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Labor Law in the Republic of Panama

International Employment Law Guide

This page outlines country-level details about the onboarding process when hiring employees, and touches upon the applicable rules when terminating employment contracts.

A. Hiring of Employees (Onboarding)


Mandatory employer requirements


The Labor Code of the Republic of Panama (the “Code”) states that, labor relationships are to be established by means of a labor contract, which can be verbal or written. The contractual relationship will involve (a) the employee, which is defined by the Code as all natural persons who are obliged to provide a service or to perform a work under the subordination or economic dependency, and (b) the employer, defined as the natural or legal person who receives the provision of services, of the execution of the work.

The labor contract is executed (signed) at the beginning of the labor relationship in three (3) copies, which must be registered in the Ministry of Labor and Labor Development (the “MITRADEL").

Labor contracts must comply with the following general conditions, as stated by the Code:

  1. Complete general information about the employee, such as name, nationality, marital status, identification number, address.
  2. Name of the employee´s dependents.
  3. Specification of the work to be provided.
  4. Place or places where the employee will provide the service.
  5. Duration of the contract, which can be stated for a (a) defined or, (b) indefinite period.
  6. Duration of the workday.
  7. The salary, and the form, day, and place of payment of such salary.
  8. Place and date of execution, as well as the signature of both parties.

The employer is further obligated to register the employee before the Social Security Administration (“the CSS”), since they begin the labor relationship as well as withhold the social security contributions (11% employee and 14,94% employer contributions).

Probation Period
 

When the provision of a service requires certain special skills from the employee, a probation period clause of up to three (3) months, can be agreed in the contract. During this period, either party, can terminate the labor relationship without any kind of responsibility. It is important to mention that this probatory period will not be applicable when the employer hires an employee that shall perform a position that has previously held within the same employer.

Hiring Checks
 

Medical examinations or pregnancy test are not mandatory requirements by the Code during recruitment process.   However, it is at the discretion of the employer to request drug tests to ensure the health and physical condition of the employee.

Also, the employer is entitled to request work reference, educational background, and a Certificate of Criminal Record, before the Directorate of Judicial Investigation (the "D.I.J."), as a as appropriate.

Diversity and Inclusion
 

Panama labour law prohibits labor discrimination for reasons of race, birth, disability, social class, sex, religion, age, or political ideas.

Maternity Rights
 

Maternity immunity is a constitutional right which entitles working mothers to be temporarily absent from work before and after childbirth. During this time, employees receive a full salary, and their work is protected by law. Maternity leave is a fundamental right that ensures the protection of the health and well-being of the mother and baby. Maternal immunity lasts fourteen (14) weeks, which is equivalent to three and a half (3.5) months. This leave is divided into two parts: (a) the first six (6) weeks before childbirth and, the eight (8) weeks after childbirth. During this time, the mother is unable to work, and her wages and salaries are protected by law.

Labor Rights for Foreigners
 

Foreigners are entitled to all guarantees and rights as national employees, which are regulated in the Political Constitution of Panama (the “Constitution”), the Code, special laws, among others.

However, in compliance with the provisions of the Code, all foreign employees are obliged to obtain an authorization to work in the country, granted by the MITRADEL. Through Executive Decree 6 of 2023, the MITRADEL established the regulation of these legal provisions through the “Regulation of Labor Migration in Panama”, determining classifications of work permits, according to the profiles of migrant populations.

Language requirements
 

All legal documents, including the labor contract, must be prepared and legally presented to the competent authority (Ministry of Labor) in the national language, which is Spanish.

However, for internal purposes between the parties, the documents could be translated into another language.

Remote work
 

Law 126 of 2020, introduces the modality of remote working as a result of the health crisis originated in 2020, This Law define remote working as “the one which consist in the performance of the subordinate services, without physical presence in the workplace or public entity, through media, telecommunications and analogues which by the means, remote work carried out the control and supervision of the work.”

In the same way the law establishes that employees will maintain all the rights and obligations established in the Labor Code. Remote Work is voluntary so in this case the employee must accept it or not in their respective labor contracts, it can also be defined after beginning the labor relationship and adding it to the labor contract through an addendum, and it can be partial or complete, Remote work can be outside the workplace or public entity, and it may be at the employee's home.

The employee has the right to recognition from the CSS regarding professional risks, that is, those that occur during the provision of the service in Remote Work if the illness was caused by the work.

It is important that both parties must respect the time of work and the rest time that every employee must has guaranteed by law. The employee will not be obliged to work overtime, unless it is established in the labor contract, if this is the case then they will be paid in accordance with the provisions of the Labor Code.

The employer must assume the costs detailed below:

  • Additional costs for broadband speed or network speed for the execution of the work at the employee's home.
  • Cost of supplies, instruments, materials, equipment, and computer programs, which must be used only for work purposes and must be returned in good conditions when this modality ends.
  • Expenses for the employee's transportation in cases where emergency work is required to be carried out outside the established address.

There are many companies who has decided to maintain Remote Work, is important to verify the labor contracts and internal processes of the companies.

B. Termination of employees (offboarding)


The causes for the termination of labor contracts are the following:

  1. By mutual consent, as long as it is in writing and does not imply the waiver of rights.
  2. Due to the expiration of the term agreed.
  3. Due to the completion of the work that is the subject of the contract.
  4. Due to the death of the employee.
  5. Due to the death of the employer, when it leads to the termination of the contract.
  6. Due to the extension of any cause of suspension for a term that exceeds the maximum authorized and at the request of the employee.
  7. By dismissal implying a justified cause or, resignation of the employee, and
  8. By unilateral decision of the employer with the formalities established by the Labor Code.

Dismissal Motivation


In accordance with the above mentioned, there are also three types of dismissal:

  1. Unilateral decision of termination with justified cause, which must be presented by writing to the employee indicating the date and explaining the cause of the dismissal, it may be by disciplinary character, by imputable character and economic character.
  2. Unilateral decision of termination without justified cause: the employee must indicate the decision to the employer through a written note fifteen days in advance and signed by the competent authority in this case (MITRADEL). It is not mandatory to justify the cause.
  3. Unilateral decision of termination with justified cause: the employee can terminate the labor relationship with just cause in writing depending on what is described in the Labor Code and has the right to compensation for unjustified dismissal.

Notice Period
 

The employer must previously notify the employee of the specific cause or causes and the date of dismissal by writing note. After this, the employer can´t allege other reasons than those already made in the written notification.

When the dismissal is by one of the causes of an economic nature, the employer must verify this cause before the competent authority (MITRADEL), if sixty calendar days pass and the authority haven’t responded to the request, the employer may proceed to dismissal and it will be considered as justified. However, if the dismissal is made without the cause being proven before the competent authority; it will be considered unjustified.

The competent authority (MITRADEL) will be the responsible for notifying the employee of the employer's request, giving them a period of three days to present evidence.

Before notifying the dismissal for any reason, the employer must obtain prior authorization to dismiss from the courts.

Severance Payment
 

When an indefinite contract is terminated, by any of the causes of termination, the employer must pay a seniority premium by one week of salary for each year worked since the labor relationship began. If a year was not completed in full, the employer must pay the proportional part.

The employee will receive compensation if the employer terminates de labor contract without justified cause or without prior authorization. The compensation will be as follows:

For seniority as of April 2, 1972

  1. For seniority of less than one year, the salary equivalent to one week for every three months of work, and in any case the compensation will be less than one week of salary.
  2. For seniority of one to two years, the salary equivalent to one week for every two months of work.
  3. For seniority from two to ten years, the salary of three additional weeks for each year of work.
  4. For more than ten additional years of seniority, the salary of one additional week for each year of work. This scale will be applied in a combined manner, distributing the time of services provided in each of the previous numerals, as appropriate.

For employment contracts In labor relations that began after August 12, 1995, the compensation will be the equivalent of 3.4 weeks of salary for each year worked in the first ten years; and each year after the ten years will be compensated with one week of  salary for each year.

When the employee claim for the reinstatement or payment of compensation through the labor court and in the process the employer cannot prove a justified cause for the dismissal of the employee, the decision will recognize the claims of the employee of the payment of compensation as the following:

  1. For up to a maximum of three (3) months from the date of dismissal for employees who started working after the Law No.44 of august 12, 1995 came into effect, and
  2. For up to a maximum of five (5) months from the date of dismissal for those who were already working before said date

Reinstatement of Employees
 

Reinstatement is the act by which the employee who was definitively and illegally separated from his job is reinstated to the previous position that the employee held, compensating him for damages in accordance with the Labor Code.

In cases where the employee´s reinstatement is ordered, the employer will terminate the labor relationship, however, must pay compensation plus a surcharge indicated as follows:

  1. 50% of the corresponding compensation for employees who were already working when the Law No.44 of august 12, 1995 entered into effect.
  2. 25% of the corresponding compensation for employees who have started working afterwards.

In addition to these two mentioned, the employer must pay the lost wages.

The employer has a period of three (3) months to reinstate the employee or to made payment of compensation with the surcharge and lost wages, until the date on which the reinstatement or payment of compensation is given; That period will run from the day after the date of execution of the sentence.

Once the reinstatement is ordered, the employer must reinstate the employee immediately or within the second business day following the execution of the resolution. In the event that the worker resigns, he will be deemed guilty of contempt of court.

Special dismissal protection
 

Some categories of employees enjoy special statutory protection against dismissal, such as pregnant women/recent mothers during maternity leave. Their employment contracts can only be terminated following a judicial procedure.

Legal means of employees
 

Labor actions prescribe in one (1) year unless the law establishes a special prescription period. The employee has that period to claim their acquired rights after the termination of the labor relationship.

Specific rules for executives
 

With regard to the specific rules pertaining to executives, the Labor Code, in Chapter III, Section One, Article 84, delineates the status of a 'trusted worker' and the conditions under which such a status is conferred. The law clearly establishes that the designation of a trusted worker is determined exclusively by the nature of the services rendered, irrespective of other considerations. This provision implies that an individual is considered a trusted worker when they are engaged in the performance of management, supervisory, or representative functions on behalf of the employer. These functions must be of a general nature and integral to the ordinary course of the employer’s activities, or alternatively, when such a designation is explicitly stipulated in the relevant collective bargaining agreement.

Collective dismissals
 

The Labor Code, within its provisions that govern the rules and procedures for dismissal, does not contain any specific regulations or guidelines addressing the matter of collective dismissal. Although it thoroughly outlines the legal framework for individual dismissals, it remains silent on the circumstances, processes, or protections related to the termination of employment affecting groups of workers simultaneously. For further reference on the conditions and clauses regarding termination, one may consult point b, which provides detailed guidance on these matters.

Get in touch
 

Michelle Martinelli
Panama
mmartinelli@deloitte.com | +507 3034100

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