San Juan, Puerto Rico
On January 26, 2017, the governor of Puerto Rico, Hon. Ricardo Rosselló, signed into law the “Labor Transformation and Flexibility Act”, better known as the Puerto Rico Labor Reform Act (hereinafter “the Act”). The Act became effective immediately. This was a campaign promise and one of the first pieces of legislation introduced by this young administration. The Act is a significant shift in Puerto Rican labor policy, which traditionally has been pro-employee. Major changes relate to, but are not limited to, rules applicable to vacation and sick leave, probationary periods, alternate work schedules, lactation leave, overtime, unjustified dismissal, worker’s compensation, wage claims, the Closing Law and many others. Additionally, the Act amends the Puerto Rico Internal Revenue Code in order to make it more attractive for employers to create Cafeteria Plans for their employees in Puerto Rico.
The Act applies to all employees, even those that started working prior to its enactment, unless expressly stated otherwise. Since this distinction is often made in the Act, as a practical matter, for the most part the Act applies to new hires. However, here we will also discuss major changes that apply to all employees, not only new hires. This is true as to some aspects related to the leaves, statutes of limitations and overtime, among others.
The following is a list of some of the key changes introduced by the Act:
I. Employment Contracts:
Employment contracts are deemed valid regardless of form, written or verbal, and may be in any language known by the employee. The Act further establishes a statutory presumption that the employee knows and understands its contents if the contract is signed by the employee. Electronic signatures will have the same effect as written signatures.
Employees hired by a foreign employer under a contract executed outside of Puerto Rico, but who are temporarily assigned to work in Puerto Rico for not more than three (3) years, will be bound to the laws of the foreign jurisdiction, except that local tax, employment discrimination and workmen’s compensation laws and regulations will be applicable.
II. Mandatory Christmas Bonus:
The mandatory Christmas Bonus is reduced to 2% of the total salary, with a $600 cap for employees who work 1,350 hours that year, and up to $300 if the employer has twenty (20) employees or less.
During the first year of employment the employer may pay 50% of the Christmas Bonus. The Bonus must be paid to each employee between November 15 and December 15 of each year, subject to late fees. This particular disposition applies to all employees, including the ones hired before the enactment of the act.
Employees hired before the enactment of the Act will keep their right to receive a Christmas Bonus equivalent to 6% of their annual salary with a $600 cap when they work a minimum of 700 hours during the year.
III. Probationary Period:
Puerto Rico is not an employment-at-will jurisdiction. However, employers are allowed to terminate employees at will during an initial probationary period. The probationary period in Puerto Rico used to be limited to ninety (90) days, provided the agreement was in writing. The probationary period is now automatic (no need for an agreement in writing), and it is extended up to nine (9) months for non-exempt employees, and up to twelve (12) months for executives, administrators and professionals (exempt employees), as defined by applicable regulations.
IV. Cafeteria Plans:
To encourage the concession of additional benefits to employees in Puerto Rico, the Puerto Rico Internal Revenue Code was amended, so that Cafeteria Plans could include the qualified benefits authorized under the Internal Revenue Code of the United States. The Puerto Rico Treasury Department is currently working on regulations to implement these changes.
V. Act to Regulate the Operations of Business Establishments (“Closing Law”) and Religious Accommodation:
The Act finally repeals the Act to Regulate the Operations of Business Establishments, better known as the “Closing Law”. Although there are some caveats, employers will no longer have to pay overtime on Sundays and commercial establishments are no longer banned from opening on Sundays during the hours of 5 a.m. to 11:00 a.m.
VI. Overtime Rules:
The overtime rate was reduced from double to one-and-a-half an employee's regular hourly rate. This change only applies to new hires. Therefore, employees hired before January 26, 2017 will keep their overtime rates, if higher. Overtime rules do not apply to all workers, such as is the case with exempt employees.
Overtime will now be paid for work performed in excess of eight (8) hours in a given calendar day. Additionally, only eight (8) hours of rest will be required between shifts. Prior to the Act, employers had to pay overtime when their employees worked more than eight (8) hours in a 24-hour cycle or their employees rested less than twelve (12) shifts between shifts.
Before the Act, many employers felt obligated to sign flexitime agreements in order to be able to avoid payment of overtime. That is no longer the case. Under the Act, employees can now even enter into alternate work schedule agreements, where an employee can work up to ten (10) hours a day for four (4) days a week without incurring in overtime.
VII. Meal Periods:
In Puerto Rico, a mandatory meal period must be taken after the second and before the sixth hour of work. Now the meal period may be waived when the workday does not exceed six (6) hours. This applies to both new hires and existing employees.
VIII. Vacation and Sick Leave:
Employees accrue one (1) day per month provided that the employee works at least 130 hours during the month in which the accrual takes place. This was not grandfathered and represents a big change, since before only 115 hours were needed to accrue sick leave.
First year: 6 days per year (1/2 day per month)
Second to fifth year: 9 days per year (3/4 day per month)
Fifth year to fifteenth year: 12 days per year (1 day per month)
Fifteenth year and above: 15 days per year (1¼ days per month)
The above only applies to new hires, and represents another significant change. Previously, employees accrued 1¼ days per month, which new hires will only now be able to accrue after having worked for more than fifteen (15) years of employment.
As indicated above in the case of sick leave, employees accrue one (1) day per month provided that the employee works at least 130 hours during the month in which the accrual takes place.
Employees who are mothers that are breastfeeding will get a 30-minute leave after every consecutive four (4) hours of work for lactating their children or expressing their milk. This is new, since this benefit was only available previously for full time employees. Our local Act also requires that the space destined for breastfeeding is a clean, secure and private. It also requires ventilation and electrical outlets in the area.
X. Statutes of Limitations:
It was reduced from fifteen (15) years to one (1) year for suits related to an employment contract and from three (3) years to one (1) year for suits to collect wages and for wrongful terminations.
XI. Wrongful Terminations:
Absent just cause for termination, severance pay provided under the “Wrongful Termination Act” will be calculated as follows:
Three months’ salary plus an additional progressive compensation equal to the salary corresponding to two (2) weeks for each year of service. This amount cannot exceed nine months’ salary. The implementation of a cap is totally new.
The provision imposing on the employer the burden of proof in a wrongful termination action was eliminated. Thus a terminated employee may now have the burden of proving that the dismissal was without cause. The enforcement of this amendment to terminations of individuals employed before the enactment of the Act will be left for the Courts to decide.
XII. Anti-Discrimination Statutes:
Damages for mental anguish, compensatory or punitive damages are now capped as follows: $50,000 if the employer has less than 101 employees; $100,000 if 101 or up to 200; $200,000 if 201 or up to 500; and $300,000 if more than 500. There was no cap before. Also gone is the presumption of discrimination where the alleged dismissal was without just cause.
Although these changes in benefits, employment terms and conditions went into effect on January 26, 2017, we recommend employers to review and amend their employment contracts, policies and procedures to avoid potential claims based on policies granting greater benefits than the ones stated in the Act.
The above summary does not contain all the dispositions in the Act and shall not be deemed as legal advice. Rather, it was drafted for informational purposes only. We look forward to hearing from you.