigration law and legal advisory services. Read more about them here. You can contact Legal Team Panama via our "contact us page".

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