Remote Work in Puerto Rico: A Legal Update for Global Employers

Quick Hits

• Puerto Rico has relaxed its remote work requirements with Law 52-2022, which exempts foreign employers without a nexus to Puerto Rico from making income tax withholdings for employees working remotely in Puerto Rico, provided certain conditions are met.
• Law 27-2024, effective January 2024, clarifies that nondomiciled employees temporarily residing in Puerto Rico are exempt from Puerto Rican employment laws and contributions, with their employment governed by their domiciles’ laws.
• Puerto Rico’s new remote work regulations have provided increased flexibility for foreign employers and employees, allowing remote work without the burden of local employment laws and tax obligations, reflecting a global trend toward accommodating remote work arrangements.

Law 52-2022

Law 52-2022 exempts foreign employers without a nexus to Puerto Rico from making income tax withholdings for employees working remotely in Puerto Rico, provided certain conditions are met. These conditions include:

• The employer must be a foreign entity, not registered or organized under Puerto Rican laws.
• The employer must have no economic nexus to Puerto Rico, meaning no business operations, tax filings, fixed place of business, or sales of goods or services in Puerto Rico through employees, independent contractors, or any affiliates.
• Remote workers cannot provide services to clients with a nexus in Puerto Rico and cannot be officers, directors, or majority owners of the employer.
• Employers must ensure that Social Security and payroll contributions for employees are filed either through a W-2 in the United States or in Puerto Rico.

If these conditions are met, foreign employers can hire remote workers in Puerto Rico without the obligation of withholding and remitting income taxes to the Puerto Rico Department of the Treasury (Departamento de Hacienda de Puerto Rico).

Law 27-2024

Law 27-2024 addresses which employment laws will govern the employment relationships of remote employees working from Puerto Rico for employers with no business nexus to Puerto Rico, depending on whether the employees are domiciled in Puerto Rico or elsewhere. Law 27-2024 exempts nondomiciled employees temporarily residing in Puerto Rico from Puerto Rican employment laws and contributions. These employees are not entitled to employment benefits under Puerto Rican law, including workers’ compensation, unemployment, or certain disability benefits. The employment relationship will be governed by the employment contract, or if there is no contract, by the laws of the employee’s domicile location. The employer will have no income tax withholding obligations for these employees. If there is any tax obligation, the employee will be the one to file separately.

Domicile Considerations

The concept of “domicile” is crucial in determining the applicable laws. Domicile is based on the employee’s intention to reside in a particular location. Factors such as where the employee’s family, doctors, and children’s schools are located will be considered. If an employee is domiciled in Puerto Rico, and exempt under the Fair Labor Standards Act (FLSA), certain requirements apply. The employment relationship will be covered by an agreement between the parties, and Puerto Rican employment laws will not apply unless agreed upon. However, workers’ compensation, short-term disability, unemployment insurance, and driver’s insurance for employees who drive as part of their duties in Puerto Rico will be applicable unless the employer provides similar or greater benefits through private insurance.

Implications for Employers

Foreign employers hiring domiciled employees in Puerto Rico must comply with specific requirements. For example, if short-term disability and unemployment benefits are provided through a private policy or in another state, employers do not need to register with the Puerto Rico Department of Labor or obtain workers’ compensation insurance. However, if these benefits are not provided, employers must register and make the necessary contributions (even when income tax withholdings are not required).

Note: The exclusions and rules apply only to (i) nondomiciled employees and (ii) domiciled employees who are exempt under the FLSA. For domiciled, nonexempt employees covered by the FLSA, all Puerto Rican employment laws will be applicable.

Future Trends in Remote Work

There is a noticeable trend of employers accommodating remote work arrangements. This trend is proliferating globally, allowing employees to work remotely without being subject to local employment laws and tax obligations. Puerto Rico, as a U.S. territory, is at the forefront of this trend, providing increased flexibility for employees to work remotely and for employers to hire remote workers without the burden of compliance with local employment laws and tax obligations. Similar changes are likely to be adopted in other jurisdictions, further increasing the flexibility of remote work arrangements.

Conclusion

The new rules governing remote work in Puerto Rico represent a significant shift in employment law, providing greater flexibility for both employers and employees. As companies continue to adapt to the post-COVID-19 landscape, these changes offer a promising start for more flexible remote work arrangements.

Ogletree Deakins’ Cross-Border Practice Group will continue to monitor developments and will provide updates on the Cross-Border blog as additional information becomes available.

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