Basics of Panama Labor Laws

Panama Employee

Starting a new Panama business or even purchasing an existing Panama company will require hiring new Panama employees.   Foreigners may not know much about Panama Labor laws.   This is a summary of the important aspects about Panama labor laws.

Contract or No Contract

While a Panamanian can be hired without a written contract we do not recommend it.   That’s because under Panama’s labor law the employee’s version of events in dispute of an oral contract will be presumed correct unless the employer can produce solid evidence to contradict the employee’s version.

Written contracts detail the job title, employee’s duties and responsibilities along with the employer’s obligations.   Three copies of a written employment contract will be required as one is for the employer, the second for the employee, and the third is filed with the Ministry of Labor.

Use a Panama law firm to draw up the written contracts for employees in order to avoid making costly mistakes which can end up costing the employer a lot of money.

What is “Employment” in Panama?

Some foreign employers may prefer to hire a Panamanian as an “independent” contractor to avoid paying social security, education, and withholding taxes.

Panama law defines “employment” by the circumstances whether the person is subordinate or dependent economically to the person who hired him.  This means a boss/employee relationship with regular checks/payments and mandatory hours/days for the work to be performed.  A true independent contractor has little or no supervision and can work at any hours or day until a project or task is completed.

Wages

Panama’s minimum wage is around $2 USD an hour depending upon the location and job type.  Employees in Panama City can earn a little more than workers performing the same duties in other parts of the country.  Office workers earn a little more than construction workers.  Nearly every worker is paid on the 15th and 30th of every month.

Hours

Panama labor law specifies that 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.  While an employee can work during the day and night shift, if he works for 3 or more hours during the night shift he is considered a night time employee who will earn more than a day time employee.

The maximum hours for a day shift employee are 8 while a night time worker is 7 hours.  The day time work week maximum is 48 hours (most work a 44 hour week).  The night shift works a maximum of 42 hours per week.

Overtime is charged for longer than the maximum daily or weekly hours.  An additional charge of 25% over the hourly wage is paid for day workers and 75% for night workers.

Taxes

Wages are subject to income tax, social security tax, and an education fund.  After the first week, employers must withhold these taxes and fund from employee salaries.  The government revenue office has charts showing what percentages are required to be withheld.  All withholdings from the prior month are required to be paid into the National Treasury through the Social Security Administration by the 15th of the month.

Holidays

The following holidays are paid days off for all employees:

New Year’s Day (January 1st)

Martyr Day (January 9th)

Tuesday Carnival (Mardi Gras Fat Tuesday)

Labor’s Day (May 1st)

Days of Independence from Colombia (November 3rd & 5th)

1st Cry for Independence Day (November 10th)

Day of Independence from Spain (November 28th)

Mother’s Day (December 8th)

Christmas (December 25th).

Working on a holiday incurs a 150% increase of the usual wages.

13th Month

Every employee receives a bonus known as the “13th month” which is one month’s wages annually.   It is paid in 3 equal installments on April 15, August 15, and December 15.

Workers Compensation

Panama’s Workers Comp pays for all accidents and sickness at the work place.  It is administered by Panama’s Social Security System.

Employers pay between .98% – 5.6% into the workers comp system with the rate depending upon the risks the employment creates and the salary.  This system protects the employer from civil lawsuits by injured employees.  The only exception is due to the employer’s negligence an occupational hazard was created resulting in the injury.  Unless it is a permanent disability the worker can resume working after recovering.

Social Security

Panamanians and foreigners are required to contribute to the Social Security System.  Employers contribute 12.25% with employees contributing 9.75% starting January 1, 2013.

The benefits offered by the Social Security System include:
1. Dental, medical and hospital coverage;
2. Disability pay;
3. Maternity leave;
4. Worker’s comp;
5. Retirement pensions;
6. Death benefits; and
7. Funeral funding.

Female Employees

Panama’s Labor Code has provisions protecting female employees.   Pregnant women cannot be fired without good reasons and court approval.   Paid maternity leave for up to 6 weeks before the child is born and then for 8 weeks afterwards. There is a minimum 14 weeks rest period.   She can only be fired for up to 1 year after she returns for good reasons and court approval.

Seniority Bonus

Indefinite period employees will be paid a Seniority Bonus when they are terminated.  The bonus is calculated at one week’s salary for every year of employment.  A severance fund is to be created to pay this bonus. Employers having 5 or fewer employees are exempt from participating in this fund unless they are in the insurance, financial, or real estate business.  The contributions are deductible from income taxes.

Foreign Workforce

Panamanians, foreigners married to Panamanians, and foreign legal residents for at least 10 years must consist of at least 90% of the company’s workforce.  The Ministry of Labor can grant an exception by allowing a maximum of 15% of the workforce to be foreigners who are technical workers or experts for a period of 5 years.

There is a Special Temporary Visitor Visa for foreign executives who are not paid from Panama sources.  These executives are exempt from paying social security and income taxes.

Citizens of 47 “friendly nations” who are employed as “professionals” can work for a Panama company and receive work permits.  Another new immigration law allows foreigner with college diplomas to also work in a “professional” capacity.  However, these are new laws which require that Panama Immigration define what is a “professional”.

Termination of Employment

Panama allows 4 methods for terminating employment:
1. Employee quits;
2. Employment Contract time period terminates;
3. By mutual agreement of employer and employee; and
4. Employer fires the employee.

The first 3 are self explanatory.  Firing an employee is easy during the first 2 years of employment.  The firing process requires the employer to give the employee a written dismissal notice at least 30 days prior or pay at least 30 days salary plus an “indemnification for unjust dismissal” which is equivalent to 3.4 weeks pay for every employment year.

Employees who have worked for more than 2 years may only be fired for “just cause” which is defined under Panama’s Labor Code which lists 16 just causes. Indemnification is exempt for employees fired for just cause.

The Labor Codes 16 just causes can best be classified into 3 categories:

1. Situational when the worker has a physical or mental condition preventing the employee from working. A non-work illness or accident which renders the employee unable to work for one year is another situation allowing termination.

2. Bad Acts committed by the employee including violence, threats, or treating the employer and his family, co-workers, and management poorly; except in self-defense.  The employee discloses business secrets or damaging confidential information without authorization.  The employee engages in serious disloyal or deceitful actions or committing a crime against property which harms the employer. The employee fails to arrive for work without good cause or permission for 2 Mondays in a month, six within a year, or any 3 days in one month.

3. Economic Conditions such as employer becomes insolvent or files for bankruptcy, or closes the business, or reduces workload because of profit losses. Another condition is Repression of Work due to the economy downturns, unable to pay operating costs because of decreases in production, cancellation of sales orders, losing major customers or clients, or any other economic condition verifiable from a competent official.

Written notice of termination is required which specifies the reasons.   Economic Conditions termination requires the employer to get authorization from the Ministry of Labor proving the economic reasons existed.  If the Ministry of Labor fails to make a ruling after 60 days from the petition filing, the employer can proceed with the termination subject to paying indemnification to the fired employees.

Contact Us for all of your Panama Business and Panama Immigration needs.

Ask the Expert

Have a question? We're here to help. Give us a call or send us a message and get a free Panama legal consult.

Panama Legal Resources

Browse 100s of articles to & learn how to make moving, living, investing and doing business in Panama easy.

Free eBooks

Browse eBooks and guides on Panama immigration, relocation, business in Panama and more.

Panama Relocation Newsletter

Sign-up and receive the latest Panama news and articles on relocation, immigration, and real estate.