Puerto Rico: Partially undoing the 2017 employment reforms

Employer Action Code: Act

The government of Puerto Rico passed sweeping legislation in 2017 to improve the island’s competitiveness by reducing employment costs and making the regulations on workforce management more flexible for employers. The Labor Transformation and Flexibility Act amended various statutes on working time, compensation and benefits, generally on less generous terms for employees (see the 2017 Global News Brief Puerto Rico: Major labor law and benefit reforms aim for flexibility and competitiveness). Enacted in part in response to Puerto Rico’s then ongoing debt crisis, the measures were unpopular with the general population for obvious reasons. With the island exiting bankruptcy in March 2022, the legislature set about amending the 2017 act as well as eight other laws, to reverse some of the reforms and provide new protections for employees. The legislation was signed into law on June 20, 2022, and takes effect July 20 for larger employers and September 18 for small and midsize companies.

Key details

• The severance pay formula is improved, to three months’ pay plus two weeks’ pay per year of service for employees with less than 15 years of service, or six months’ pay plus three weeks’ pay per year of service for employees with 15 or more years of service. The current overall cap on severance of nine months’ pay (for employees hired in 2017 or later) is abolished.   
• The period of automatic probationary employment is reduced from nine months to three months, with the option for a three-month extension subject to mandatory notification of the Department of Labor and Human Resources.
• The minimum number of monthly working hours to qualify for paid vacation and sick leave is restored to 115 (from 130). Annual leave for full-time employees accrues at a uniform rate of 1.25 days per month of service (rather than 0.5, 0.75, 1.0 or 1.25 days depending on length of service under the 2017 act); sick leave continues to accrue at 1.0 day per month of service. Separate accrual standards for companies with 12 or fewer staff are 0.5 day of annual leave and 1.0 day of sick leave per month of service for full-time staff. Part-time staff accrue paid sick and annual leave at varying rates depending on employer size and revenue.
• Non-exempt employees (as defined by the federal Fair Labor Standards Act) now have the option to request pay in lieu of all or a portion of their unused annual leave (rather than only unused leave in excess of 10 days).
• The minimum service eligibility requirement for the mandatory annual Christmas bonus returns to 700 hours (from 1,350).

Employer implications

Other changes introduced by Act No. 41-2022 broaden employment rights, revise standards for meal breaks and working time, amend provisions on dismissal for just cause, revise anti-discrimination protections, and expand the definition of catastrophic illnesses for eligibility for catastrophic leave (six days of paid leave available after paid sick leave is exhausted), among other things. Companies should consult with appropriate legal counsel on the many aspects of the act, not all of whose provisions are entirely clear. Note: The Financial Oversight and Management Board established as part of the bankruptcy proceedings for Puerto Rico may yet challenge the act in federal court based on the claim that it impedes the board’s plans to revitalize the economy.