Puerto Rico recently enacted the Labor Transformation and Flexibility Act, on January 26, 2017 (see Payroll Management Guide Report Letter 1488/2495, dated February 28, 2017). The law contains numerous changes on employment contracts, exclusions, independent contractors, employee rights, contract termination, statute of limitations, overtime, vacation and sick leave, gross income, and unemployment insurance (flexicurity).
Employment contract. An employment contract is a contract by which a judicial or natural person, called an “employer,” hires a natural person who is called the “employee” to render services voluntarily for the benefit of the employer or a third person in exchange for compensation. The term employer includes any person that represents the employer or exercises authority on its behalf.
Employment relationships. Independent contractor relationships; franchise relationships; government employees or public officials; mandatory services rendered in a penal or correctional institution; work performed voluntarily and free of charge, due to a mere friendship or benevolence for public service, religious, or humanitarian institutions; and work performed by an immediate family member, unless it is shown, in this last case, that the intent of the parties and the manner in which such relationship is to be maintained is that of an employer-employee, are excluded from employment relationships and from the definition of employee.
Independent contractor. A person is an independent contractor if the relationship has been established through a written contract and the person:
a. possesses or has requested an employer identification number or employer social security number;
b. has filed income tax returns claiming sole proprietorship;
c. has been contractually obligated to hold licenses or permits required by the government to operate his business, as well as any license or authorization required by law to render the services agreed on; and
d. meets three (3) or more of the following criteria:
1. has control and discretion as to the manner in which the work is performed, except for the principal’s exercise of necessary control to ensure compliance with any legal or contractual obligation.
2. has control over the moment in which the work will be performed, unless there is an agreement with the principal on the completion times of the work, the parameters for the schedule to perform the works, and, in the case of training, the moment the training is to be provided.
3. is not required to work exclusively for the principal, unless there is a law that prohibits him from rendering services to more than one principal, or the exclusivity agreement is for a limited time.
4. is free to hire employees to assist in doing the jobs.
5. has made an investment in the business to do the work including, among others:
(i) purchasing or leasing tools, equipment, or materials;
(ii) obtaining a license or permit from the principal to gain access to the principal’s workplace to perform the agreed on work; and
(iii) leasing a work space or equipment from the principal in order to perform the agreed-on work.
If the factors do not apply, then the common law independent contractor/employee test applies, except that the economic reality test will not be used, except where a law of Puerto Rico or a U.S. law that is applicable to Puerto Rico on the same issue expressly requires the use of the economic reality test, or another test.
Employee contract rights. An employee has the following rights:
a. To be free from discrimination with regard to the terms and conditions of employment, and from retaliation by reason of criteria prohibited by law.
b. To have protection against risks to his health or person.
c. To have his privacy protected, subject to the legitimate interests of the employer to protect the business, property, and workplace; or as provided by law.
d. To have his dignity respected, which includes protection against abusive attacks on his honor and reputation.
e. The prompt payment of the agreed upon or legally required compensation pursuant to the time periods established.
f. The individual or collective exercise of the actions arising out of the employment contract.
Employee duties. An employee has the following basic duties:
a. To fulfill the responsibilities and obligations of his position pursuant to the rules of the employer, good faith and diligence.
b. To follow the safety and hygiene measures established by the employer.
c. To refrain from engaging in improper, disorderly, criminal, or immoral conduct that could reasonably impair the best interests of the employer.
d. To comply with the orders and instructions of the employer during the regular exercise of his managerial duties.
e. To refrain from competing with the business activity of the employer, except as otherwise provided by law or an employment contract.
f. To contribute to improving the productivity and competitiveness of the employers’ business.
g. Any duties arising out of the employment contract or the rules and regulations established by the employer that are not contrary to the law, morality, or public order.
Workplace and flexible benefits:
Overtime. Overtime includes:
a. Hours that an employee works in excess of eight hours during any calendar day. Nonetheless, the employer may notify the employee of an alternate 24 hour cycle, provided, that the notification is made in writing and within a term not less than five days prior to the start of the alternate cycle and that there are eight hours between consecutive shifts.
b. Hours that an employee works in excess of 40 hours during any workweek.
c. Hours that an employee works during the days or hours in which the establishment should remain closed to the public by legal provision. However, hours worked on Sundays, when the establishment should remain closed to the public by provision of law, will not be considered overtime hours for the mere reason of being worked during that period.
d. Hours that an employee works during the weekly rest day, as provided by law.
e. Hours that an employee works in excess of the maximum number of working hours a day fixed in a collective bargaining agreement.
In excess of 40 hours. For the purpose of computing the hours worked in excess of 40 hours, the workweek is a period of 168 consecutive hours. The workweek begins on the day and time that the employer determines and notifies to the employee in writing. If there is no notice, the workweek begins every Monday at 12:01 a.m. Once the employer establishes the beginning of the workweek, any change must be notified to the employee within at least five calendar days in advance in order to be effective.
Overtime rules. The overtime rules include the following:
a. Any employer who allows an employee to work overtime is required to pay the employee for each extra hour, at a rate of not less than one and one-half times the regular pay rate; provided, that any employee hired prior to the law who was entitled to greater rights or benefits must be able to maintain those rights or benefits.
b. An alternate weekly work schedule may be established, through a written agreement between the employee and the employer, which may allow for the employee to complete a workweek not to exceed 40 hours, with daily shifts that do not exceed 10 hours per work day. However, if the employee works more than 10 hours in a workday, the hours shall be paid at a rate of one and one-half times the regular pay rate.
c. A voluntary or approved alternate weekly work schedule may be revoked by mutual agreement of the parties at any time. Nonetheless, any of the parties can unilaterally terminate the voluntary agreement after one year has elapsed since it was entered into.
d. The alternate weekly work schedules may be honored by a third party that acquires the business without the need to enter into a new agreement.
e. The employer may approve an employee’s request to make-up for work time lost in a week due to personal reasons. Those hours worked will not be considered overtime when they are worked during the same week of the absence, are not in excess of 12 hours in a day, and are not in excess of 40 hours in a week.
No regular rate of pay. For the purpose of determining overtime pay when no regular pay rate has been agreed on, the daily, weekly, monthly, or otherwise agreed pay must be divided by the total number of hours worked during that same period.
Change of schedule. An employee may request, in writing, a change of schedule, number of hours, or workplace. The employee’s written request must specify the change requested, the reason for the request, the effective date, and the duration of the change. The employer is required to answer within a term of 20 calendar days counted as of the receipt of the request. In the case of an employer with more than 15 employees, the answer must be in writing. If the employer meets with the employee within 20 calendar days after receipt of the request for a change, the notice of the answer may be issued within 14 calendar days after the meeting. The employer may approve or deny the employee’s request. The approval of a request is subject to the conditions and requirements that the employer deems appropriate. A denial must state the reasons for the denial and any alternative to the request submitted. The employer must give priority to the requests made by heads of family who have legal or sole custody of their minor children. The change of schedule provisions only apply to employees who regularly work 30 hours or more per week, and who have worked for the employer for at least one year. In addition, the provisions do not apply to a request submitted within six months after having received a written decision from the employer, or after approving the change, whichever is greater. Additional compensation allowed by law as overtime pay may not be waived, except as authorized under the overtime rules above.
Retaliation. Employers may not retaliate against, discharge, suspend, or otherwise affect the employment or working conditions of any employee for having refused to accept an alternate weekly work schedule or for having submitted a request for schedule, work hours, or workplace change. Any employer that engages in such conduct may be held liable for civil damages in an amount equal to the damages that the decision has caused to the employee, and if it is proven that the employer engaged in such action with malice or reckless disregard for the employee’s rights, punitive damages may be imposed in a maximum additional amount equal to the actual damages caused. The employer’s financial situation, the reprehensibility of the employer’s wrongdoing, the duration and frequency thereof, the sum of the damages caused, and the size of the company will be taken into consideration, among other factors, in order to determine the sum to be imposed as punitive damages. The employer may also be required to reinstate the worker in his employment and to cease and desist of the act in question.
Notification. Every employer must notify his employees, in writing, of the number of working hours required daily for each day of the week, the time work ends and begins, and the times the meal period begins and ends within the regular working hours. The work schedule notice shall constitute prima facie evidence that such working hours in each establishment constitute the division of the working day.
Meal periods. An employer who requires or allows an employee to work for a period longer than five consecutive hours, without providing a meal period, must pay the employee an extraordinary compensation for the time worked. In the event that the total number of hours worked by the employee during the day does not exceed six hours, the meal period may be waived.
The meal period must not begin before the conclusion of the second hour, or after the sixth consecutive hour of work begins. An employer cannot employ an employee for a work period that exceeds 10 hours per day without providing an employee a second meal period except when the total number of hours worked does not exceed 12 hours. In cases in which the total of hours worked does not exceed 12 hours, the second meal period may be waived provided that the employee took the first meal period.
Meal periods within or outside the regular work schedule may be reduced to a period of not less than 30 minutes, provided, that there is a written agreement between the employer and the employee. In the case of croupiers, nurses, security guards, and those authorized by the Secretary of Labor and Human Resources, the meal period may be reduced up to 20 minutes when there is a written agreement between the employer and the employee without requiring the approval of the Secretary.
Agreements to reduce the meal period are valid indefinitely and neither party may withdraw consent to what was stipulated, without the consent of the other, until one year after the agreement’s effective date. The agreements will continue even if a third party acquires the business from the employer. Any employer that employs or allows an employee to work during the meal period is required to pay the period or fraction thereof at a pay rate equal to one and one-half times the regular pay rate agreed on, provided, that the employees who have the right to a pay rate higher than one and one-half times prior to January 26, 2017, will maintain the same rate.
Exemptions. The law does not apply to:
a. administrators, executives, and professionals;
b. travel agents, peddlers, and outside salesmen;
c. labor union officials or organizers;
d. chauffeurs and operators of public and private motor vehicles who work on commission, receive pay per rate, or get paid per route;
e. domestic service employees who, notwithstanding, are entitled to a rest day for every six consecutive days of work;
f. employees, occupations, or trades exempt from the overtime provisions provided in the Fair Labor Standards Act;
g. persons employed by the Government of the United States of America, including each of its three branches and their instrumentalities or public corporations;
h. persons employed by the Government of Puerto Rico, including each of its three branches and
their instrumentalities or public corporations;
i. persons employed by the municipal governments and their agencies or instrumentalities;
j. employees covered by a collective bargaining agreement unless the agreement establishes that the provisions of this Act shall apply to the relationship of the parties. However, all overtime provisions of the Fair Labor Standards Act apply;
k. persons exempt pursuant to the provision of a special law.
Day of rest. Any employer who employs or allows an employee to work on a day of rest is required to pay the employee for the hours worked during such day of rest at a compensation rate equal to one and one-half times the regular rates of pay agreed on, provided, that employees entitled to greater benefits prior to January 26, 2017, will entitled to those benefits. Business establishments were required to remain closed prior to January 26, 2017, on Good Friday and on Easter Sunday, are still required to remain closed.
Greater or lesser benefits. Any employee who worked for an employer before January 26, 2017, who was entitled to monthly vacation and sick leave accrual rates higher than those provided in the law will continue to enjoy such monthly leave accrual rates as before. The provision applies as long as he works for the same employer. It is an unlawful employment practice for an employer to dismiss, discharge, or indefinitely suspend an employee who worked for the employer before January 26, 2017, for the purpose of rehiring or substituting the employee for a new employee in order to avail himself of the sick or vacation leave accrual scheme provided under the law.
Vacation and sick leave. Every employee is entitled to a minimum vacation and sick leave accrual after working at least 130 hours a month. The minimum monthly vacation leave accrual rate shall be one-half day during the first year of service; three-fourths of a day after the first year of service up to the fifth year of service; one day after the fifth year of service up to the fifteenth year of service; and one and one-fourth of a day after the fifteenth year of service. The minimum monthly sick leave accrual rate shall be one day for every month.
However, in the case of Puerto Rico resident employers who have less than 12 employees, the minimum monthly vacation leave accrual rate is one-half day. This exception will be available for an employer with less than 12 employees and ceases in the calendar year following that in which the number of employees exceeds 12 during 26 weeks or more on each one of the two consecutive calendar years. The minimum monthly sick leave accrual rate for the employees is one day for every month. The use of vacation and sick leaves is considered time worked for purposes of the accrual of these benefits.
Vacation and sick leave must be paid on the basis of an amount which is not less than the regular hourly wage earned by the employee in the month the leave was accrued. For employees who receive commissions or other incentives that are not at the full discretion of the employer, the total commissions or incentives earned for the year, can be divided by 52 weeks, to compute the regular hourly wage. If employees receive tips or if the employer shares, in whole or in part, service charges with his employees, the payment of vacation or sick leave must be made on the basis of the legal minimum wage or the regular hourly wage agreed on for such benefits, whichever is higher. The law does not apply to employees covered under a collective bargaining agreement.
Statute of limitations. An employee’s suit to claim wages against his employer must occur within one year. The statute of limitation starts from the time the employee ceased to work for the employer.
Bonuses. Any employer who has one or more employees within the period of 12 months from October 1st of any calendar year through September 30th of the following calendar year is required to pay to each employee, who has worked 700 hours or more, or 100 hours or more in the case of dock workers, a bonus equal to six percent of the total maximum wage of $10,000 earned by the employee or worker. Every employer who has 15 employees or less must pay a bonus equal to three percent of the total maximum wage $10,000.
As for employees hired after January 26, 2017, any employer who has more than 20 employees during more than 26 weeks within the 12 year period comprised from October 1st of any year through September 30th, of the following calendar year, must pay each employee who has worked at least 1,350 hours or more a bonus equal to two percent of the total wage earned up to $600.00. If an employer has 20 employees or less during more than 26 weeks within the 12 year period comprised from October 1st of any year through September 30th of the following calendar year, must pay each employee who has worked at least 1,350 hours or more a bonus equal to two percent of the total wage earned up to $300.00.
The total of the amounts paid on account of the bonus cannot exceed 15% of the net annual profit within the period comprised from September 30th of the preceding year until September 30th of the year to which the bonus corresponds. In computing the total hours worked by an employee to receive the benefits, those hours worked for the same employer, even if the services have been rendered in different businesses, trades, and other activities of this employer, must be counted. To determine net profits, the amount of the net loss carryover of previous years and account receivables that remain unpaid at the end of the period covered in the balance sheet as well as in the profits and loss statement are not be included.
As for employees hired after January 26, 2017, the bonus required shall be 50% of what is provided herein during their first year of employment. This bonus shall constitute a compensation in addition to any other wages or benefits of any other kind to which the employee is entitled. The employer may credit against said obligation any other bonus previously paid to the employee during the year on any account; provided, that the employer has notified the employee in writing of his intent to apply such other bonus toward the payment of the bonus required under the Act.
Bonus payments. The payment of the bonus must be made normally between November 15 and December 15 of each year. If the payment of the bonus is not made within that time, the employer is required to pay, in addition to the bonus, a sum equal to one-half of the sum of the bonus by reason of additional compensation when the payment has been made within the first six months of its noncompliance. If the payment is delayed more than six months, the employer is required to pay another sum equal to the bonus, as additional compensation.
Definitions. The following terms and phrases shall have the meaning stated below, unless the context indicates otherwise:
1. Employee means any natural person who works for an employer and is paid for his services. It does not include independent contractors, labor union officials, or organizers acting as such.
2. Employer means any natural or juridical person of any kind that hires and uses the services of an employee.
3. Employ means to suffer or permit to work.
4. Wages includes salary, day wages, payment, and any other form of monetary compensation. It shall not include any portion of tips received in excess of the amount used to comply with the payment of the legal minimum wage, nor the service charges.
5. Tips means any gifts or gratuity that employee receives directly or indirectly by a person other than the employer in recognition for the services received.
6. Service charge is any sum of money added to a bill, and required by an establishment, which is allocated between all or some of the employees. It also includes any charges negotiated between an establishment and a customer.
Failure to pay bonuses. Employers are exempt from paying bonuses if they do not make profits or when the profits are not sufficient to cover the total amount of the bonus without exceeding the 15% limit of the net annual profits. Those employers must submit to the Secretary of Labor and Human Resources not later than November 30 of each year a general balance sheet and a profit and loss statement for the 12 month period from October 1st of the previous year to September 30 of the current year, duly certified by a certified public accountant, as evidence of said financial status. In those cases in which the fiscal year of the employer who requests the exemption does not end on September 30th of each year, the balance sheet and the profit and loss statement required may be that corresponding to the fiscal year of the business. The balance sheet and the profit and loss statement may be drafted or reviewed by a certified public accountant.
Cooperatives do not have to have the general balance sheet and the profit and loss statement certified by a certified public accountant. The Secretary of Labor and Human Resources will accept the profit and loss statement that has been audited by the Public Corporation for the Supervision and Insurance of Cooperatives in Puerto Rico (COSSEC) with its internal auditors, and that covers the applicable period of time.
Employers who fail to submit the required balance sheet and the profit and loss statement are required to pay the bonus in its entirety.
Exclusions from gross income. Compensations or severance pay received by an employee by reason of dismissal, without the need to determine just cause, up to a maximum amount equal to the severance pay that the employee may receive under the law is excluded from gross income and withholding.
Cafeteria plans. The term qualified benefit means the cost or the value of any benefit which is not includible in the gross income of the employee by reason of an express provision of Code Section 1031.02 (a)(2). The term includes any group term life insurance, health insurance, including hospital indemnity plans, cancer insurance policies, and dental insurance; health savings accounts; dependent care assistance programs, long-term disability benefits, accident insurance, including accidental death and dismemberment insurance; adoption assistance; and any other qualified benefit authorized under Code Sec. 125. However, such term does not include any product which is advertised, marketed, or offered as long-term care insurance.
Working day. Full-time working day means the daily working period of a working mother consisting of at least seven and a half hours. Part-time working day means the daily working period of a working mother consisting of less than seven and a half hours.
Breastfeeding. Working mothers who return to work after maternity leave may nurse their children for an hour during each full-time working day for up to two 30 minute sessions or three 20 minute sessions, to go where the child is if the employer has a child care center in its facilities or to express breast milk at the place provided in the workplace. Those places must guarantee nursing mothers privacy, safety and hygiene and must have electrical outlets and ventilation. If the employee is working on a part-time basis and the working day exceeds four hours, the period granted is 30 minutes for every consecutive four hour work period. Small business are required to provide breastfeeding mothers with a period of at least one-half hour during each full-time working day to breastfeed or express breast milk, which period may be divided into two 15 minute periods each. If the employee is working on a part-time basis and the working day exceeds four hours, the period granted is 30 minutes for every consecutive four hour working period.
Unemployment insurance (flexicurity):
Weekly benefit amount. The Secretary must establish a formula for determining the average weekly wage. The regulations must provide that, beginning July 1st, 2018, the minimum weekly benefit will increase to $33 and the maximum weekly benefit will increase to $190, and that, beginning July 1st, 2019, the minimum weekly benefit will be $60 and the maximum weekly benefit will be $240. This increase applies only to workers or employees hired after January 26, 2017. The weekly benefit amount of an agricultural worker is based on a compensation schedule.
Contributions wage base. The Secretary of the Department of Labor and Human Resources is authorized to raise the contribution wage base to $10,500.
Wrongful termination/severance. Every employee who works for an employer, hired without a fixed term, who is wrongfully terminated is entitled to receive three months of salary provided the employee has completed the applicable probationary period (see below) or a different probationary period as agreed by the parties and two weeks of salary for every full year of service. The total severance cannot exceed the nine months of salary. The nine month cap does not apply to employees hired before January 26, 2017. Those employees are covered under prior law. One month equals four weeks. The severance pay and any equivalent voluntary payment is exempt from income tax, regardless of whether such payment is made at the time of the discharge or later, or whether it is made by reason of a settlement agreement or pursuant to a judgment or administrative order. Any amount paid in excess of the required severance is subject to income taxes.
Years of service. Years of service is determined on the basis of all the preceding accrued work periods during which the employee worked for the same employer provided that the employment relationship has not been interrupted for more than two years and the services have been rendered in Puerto Rico. Years of service that by reason of discharge, separation or termination of employment, or transfer of business operations are compensated to an employee voluntarily or pursuant to an award by the court or an out of court settlement agreement are excluded. The law does not apply to employees who at the time of their discharge, were rendering services to an employer under a temporary employment contract or fixed-term contract.
Progressive severance pay. The allowance for compensation and progressive severance pay for wrongful termination must be computed on the basis of the highest number of regular working hours of the employee during any period of 30 consecutive calendar days within the year immediately preceding the discharge.
White collar employees. Employees classified as executive, administrative or professional employees under the Federal Labor Standards Act and the regulations of the Department of Labor and Human Resources have an automatic probationary period of 12 months. All other employees have an automatic probationary period of nine months. However, the employer and the employee may agree on a probationary period if it is shorter than period provided by law. If the employee is represented by a labor union, the employer and the labor union must agree on the applicable probationary period. The discharge of an employee on a probationary period is not subject to the severance requirements. The probationary period does not have the effect of limiting the accrual of vacation leave of the employees who are entitled thereto by law. These employees accrue vacation leave upon being employed for six months and such accrual is retroactive to the starting date of employment.
Probation. The probationary period of an employee who takes an authorized leave is interrupted automatically and begins again when the employee returns to the job. Any employer who hires an employee through a temporary employment company or hired directly through a temporary or fixed-term contract or for a specific project, will credit the time worked by the temporary employee up to a maximum of six months; provided, that the work to be performed involves the same functions or duties the employee had when he was a temporary employee.
Wrongful termination. The right of an employee who is wrongfully terminated from employment without just cause, to receive severance will not be waived. Any contract or part thereof in which an employee attempts to waive the severance is null and void. However, once the discharge has occurred or the notice of discharge has been issued, the right to severance pay may be settled, provided that all the requirements of a valid settlement agreement are met. Any voluntary payment made by the employer to the employee solely by reason of termination of employment will be credited to the severance pay provided under the law.
Severance withholding. No payroll deduction or withholding can be made from severance, except for deductions or withholding required by U.S. law. (Act. 4 (H.B. 453), Laws 2017, approved and effective January 26, 2017, except as otherwise noted above.)
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