Cross-Border Catch-Up: Puerto Rico Employment Law Particularities

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Maya Barba : Welcome to the Cross-Border Catch-Up, the podcast for global employers who want to stay in the know about cutting-edge employment issues worldwide. I am Maya Barba and I’m here with my colleague Carlos Colón-Machargo. We are cross-border attorneys here at Ogletree Deakins and today we’re going to discuss the particularities of Puerto Rico employment laws. Hi, Carlos, how are you?

Carlos Colón-Machargo: I am well, Maya. Good to be here with you today.

Maya Barba : Happy to have you. Carlos, so I understand that Puerto Rico has some similarities and some differences with respect to its employment laws compared to the states. Can you tell me about some of those similarities and differences?

Carlos Colón-Machargo: Yes, of course, Maya. So, first of all, Puerto Rico, for employment law matters, basically, functions like a state. All the federal statutes are applicable, Title VII, the Fair Labor Standards Act, the Family Medical Leave Act, the National Labor Relations Act. All federal statutes are applicable. So in that regard it’s very similar than doing business in a state. Most federal laws are applicable. What makes the big difference in Puerto Rico is the tax laws. The US Internal Revenue Code is not applicable in Puerto Rico. So any withholdings that employers make in Puerto Rico … Instead of going to the IRS for income tax purposes it will go to the Puerto Rico Department of the Treasury. Any and all payroll contributions would still go to the IRS. So any Social Security, Medicare, federal unemployment taxes those will be … You file a similar form that you file in the statutes that is Puerto Rico specific but you deposit in the same fashion that employers in the states deposit. And, of course, there is a host of local laws that are applicable. And Puerto Rico tends to be a very protected jurisdiction in that regard so it offers a substantial amount of protections to employees, not much different than California. I don’t think it’s as regulated but I think it’s as protective as California. So today, hopefully, we’ll discuss some of those intricacies and differences that make Puerto Rico a special jurisdiction.

Maya Barba : Thanks, Carlos. I’m excited to learn more about the similarities and differences. Can we start with statutory entitlements for employees in Puerto Rico? Maybe the statutory entitlements that apply to all employees in Puerto Rico.

Carlos Colón-Machargo: So there are three basic environments and protections that apply to all employees. The first one is a big one because Puerto Rico is not an at-will so, basically, you have to terminate employees for just cause. And the law gives an example. Anything that affects the way that employers conduct business could be just cause. But just as an example, the law states six instances in which are considered just cause. The first three pertain to the employee and they relate to performance, they relate to insubordination, and they relate to, basically, breaking the handbooks and rules and policies that have been established by the employer and have been promulgated duly, the employee has been notified about that. That’s what is important in Puerto Rico to have a good handbook because you can create just cause by having … In terms of attendance, for example, you can create rules that will be enforceable if they are contained in your handbook and they’re clearly stated.

There are the three reasons relate to the employer and they are reorganizations, reductions in force, or financial changes that are affecting … That justify terminating employees. If you terminate employees under any of those circumstances it will be considered just cause. Just cause is ultimately determined by a judge. What happens in reality is that employers and employees negotiate, and then some severance is offered in exchange for that, and the employee signs a termination agreement that they waive all the rights and that it’s valid. If it’s determined by a judge that the termination was without just cause then their employers … The sole remedy will be the statutory severance which ranges between … For employees under 15 years of service is three months plus two years of each full year of service. And for employees with more than 15 years of service, it’s six months of salary plus three weeks for each year of full service. So it could become substantial for employees with a substantial tenure.

Then after January 26, 2027 there were no new rules. There was a labor reform in an attempt to be less protective and become more attractive for employers to do business. It was enacted and became law. So employees hire after that day, January 26th, 2027, are subject to a nine months cap in … For the severance. And they’re also subject to a probationary period. Exempt employees are subject to 360 days and non-exempt employees are subject to 270 days. Any termination within the probationary period will not be subject to the statutory severance. Those are in high level some of the rules that apply to the just cost.

In addition to that, there’s a mandatory Christmas bonus in Puerto Rico. All employees are entitled to it. It fluctuates between 600 and $300. It’s capped at that level based on several factors. And the rules are complicated. That they’re based on the number of employees and the hiring date. There are several formulas. But at the end of the day they’re all capped at either 300 or $600. And it has to be paid between November 15th and December 15th. If employers they grab discretionary bonuses throughout the year and inform the employee in writing that that bonus is in lieu of the Christmas bonus, then it will deduct or eliminate the Christmas bonus. So something to keep in mind if employers give discretionary bonuses. And then finally, all employees, female employees are entitled to maternity leave. It’s eight weeks. And it could be four weeks before birth, four weeks after, or the employee could request one week before and then seven weeks after. Has complications and they can extend for the maternity leave. The second portion for the complications will be unpaid, but the maternity leave for the eight weeks it will be paid.

Maya Barba : Thanks, Carlos, that’s fascinating. Does the employer pay for the maternity leave in Puerto Rico?

Carlos Colón-Machargo: Yep. It’s fully paid by the employer. And there’s no requirement if the employee is newly hired or they have been … They have to be there for a certain amount of time, it doesn’t matter. Any employee who is pregnant will be entitled to the maternity leave.

Maya Barba : Interesting, especially compared to the applicability with the family leave in the states where it really depends on the state that you live, the entitlements that you get. All righty. Thanks for talking about the statutory entitlements for all employees but what about non-exempt employees? Are there any additional entitlements or protections available?

Carlos Colón-Machargo: There are many and they are very specific in how they operate. And employers can deviate from those rules that cover these entitlements that I’m going to discuss provided that they offer greater benefits to employees. It affects the employee in a way that they’re reducing benefits, that will be non-applicable and that will be null and void. So when employers they want a uniform, for example, like vacation, sick leave, and the like they have to make sure that they are not … That those changes do not affect inversely employees in Puerto Rico.

So the first big one is vacation. If employees work 130 hours a month they are entitled to accrued vacation. And this is non-exempt employees. At the rate that they accrued, it’s also depends on the day of hire that was affected by the labor reform. The new accrual rate varies from half a day per month to a day and a quarter. An employee is hired before January of 2017, they accrue at a day and a quarter. So, basically, they accrued 15 days of vacation. You cannot have use or lose, you cannot cap the benefits.

And you have to make sure that employees take their vacation time. Not force, but you can yes, sort of tell employees, “You have this range to take vacation and you have to go on vacation.” They accrued more than two years worth of vacation, in this our example, 30 days. For the 31st day there will be a double penalty. The employee will receive a double compensation for that day and the employee will still be entitled to receive that day and to either cash out or to enjoy that day. The best way to avoid a double penalty is to make sure employees go on vacation. There’s also sick leave. Employees who work 130 hours a month they accrue one sick leave per day. And again, there’s no cap per sick leave but there’s a carryover cap so employees can only carry over up to 15 days of sick leave. And that’s, basically, the only rule that is applicable to that.

There’s also a daily overtime. So employees who work in excess of eight hours, they are also entitled to overtime. And, obviously, the Fair Labor Standards Act applies. So if they work over 40 hours they’re also entitled to overtime. It has been resolved that the same hour cannot be calculated twice. So if the employee works nine hours on Monday and eight hours the other days, they will have 41 hours for the weekly overtime and they will have one hour on Monday for daily overtime. But since it’s the same hour it would only be paid once.

And also employees, if they can enter into a [inaudible 00:11:13] agreement to do a flexible schedule where the employees will get … Can work up to 10 hours per day. The weekly requirement will still be imposed but the employees can work up to 10 hour days and then the overtime will be if they exceed 10 hours. There are also restrictions about meal periods. So non-exempt employees they are entitled to … For every five hours that they work, basically, they’re entitled to a meal period of an hour. By [inaudible 00:11:47] agreement they can reduce that to half an hour. And the meal period must happen after the end of the hour and before the beginning of the sixth hour. So it’s regulated that way in terms of when does it need to take place.

And finally, there’s also a rest day. So for every six consecutive days the employee work they are entitled to a day off. So they cannot work more than six consecutive days. And then the meal period and the rest period they are subject to a penalty of a time and a half for new employees. And employees hired before January 2017, they’re entitled to double time for those. And the meal period, in particular, they are on top of overtime. So if you work during your meal period, and that causes overtime, you’re entitled to both the overtime and for the meal period penalty. So that’s a particularity of that particular statute.

Maya Barba : Thanks, Carlos. That’s a lot of entitlements for non-exempt employees, it’s really interesting. At the start of this conversation you mentioned that the Internal Revenue Code is not applicable in Puerto Rico. What withholding obligations should employers be aware of?

Carlos Colón-Machargo: There has been recent legislation covering remote workers who work for employers who are not engaged in trade or business in Puerto Rico, and there are special rules for those. But if you are engaged in trade or business in Puerto Rico, or you employ non-exempt employees then you have to register with the Puerto Rico Department of Treasury to do the, what we call, income tax withholding. And you also need to do, as I said, the FICA, and FUTA. Social Security, and Medicare, and federal unemployment payroll contributions with the IRS. You also need to register for short-term disability insurance and for unemployment insurance with the Puerto Rico Department of Labor. And Workers’ Comp in Puerto Rico is not offered through a private insurer, there’s an agency that functions as an insurer and you need to register with them and obtain … Provide information about your activities, provide your payroll so they know the number of employees that you are… That they’re going to be insuring and they will provide you coverage for that purpose.

Maya Barba : Thanks, Carlos, that’s really, really interesting. Next, can we talk about mandatory employment policies? For example, in California there’s a recent requirement that’s implemented that requires employers to have a workplace violence prevention plan. Are there any mandatory employment policies required in Puerto Rico?

Carlos Colón-Machargo: Yeah. Well, for domestic violence there’s a domestic violence protocol that the employer must implement. Identify people within the organization to be … To sort of champion that initiative and be the contact person, and be aware, and sort of keep an eye on possible employees. And then activate a protocol if one of the employees is a victim of domestic violence. The second one is the sexual harassment policy. Recently the Puerto Rico anti-sexual harassment statute was amended to include that employers must adopt the policy. And it went further to say the policy had to be the model adopted by the Puerto Rico Department of Labor or one provide greater benefits. So in essence, in order to comply with that requirements both employers have adopted the model, with slight modifications, that was enacted by the Puerto Rico Department of Labor. So the language is very specific in that regard. And indirectly provides statutory requirements of investigation terms and things of that nature. Even though employers in the US have their sexual harassment policies, it’s recommended to adopt the one with the language that wasn’t provided by the Puerto Rico Department of Labor.

The third one is a sexual orientation and gender identity policy that is highly recommended. And these are either highly recommended or mandatory. They’re the [inaudible 00:16:10] that either require that you adopt one, or add specific language, or that you adopt a policy containing high-level requirements under the policy. So the sexual orientation and gender identity is to make employees conscious about the differences in that community. And to make sure that the employer observes … Respects and treat everybody with dignity regardless of their sexual orientation or gender identity.

And the last one is an anti-bullying policy. It sort of qualifies that harassment in the workplace without being connected to one of the prohibited categories under Title VII like gender, religion, sex … Well, under Puerto Rico law which is more expansive in protect political affiliation, beliefs, or that without having to do that. If the supervisor use a disrespectful tone, that is now protected under Puerto Rico law. And they sort of watered down because it was a controversial move because it’s hard to distinguish between what is a stern tone and what constitutes bully. So in order to gain access to the court you have to exhaust administrative remedies and you start by going to the supervisor. There’s a conciliation process and there are several steps that you need to engage in before you obtain access to the court. But employers must have an anti-bullying policy in that regard so employees are aware of what is prohibited.

Maya Barba : Thanks for talking us through those policies, Carlos. I think we’re almost ready to wrap, but do you have any final thoughts on the particularities of Puerto Rico employment law?

Carlos Colón-Machargo: Yeah. I think it’s important for employers to be aware that there are similarities and there are distinctions in order to be able to identify what the issues might be and that you don’t know what you don’t know. But if you know enough about what is similar, what is different, and you know that there might be an issue and you know to look further … So Puerto Rico is … It’s very similar to US jurisdictions in many ways and it’s very different in other ways so it’s important to be aware of that.

Maya Barba : Absolutely. And thanks for taking some time to start making us aware of those distinctions. This has been super informative. Thank you so much, Carlos. Thank you to everyone joining us for today’s Cross-Border Catch-Up. Follow us to stay in the know about cutting-edge employment issues worldwide.

Carlos Colón-Machargo: Thank you.

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