Panama

Sources of regulation

Art. 70 of the 1972 Constitution of Panama states that “no worker can be dismissed without just cause and without the formalities established by law. The law will specify the just reasons for dismissal, special exceptions and corresponding compensation.” In accordance with art. 75 of the Constitution, this is considered as a minimum protection for workers.

The Labour Code (LC), as amended in 1995, is the primary source in the area of labour law, although there are also supplementary laws regulating specific subjects. Collective agreements and internal work rules (which should contain, among other things, disciplinary provisions and the form in which they are to be applied) also supplement the main legal sources (secs. 181 et seq., LC).

Rulings made by the labour courts do not establish precedents although their contents are regarded as legal doctrine.

Scope of legislation

Pursuant to sec. 2 of the LC, its provisions are binding on all physical persons and incorporated bodies, undertakings, farms and establishments existing or to come into existence in the national territory. Civil servants are governed by civil service rules, except in those cases where any provision of the LC is expressly stated to be applicable to them.

Agricultural and agro-industrial cooperatives are governed by the special regulations made on this subject (sec. 3, LC).

Contracts of employment

An employment contract is a verbal or written contract whereby a person undertakes to provide services or perform work for another person, under the latter’s orders and authority (sec. 62, LC). Contracts may be made for an unspecified period, for a specified period (of not more than one year, except in the case of services requiring special technical skills, in which case the duration may be stipulated for a maximum of three years) or for a specified piece of work (sec. 73, LC). The duration of a contract for a specified period is valid only (sec. 75, LC):

• where the nature of the work performed so permits;
• if it is made for the purpose of temporarily replacing a worker who is on leave, on vacation or absent because of any temporary impediment; or
• in the other cases provided for in the LC.

The employment relationship is deemed to be for an unspecified period (sec. 77) if on expiry of the agreed period, the worker nevertheless continues in the employer’s service; when the contract is made for the execution of a specified piece of work and the worker continues to do the same kind of work after the specified piece of work has been completed; when successive contracts for a specified period or for a specified piece of work are entered into, or the agreement is not adjusted to the nature of the service, or if it is clear from the quantity and total duration of the contracts that there is the intention to foster an indefinite relationship.

A clause stipulating a probation period will be valid when the work requires certain aptitudes or special skills (sec. 78, LC). The maximum duration of the probation period is three months, provided that it is expressly contained in the written contract of employment. A probation period may not be required in the event that a worker is hired to work in a post which he or she had previously occupied in the same undertaking.

The LC also provides for temporary contracts (sec. 79, LC), which are contracts for work performed at a given time each year, in certain branches of activity forming part of the normal routine of the employer’s activities, and which is suitable for the establishment of contracts of unspecified duration. The employment relationship is deemed to be a regular or stable one, on a seasonal basis, once a worker has been employed for two full consecutive seasons.

Domestic employees, rural workers, teachers and instructors, commercial travellers, sales personnel and similar workers, artists, musicians and announcers, motor transport workers, sea and inland waterway transport workers are covered by special contracts.

Termination of employment

A contract of employment may be terminated other than at the initiative of the employer (sec. 210, LC):

• by mutual consent, on condition that consent is expressed in writing and does not imply a waiver of rights;
• on the expiry of the stipulated period;
• on completion of the work which is the subject of the contract;
• on the death of the worker;
• on the death of the employer, if this has the inevitable result of terminating the contract;
• by prolongation, at the worker’s request, of any of the reasons for suspension of the contract for a period exceeding the maximum authorized in the LC for the reason concerned; and
• by the worker’s resignation.

The worker may terminate the employment relation (sec. 222, LC), without having to give any reasons as justification, by serving 15 days’ prior notice in writing on the employer, except in the case of technicians who must give two months’ prior notice. A worker who fails to give such notice is obliged to pay the employer an amount equal to one week’s wages, which may be deducted from the long-service bonus if the worker is entitled to one. The worker may also end the employment relationship for just cause, and in this case may be entitled to compensation for unjustified dismissal (on the grounds stated in sec. 223, LC).

The following workers are exempted from these rules (sec. 212, LC):

• workers who have completed less than two years’ uninterrupted service;
• domestic employees;
• workers who are permanently with or on the staff of small agricultural, fishing or manufacturing undertakings (if the agricultural or fishing undertaking employs ten or fewer workers, the agro-industrial undertaking employs 20 or fewer and the manufacturing company, 15 or fewer);
• seafarers serving on board vessels operating on international routes, apprentices;
• workers in retail sales establishments and in undertakings with five or fewer workers, except in the case of insurance establishments or real estate. In these cases, in addition to paying compensation, the employer must give 30 days’ prior notice or pay the corresponding amount. Also, no payment of wages in arrears is due for unjustified dismissal, unless the absence of a valid reason is proved.

Dismissal

Panamanian law recognizes numerous disciplinary, non-disciplinary and economic reason as valid grounds for the termination of employment at the initiative of the employer.

The following are valid disciplinary reasons for the employer to terminate the contract of employment:

• if the worker misled the employer by submitting false certificates attesting skills, aptitudes or abilities which the worker does not in fact possess, where the possession of these attributes was a material fact on which the contract was based. The employer’s right to terminate the contract on these grounds lapses one month after the date on which he or she becomes aware of the facts, if he or she fails to take action. In cases where no proficiency certificates are involved, the time limit should in no case exceed one year running from the date of entry into employment;
• if the worker, in the course of the work, behaves in a violent manner or physically attacks or threatens or is guilty of verbal abuse towards the employer or the latter’s family or members of the management of the undertaking or business or his or her fellow workers, unless the worker has been severely provoked;
• if the worker behaves in the above manner outside the workplace towards the employer or members of the management of the undertaking or business or fellow workers involving any of the acts described above, if it is impossible to continue the employment relationship on account of the seriousness of these acts;
• if, without the employer’s authorization, the worker discloses technical, commercial or manufacturing secrets or confidential management secrets, the disclosure of which may cause prejudice to the employer;
• if the worker commits at any time during the validity of his or her contract serious dishonest or immoral acts or acts damaging property, thereby causing direct prejudice to the employer;
• if the worker wilfully damages, in the performance of his or her work or in connection therewith, any machinery, tool, raw material, product, building or other object directly connected with the employment;
• if the worker causes, through his or her wilful negligence or unlawful act, the material damage referred to in the preceding clause, if the damage is sufficiently serious and the worker’s act is the sole cause of the prejudice suffered;
• if the worker’s inexcusable imprudence or negligence endangers the workplace and the persons on such premises;
• if the worker flagrantly and repeatedly refuses to observe the prevention rules and the precautions imposed for the avoidance of employment injury;
• if the worker refuses to obey, without justification and thereby causing prejudice to the employer, any order given by the latter or the latter’s agents in directing the work, on condition that such orders are given clearly and refer directly to the performance of the work contracted for;
• the worker’s absenteeism, without the employer’s permission or valid excuse, on two Mondays in the course of one month or six Mondays in the course of one year, or three consecutive or alternating days in the course of one month. For the purposes of this clause “Monday” is to be interpreted as meaning also the day following any public holiday or day of national mourning;
• if a worker repeatedly leaves his or her post, which means leaving the workplace at prohibited times without justification and without the permission of the employer or the latter’s representative, during working hours, or repeated refusal to perform the work which is the subject of the contract, without valid reason;
• repeated failure on the part of the worker to observe the prohibitions laid down in sec. 127(3), (4) and (5) (prohibitions on workers);
• if a worker, being in a position of trust or confidence, is guilty of acts or omissions, in the performance of his or her services or outside his or her employment, which cause the employer to lose confidence in him or her;
• sexual harassment, immoral conduct or unlawful acts perpetrated by the worker at work; and
• if the worker’s output is obviously below standard according to the systems of and regulations for their appraisal previously approved by the Ministry of Labour and Social Welfare or agreed through collective agreement.

The following are valid non-disciplinary reasons for the employer to terminate the contract of employment:

• the pre-existing inability or manifest inefficiency of the worker making the fulfilment of the essential obligations of the contract impossible. These grounds may be alleged by the employer only within the first six months following the date on which the worker commences his or her service;
• an executory judgement sentencing the worker to a term of imprisonment or hard labour or the fact that a worker who is in custody or preventive detention does not give the notification referred to in sec. 199(2) in due time, or after his or her imprisonment for a period of one year;
• the grant to the worker by the social insurance scheme of a retirement or permanent absolute disability pension, after confirmation is received that he or she is due to receive such pension as from the following month;
• the worker’s mental or physical incapacity, duly certified, making the performance of the contract impossible;
• on the expiry of a period of one year from the date of suspension of the contract on account of sickness, other than an occupational disease, contracted by the worker or an accident other than an occupational injury sustained by him or her;
• the employer’s incapacity, inevitably resulting in termination of the contract; and
• force majeure or unforeseen event having as its necessary immediate and direct consequence the definitive cessation of the employer’s activities.

The following are valid economic reasons for the employer to terminate the contract of employment:

• the employer’s bankruptcy or insolvency;
• the closing down of the undertaking or retrenchment, due to the undertaking obviously not being able to pay its way, or to the exhaustion of raw materials in the case of extractive industries;
• the final and permanent termination of the activity which is the subject of the contract; and
• the duly proven reduction of the employer’s activities due to serious economic crisis or part of the operations not paying their way on account of decline in production or innovations in the production process or manufacturing plant; or the fact that an official tender or concession is called in or lapses; cancellation of sales or purchasing orders, or any similar reason duly proven by the competent authority.

The LC provides the guarantee of trade union immunity to the following workers:

• the members of trade unions, where the unions are being established;
• the members of the executive committees of workers’ trade unions’ federations, confederations or central congresses, up to a maximum of 11 members (sec. 369, LC);
• trade union representatives; and
• substitute members of the executive committee whether actively serving or not. If the trade union has more than 200 members, it may appoint a number of substitute members equal to or less than the titular members and all such members are to enjoy full trade union rights and privileges. If the membership of the trade union is less than 200, the union may designate one substitute member for every titular member, but only five such members have full trade union rights and privileges; in every case, the substitute members of the executive committees of workers’ federations, confederations and central congresses enjoy full trade union rights and privileges (sec. 382, LC).

Sec. 384 of the LC establishes a series of rules applicable to the duration of trade union immunity:

• for the members of trade unions in the course of formation: for three months following the date on which such association’s registration is authorized;
• for titular and substitute members of executive committees (the latter if they enjoy trade union immunity) and trade union representatives: for one year running from the date on which they cease to hold office;

The protection of trade union immunity commences on the date on which the worker’s name appears on the list of candidates for election, on condition that such list is communicated to the employer or to the Inspectorate of Labour, and provided that such protection does not cover a period of more than one month before the actual date of the elections. Elected candidates continue to enjoy trade union immunity even before they take office, and unsuccessful candidates are to continue to enjoy such protection for the entire month following the date of the election returns. If the communication referred to above is not made, immunity should be afforded to members of the executive committee and trade union representatives as from the date of their election.

Similarly, in the area of maternity protection, sec. 106 of the LC provides that an expectant mother may be dismissed only for valid reasons and with prior authorization of the judicial authorities. An expectant mother who receives notice of dismissal or of unilateral termination of her employment which has not been authorized by the competent labour court must submit to the employer or to any labour authority a medical certificate of her pregnancy within the 20 days of receipt of such notice of dismissal. On completion of this formality the employee is entitled to immediate reinstatement in her employment plus payment in full of her remuneration as from the date of the dismissal. If she allows the said 20-day period to expire without taking any action, she may submit the certificate and claim reinstatement at any time during the following three months, but in this case she is entitled only to back payment of her remuneration as from the date on which she submits the certificate. If the employer refuses to reinstate her, she may sue in the ordinary way for a reinstatement order.

Notice and prior procedural safeguards

If an employer contemplates dismissing a worker for any of the reasons stated in sec. 213, clause C (valid grounds for dismissal based on economic reasons), the employer must furnish evidence to the labour administration authorities.

In the cases covered by this section, dismissal carried out without the fulfilment of the requirements stated in the previous paragraph is considered wholly unjustified. However, if after 60 calendar days the labour administration authorities have not issued a decision on the application, the employer may proceed to give notice of dismissal, which will be considered entirely proper but which will require the payment of the compensation prescribed by the LC (sec. 225, LC).

The notice is to be in writing, specifying the date and the specific reasons for the dismissal or termination of the employment relationship (sec. 214, LC). Any additional reasons subsequently alleged and differing from those set out in the said notice are invalid.

The labour administration authorities called upon to take a decision respecting the granting of prior authorization to terminate a contract or dismiss a worker on the grounds referred to in sec. 213 of the LC must personally inform the worker or workers concerned of the employer’s making an application, giving them a time limit of three days to present their case. The authority must examine the evidence within a reasonable period and issue an immediate decision granting or refusing the authorization applied for (sec. 216, LC). After being notified, the parties may appeal against the decision to the next higher competent authority, such appeal acting to suspend the decision.

The employer has the option, before proceeding to give notice of dismissal on any of the grounds set out in sec. 213, clauses A, B and C(1), of applying to the labour courts for prior authorization to dismiss, the application being dealt with in the summary or expedited proceedings (sec. 217, LC).

The right to dismiss a worker and the right for the worker to quit his or her job with just cause expires within a time limit of two months. In the case of authorization for dismissal, the period runs from when the respective final judgement is handed down.

The imposition of disciplinary sanction on a worker excludes the possibility of dismissing the same worker or applying for an authorization to dismiss him or her on the same grounds (sec. 13, LC).

In the event of dismissal for economic reasons, the following rules are applied (sec. 213(C)(3), LC):

• the first workers to be affected are those having the shortest length of service in the categories concerned;
• after that, in deciding which workers are to be maintained on the staff, preference should be given to Panamanian workers (over aliens), to workers who are members of the trade union (over those who are not), and those who have shown the most efficiency should be given preference over less efficient workers;
• expectant mothers, even if they are not protected by the preferential treatment referred to in the foregoing provisions, should be laid off last of all and only in cases of absolute necessity, with due observance of all the legal formalities; and
• all other things being equal, after the above rules have been applied, workers protected by their trade union status or office have preference over the other workers as regards maintenance of their contracts (sec. 213, in fine, LC).

Severance pay

In the case of contracts of unspecified duration, a worker who is given notice of dismissal may apply to the arbitration and conciliation board or the labour courts, in the absence of arbitration boards, for reinstatement to his or her post or payment of the compensation referred to in sec. 225 of the LC. If, in the course of the subsequent proceedings, the employer is unable to furnish evidence of justification for dismissal or is unable to produce the authorization for such dismissal, the court will issue judgement in the worker’s favour, confirming the rights claimed by him or her and ordering the back payment of all wages, calculated as follows (sec. 218, LC):

• up to a maximum of three months following the date of dismissal, for those workers who were employed after the LC came into force; and
• up to a maximum of five months, for those workers who were already employed at the time the LC came into force.

Labour proceedings under way in the courts before the LC entered into force and which imply the payment of employment benefits, wages in arrears or compensation are governed by the rules in force at the time the LC entered into force. Judgement will require the payment of this compensation from the fund established by the employer for this purpose or, in the absence of such a fund, the board or court should order the employer to pay the legal costs, in addition to compensation.

The arbitration and conciliation board must render a decision within a maximum period of three months, following the submission of the application. The fine for the infringement of the foregoing stipulations is subject to the provisions of the LC.

The Ministry of Labour may establish the arbitration and conciliation boards as needed for the fulfilment of the objectives of this section and, in particular, to prevent the accumulation of wages in arrears (sec. 218, LC).

In the event that reinstatement is ordered, the employer may end the employment relationship through the payment of compensation plus a surcharge, calculated as follows (sec. 219, LC):

• 50%, in addition to the corresponding compensation, for those workers employed in the undertaking at the time the LC entered into force; and
• 25%, in addition to the corresponding compensation, for those workers who begin working after the LC entered into force, provided that the employer has not established a severance fund.

In addition, wages in arrears are to be paid in the form prescribed by the respective judgement, in accordance with sec. 218 of the LC.

The employer has a time limit of one month to reinstate the worker or pay the compensation with a surcharge and the wages in arrears, up to the date on which reinstatement takes place or compensation is paid; this period will run from the day following the date on which the judgement is handed down.

In the cases considered in sec. 212(3) and (6) of the LC, the payment of compensation should be made within a time limit of not more than six months, with proof, duly endorsed in advance by the judge or board, of the poor economic status of the undertaking, and on condition that such payments are not less than the equivalent average monthly wages of the dismissed worker (sec. 219, LC).

Upon termination of a contract of employment of unspecified duration (sec. 224, LC), irrespective of the cause of termination, the worker is entitled to receive a long-service bonus from his or her employer, at the rate of one week’s pay for every year of employment since the commencement of the employment relationship. In the event that any of the years of service has not been completed since the commencement of the employment relationship or in subsequent years, the worker is entitled to the corresponding proportion. In the case of a worker who was already employed at the time the severance fund was established, this right is calculated from that date. The period previously worked should also be paid to him or her upon termination of employment, provided that he or she has rendered continuous services to the employer for ten or more years.

The worker is entitled to receive from his or her employer compensation based on the following scale (sec. 225, LC) for periods of service prior to 2 April 1972:

• for less than one year’s service, the equivalent of one week’s wages for every three months of employment, and with a minimum amount of such compensation equivalent to one week’s wages;
• for a period of service of between one and two years, the equivalent of one week’s wages for every two months of employment;
• for more than two and not more than five years’ service, three months’ wages;
• for more than five and not more than ten years’ service, four months’ wages;
• for more than ten and not more than 15 years’ service, five months’ wages;
• for more than 15 and not more than 20 years’ service, six months’ wages; and
• for more than 20 years’ service, seven months’ wages.

This scale may not be applied on a graduated basis, i.e. the highest applicable level determines the amount to be paid.

For periods of service after 2 April 1972, the following scale is to be applied:

• for less than one year’s service, the equivalent of one week’s wages for every three months of employment (the minimum amount of such compensation to be the equivalent of one week’s wages);
• for a period of service between one and two years, the equivalent of one week’s wages for each two months of employment;
• for a period of service between two and ten years, the equivalent of wages for three additional weeks for each year of service; and
• for more than ten additional years of service, the equivalent of one additional week for each year of service.

This scale is applied on a graduated basis, the total length of service completed being distributed among the corresponding steps set out in the previous sub-items. In the case of service rendered in periods before and after 2 April 1972, the above-mentioned scales are to be applied separately.

In the case of employment commencing after the LC entered into force, compensation should be equivalent to three to four weeks of wages for each year worked in the ten first years; and each year after ten years should be compensated with the equivalent of one week’s wages for each year. Such compensation should not be combined with any other scale. For the two instances cited in this sub-item, where a full year has not been completed, the corresponding proportion is due.

Compensation provided under this section is also due when the employment relationship is terminated for any of the reasons stated in sec. 213(C) of the LC.

Payment in kind for the long-service bonus, compensation and surcharge applicable to the compensation is prohibited. For the purposes of determining the amount of the long-service bonus (sec. 226, LC), “wage” means, in respect of each year of service completed by the worker, the average of the total remuneration received by him or her during the last five years of employment.

In the case of a contract of employment of specified duration or for the performance of a specified task (sec. 227, LC), if the employer terminates such contract without valid reason before the expiry of the fixed term or before the specified task or job is completed, he or she is obliged to pay to the worker compensation equal in amount to the remuneration which the latter should have received during the remainder of the period which the contract had to run.

If the employer terminates the contract without valid reason before the date on which the employment relationship is due to commence, he or she must pay compensation to the worker for loss incurred. Such compensation should not be less than one month’s wages, except in the case of contracts made for a shorter period (sec. 228, LC).

With regard to contracts of unspecified duration, employers should establish a severance fund to pay the worker, at the end of the employment relationship, the long-service bonus and compensation for unjustified dismissal or resignation with just cause (sec. 229(A), LC). In order to establish this fund, the employer is to make quarterly contributions, the assessed share relative to the worker’s long-service bonus and 5 per cent of the monthly assessed share of the compensation to which the worker is entitled, in the event that the relationship is terminated through unjustified dismissal or resignation with just cause.

Avenues for redress

The worker’s right to sue for unjustified dismissal is barred by the statute of limitations three months after the date of the dismissal. This period of limitation applies to actions for reinstatement or compensation on the grounds of unjustified dismissal, with back pay in both cases. Actions exclusively for compensation on the grounds of unjustified dismissal, plus the other payments connected with or consequent on the termination of the employment relationship, are statute-barred one year after the date of dismissal (sec. 221, LC). The labour courts are the competent bodies to resolve such cases.

The amount of the compensation for unjustified dismissal is to be determined in the manner prescribed in sec. 149 of the LC.

If reinstatement is ordered, the unjustly dismissed worker must be reinstated in his or her work immediately or at any rate before the second working day following the date on which the order becomes executory, and his or her reinstatement must restore him or her to his or her employment in exactly the same conditions as existed prior to the dismissal. At the request of the other party, the judge may order the arrest of the employer for contempt of court (sec. 220, LC).

Further information

• ILO NATLEX Panama
• Vega Ruiz Marìa Luz (ed.). «La reforma laboral en América Latina : 15 años después». 2005. Regional Office in Latin America and the Caribbean.