Law No. 4 of January 26, 2017 [A New Labor and Employment Playing Field in Puerto Rico]
P.R. Law No. 4 of January 26, 2017, known as the Employment Transformation and Flexibility Act (“Transformation Act” or “P.R. Law No. 4”), is a seven chapter statute that reconfigures longtime-established employment management rules in Puerto Rico.
It is not our intention to discuss here P.R. Law No. 4 in its entirety. We herein highlight what is considered to be the most important changes introduced by the statute. This memorandum is not intended to be, and shall not be deemed as, a legal opinion on this matter. Accordingly, you are encouraged to contact us for proper legal counsel on this or any other relevant matter.
The main purpose behind the enactment of P.R. Law No. 4 is to make Puerto Rico a more competitive jurisdiction while, at the same time, protecting the essential rights of the employee. The Transformation Act will without a doubt apply to new employees hired after its enactment. Pursuant to Article 1.2, it is of utmost importance to note that not all of its dispositions will apply to employees hired before the enactment of P.R. Law No. 4. Generally, all employees contracted prior to the enactment of P.R. Law No. 4 will continue to enjoy the same rights and benefits they previously had. However, specific sections or articles of P.R. Law No. 4 may provide otherwise; that is, the said provision may be retroactively applicable. Resultantly, the Transformation Act creates two systems: one set of rules applicable to new employees after the enactment of the Act, and those rules applicable to all employees, regardless of the time they were hired.
The employment agreement need not be in writing. Actually, Article 2.4 provides it may be either verbal or written, unless specifically required otherwise. And, pursuant to Article 2.5, it may be in any language, provided the employee understands it. The employment agreement may contain any and all conveyances, terms or conditions, which the employer and the employee may consider convenient, unless the same is deemed to be illegal, contrary to moral standards, or the public order. See Article 2.8. However, it would be necessary that there is a statute specifically stating that such conveyance, term or conditions are illegal, or that the said moral standards or public order considerations are generally accepted commercial or labor standards.
The contract, as well as any other employment document issued to the employee by the employer, may be formalized or acknowledged electronically (see Article 2.6). It is also important to note, pursuant to Article 2.16, that the employment agreement may be terminated at any time by mutual consent, for causes stated in the agreement, the expiration of the employment term agreed to in the agreement, resignation or abandonment, death, retirement, change in employer, unless there is an agreement between the parties or an Act states otherwise, dismissal/termination, or failure to abide by applicable rules of conduct.
P.R. Law No. 4 also reduces the statute of limitations of all causes of action deriving from an employment contract, from three (3) to one (1) year, unless otherwise provided. An exception to this new rule be would a cause of action that arose before the enactment of this Act in which case, the old three-years statute of limitations shall govern. See Article 2.18. The Transformation Act ratifies a clear policy in favor of arbitration of labor disputes, see Article 2.20.
Under Article 2.1 the employer may be either a natural person or a business entity while the employee may only be a natural person. Moreover, any person acting on behalf of the employer is also considered an employer. Both the employee and the employer must be at least 18 years of age See Article 2.7.
Among others, Article 2.2 specifically excludes private contractors, franchise relationships, government employees and officers, as employees. Article 2.3 includes the elements to consider in order to determine whether or not there is or there is not a private contractor relationship, among them if the person has obtained an employer’s identification number, claims to operate his own business on his tax return forms, there is a written contract stating the nature of his relationship, has control over the way and time the services are to be provided, is not subject to an exclusivity agreement, may contract his own employees, acquired his own equipment and materials, and obtained necessary permits, licenses to perform his services.
P.R. Law No. 4 includes interpretation rules applicable to the employment agreement, employer’s policies and regulations taking into consideration its contents, the law, the purpose of the relationship, productivity, nature of the relationship, good faith, and generally commercial acceptable practices. See Article 2.12. Moreover, Article 2.13 provides that federal and state laws applying to similar matters will be interpreted in a consistent way with the federal counterpart, unless otherwise instructed.
Article 2.14 lists, in general terms, fundamental employees’ rights, among them, the right not to be discriminated and the subject of retaliation, protection of his privacy and dignity, and timely payment of his salary. However, Article 2.15 includes the employees’ basic duties, such as to comply with his job duties, follow safety precautions, not incur in improper conduct, and follow the employer’s instructions and rules.
Chapter III of P.R. Law No. 4 deals with flexible work time accommodations. Article 3.1 of P.R. Law No. 4 amends Article 4 of P.R. Law No. 379-1948 to establish that overtime is, generally: (i) the time worked in excess of 8 hours in any given day; (ii) time worked in excess of 40 hours in any given week; (iii) time worked on any day the law states the workplace must be closed to the public; (iv) time worked during the weekly day-of-rest; and (v) time worked in excess of the daily maximum stated in a collective bargain agreement. Pursuant to Article 3.3 of P.R. Law No. 4, overtime must be paid at a 1.5 rate of the regular hourly rate. Generally, the right to overtime pay may not be waived (see Articles 3.7 and 6.)
An alternate 40 hours workweek may be agreed-to with the employee to compress the regular 40-hours workweek by way of 10-hours maximum workdays without incurring in overtime. See Article 3.3. However, overtime in excess of the said 10 hours must be paid at the 1.5 rate.
Article 3.5 allows for agreements to changes in work schedules, amount of hours, and place of work. The employee’s change request must be in writing. The employer must reply to this request in less than 20 days. However, the employee must at least work regularly 30-hours per week schedule and had at least previously worked a year for his employer. However, these agreements are entirely voluntary and, specifically, subject to the retaliation provisions established under Article 3.8.
Employers are required to notify the employee in writing the amount of daily hours they are to comply with, starting and finish hour, and lunch breaks. See Article 3.9. Lunch breaks may not be less than 30 minutes, in which case there must be a written agreement to reduce the ordinary 1 hour lunch break. However, said 30-minutes lunch break may be further reduced to 20 minutes by means of a written agreement in the case of croupiers, nurses, security guards and any other employees authorized by the P.R. Secretary of Labor. This agreement does not require prior approval of the P.R. Secretary of Labor. The penalty for not allowing or interrupting the lunch break is 1.5 payment of the regular rate.
Article 3.11 lists exempt employees, among them, executives, managers, professionals, outside salesmen, union organizers, commission-based public transportation drivers, exempt employees under FLSA, U.S. Government employees, P.R. Government employees, Municipal employees, and unionized employees. See also Article 3.16, expressly excluding those exempt employees under P.R. Law No. 379 of May 15, 1948, as amended.
P.R. Law No. 4 also repeals P.R. Law No. 1 of December 1, 1989 (to Regulate the Operation of Commercial Establishments in Puerto Rico, commonly known as the Puerto Rico Closing Law), as amended. See Article 3.17. Commercial operations will only remain closed on Good Friday and Easter Sunday. See Article 3.17a.
P.R. Law No. 4 also modifies P.R. Law No. 180-1998. Accordingly, pursuant to Article 3.18, vacation leave of employees entitled to longer periods accrued prior to the enactment of P.R. Law No. 4 will not be affected. Additionally, it will be deemed an illegal action the dismissal of an employee to subsequently hire him with reduced vacation and sick leave benefits. Said action is deemed a misdemeanor subject to a monetary penalty ranging between $500.00 to $5,000.00, and/or jail time ranging between 120 days to a year, as determined by the Court. Additionally, said employer will be subject to the twice the amount of the corresponding damages sustained by the employee.
In order to accrue vacation or sick leave, now an employee shall at least work 130 monthly hours. See Article 3.19. Moreover, generally, vacation accrual in the case of employees hired after the enactment of P.R. Law No. 4, is at least 0.5 day per month during the first year of work, ¾ of a day after the first year up to the fifth year of work, 1 day after the fifth year up to the 15th year of service, and 1 ¼ day after the 15th year of work. Sick leave accrual is limited to 1 day per each month. However, the accrual rates are different in the case of employers with 12 or less employees, in which case, generally, the minimum vacation accrual is ½ day per each month of work, while sick leave accrual is 1 day per each month.
Articles 9 through 12 of P.R. Law No. 379-1948 were repealed.
P.R. Law No. 180-1998 was also substantially modified. Pursuant to Article 3.21, the statute of limitations has been reduced from 3 years to 1 year to claim due salaries. However, the new statute of limitations is not applicable to claims filed prior to the enactment of P.R. Law No. 4.
Payment of Christmas Bonus has also been affected by P.R. Law No. 4. Pursuant to Article 3.23, in the case of employees hired prior to January 26, 2017, an employer of more than 15 employees must pay a Christmas Bonus calculated at 6% of the employee’s salary (capped at $10,000.00). If the amount of employees is less than 15, then the applicable rate is reduced to 3%. The 700 worked‑hours requirement continues in effect.
However, Christmas Bonus in the case of new hires (after January 26, 2017) is reduced to 2% of the employee’s total salary with a $600.00 bonus cap. If the employer has less than 20 employees, then the Christmas Bonus will be 2% of the employee’s total salary with a $300.00 maximum bonus. Moreover, Christmas Bonus will be further reduced in an additional 50% during the employee’s first year of work. Additionally, the worked-hours requirement increased to 1,350 hours.
The total amount to be paid as Christmas Bonus is not to exceed 15% of the employer’s net yearly earnings. Additionally, the employer may also consider as part of the Christmas Bonus other bonuses paid to the employee during the same year, regardless of its nature, in which case the employer shall previously inform in writing his intention to do so to the employee. The Christmas Bonus is due and payable on November the 15th and no later than December the 15th of each year. See Article 3.24. Late-payment monetary penalties apply. Employers may file a request with the Puerto Rico Secretary of Labor to avoid payment of Christmas Bonus if and when payment thereof exceeds 15% of their net earnings. The said application shall be filed on or before November the 30th and shall include a CPA certified income and loss statement for a 12 months period starting on October the 1st of the prior year and ending on September the 30th of the current year. However, pursuant to Article 3.25, said CPA certified income and loss statement is not required in the case of cooperative financial institutions organized under the laws of the Commonwealth of Puerto Rico, in which case a profit and loss statement audited by COSSEC will suffice.
Article 3.26 amends the Puerto Rico Tax Code to exempt settlement or judgment amounts received by an employee as the result of wrongful termination from the payment of state income tax. However, the exemption is limited to an amount equivalent to the severance due for wrongful termination. Also considered exempt are the employer’s payment for other employee benefits such as health insurance, life insurance, child care payment, long-term disability, accident and death insurance.
Article 3.29 of P.R. Law No. 4 amended the definitions contained in Article 2 of P.R. Law No. 427 (to Regulate the Period of Time for Breastfeeding or Expressing Breast Milk) of December 16, 2000, to include the terms full-time work shift and part-time work shift, where the former relates to at least 7½ daily worked hours, and the later to less than 7½ hours. Pursuant to Article 3.30 of P.R. Law No. 4, the break period is one (1) hour for full-time mothers, and 30 minutes for part-time mothers working more than 4 hours during the day. The 1-hour break period in the case of full-time working mothers may be scheduled/broken down into two (2) 30 minutes breaks, or three (3) 20 minutes breaks. Dully SBA classified small businesses shall allow for 30-minutes breaks (which may be scheduled/broken down into two (2) 15-minute breaks) in the case of full-time mothers, and a single 30-minutes break in the case of part-time working mothers working more than 4 daily hours. Failure to comply with these break requirements may result in the assessment of damages ranging from three (3) times the working mother’s daily salary for each day this right was denied, or at least $3,000.00, or whichever of these two results in the higher amount.
P.R. Law No. 4 further amended the Puerto Rico Employment Security Law, Law No. 74 of June 21, 1956. Accordingly, Article 4.1 provides that, generally, in the case of a non-agricultural worker, the weekly unemployment benefit will be determined by regulation promulgated by the P.R. Secretary of Labor. In the case of agricultural workers the unemployment benefits will also be determined by regulation promulgated by the P.R. Secretary of Labor. However, the said regulation shall establish a weekly minimum for agricultural workers of $33.00 and a maximum weekly benefit of $190.00 come July 1, 2018, and, subsequent to July 1, 2019, the weekly unemployment benefit will increase to $60.00 and the maximum to $240.00. The unemployment benefit is limited to a maximum of 26 weeks per year.
Severance payment under P.R. Law No. 80 of May 30, 1976, as amended, was also revised. Pursuant to Article 4.3, severance due to a wrongfully terminated employee will be three (3) months of salary and two (2) additional weeks for each year of service, up to an amount not exceeding 9 months of salary. The 9-month severance cap does not apply to employees hired prior to January 26, 2017. Severance payment is exempt from state income tax (see also Article 4.11). However, amounts paid in excess of said severance are subject to state income tax. Part-time employees and fixed-term employees are expressly excluded from P.R. Law No. 80. Article 4.3 further establishes its applicability going forward; that is, upon the date of its approval (January 26, 2017) and thereafter. Any agreement to waive in advance the right to severance payment for wrongful termination is null and void. See Article 4.10.
Most importantly are the amendments introduced to Article 2 of P.R. Law No. 80 under Article 4.4 of P.R. Law No. 4, which includes a numerus apertus list of what is considered just cause for the termination of an employee as those affecting the good and normal operation of the business, to wit: (i) a pattern of improper/disorderly conduct; (ii) pattern of poor, deficient, unsatisfactory, late or negligent performance; (iii) repeated violations of company reasonable rules and regulations (the same must have been previously furnished in writing to the employee); (iv) total, temporary, or partial closings; (v) technological changes or reorganization, as well as changes in products or services’ style, design or nature; (vi) personnel reductions in response to reductions in production volume, forecast sales or profits, or that are necessary to increase competitiveness or productivity.
Generally, the term termination also includes lay off, indefinite suspension, or a suspension exceeding more than 3 months, exception made, however, of seasonal businesses, or constructive termination. See Article 4.7. However, the burden of proof in the case of constructive termination rests on the employee.
The termination of employees pursuant to any of the aforestated reasons (iv), (v) and (vi) must follow the seniority rule, and said employees must be afforded first option if recruiting for similar posts is performed within 6 months of their termination. However if a reasonable clear and evident difference is present in favor of the capacity, productivity, performance, competence, efficiency and conduct or disciplinary history between the employees, the employer can choose the employee that will be retained based upon these factors instead of the seniority of the employees. See Article 4.5. Additionally, if the employer conducts multiple operations, the seniority and first option requirements apply to the one facility affected by the personnel reduction. See Article 4.6.
Article 4.4 also includes an anti-retaliation provision to protect an employee against unjust dismissal related to his collaboration or information furnished about his employer’s business during the course of an investigation before any forum whether judicial, legislative, or administrative. The employee terminated in violation of this anti-retaliation provision will be entitled to employment reinstatement and payment of lost income.
Under Article 4.9, probationary period in the case of executive, management and professional employees, as defined under the FLSA, is now automatic 12 months. All other employees are subject to a 9 months automatic probationary period. Contractually, these terms may be shortened though. An employee terminated during the probationary period is not entitled to the provisions and reliefs afforded under P.R. Law No. 80. The new probationary period limits apply from January 26, 2017 onward. The time worked under a temporary employment placement contract will be considered toward the probationary period time requirement.
Cases filed under P.R. Law No. 80 will now have preferential court treatment; the initial conference shall take place no later than 60 days after the filing of the answer to complaint. See Article 4.12. The statute of limitations has also been reduced to 1 year in P.R. Law No. 80 claims filed prior to the enactment of P.R. Law No. 4. See Article 4.13.
Pursuant to Article 4.14 of P.R. Law No. 4, a new Article 14 has been added to P.R. Law No. 80 to define the terms improper conduct, disorderly conduct, temporary employment contract, fixed-term employment contract, employee, establishment, employer, salary, and transfer of an on-going concern.
Article 5-A of P.R. Law No. 45 of April 18, 1935 (the Puerto Rico Law for a Compensation System of Occupational Accidents), as amended, was further amended by Article 5.1 of P.R. Law No. 4. Article 5‑A requires the employer to reserve the position held by an employee unable to work as a result of a job-related inability (accident or sickness). The employee shall request the employer to reinstate him in his position within a term not to exceed 15 days once he has been released from medical treatment or authorized to work by the CFSE with treatment. The request for reinstatement shall be made within a term not to exceed 12 months after the date of work-related accident, or within 6 months in the case of employees with 15 or less employees at the time of the accident. Moreover, pursuant to Article 7.1 of P.R. Law No. 4, the right to reinstatement due to inability or disability originated prior to the enactment of the statute will be regulated by P.R. Law No. 4, nonetheless.
Paragraph “q” of Section 3 of P.R. Law No. 139 of June 26, 1968 (the Puerto Rico Disability Benefits Law), as amended, was also modified by P.R. Law No. 4. Pursuant to Article 5.2, the employers must also reserve the position held by an employee unable to work as a result of a non-occupational disability and to reinstate the employee back to his employment. The employee shall request the employer to reinstate him in his position within a term not to exceed 15 days once he has been released from medical treatment. The request for reinstatement shall be made within a term not to exceed 12 months after the initial date of his disability, or within 6 months in the case of employees with 15 or less employees at the time of the disability.
Pursuant to Article 6.1 of P.R. Law No. 4, in all cases involving discrimination or retaliation, the prevailing employee shall be entitled to all unpaid salaries and benefits and, under certain conditions, forward pay. It is important to note that any law provision concerning discrimination or retaliation demanding the payment of double damages remains in effect. However, the amount granted by way of emotional pain and suffering, compensatory, or punitive damages, if any, are caped based on the amount of employees the employer has: (i) $50,000.00, if less than 101 employees; (ii) $100,000.00, if more than 101 but less than 200 employees; (iii) $200,000.00, if more than 201 but less than 500 employees; and (iv) $500,000.00 if more than 501 employees.
Article 3 of P.R. Law No. 100 of June 1959 (the Puerto Rico Employment Anti-Discrimination Law), as amended. Under Law No. 100, as amended, it is unlawful to discriminate against an employee or applicant for employment because of age, race, color, sex, social or national origin or social condition, political affiliation, political or religious ideology, for being a victim or perceived as a victim of domestic violence, sexual aggression or stalking, or for sexual orientation and gender identity. Article 3 of Law No. 100 was amended by Article 6.3 of P.R. Law No. 4 to establish that the employer may not be presumed to be knowledgeable of an employee’s personal situation involving domestic violence, sexual aggression or stalking, unless the employer was in fact at position to know that fact. The second paragraph of Article 3 provides that the employer must make the reasonable necessary accommodations to protect an employee once he has gained knowledge of a potentially dangerous situation to an employee. Failure to take such preventive measures will be deemed as discriminatory conduct.
Finally, Articles 7.2. and 7.3 of P.R. Law No. 4 contain the statute’s severability and effective date provisions, respectively.