EMPLOYER ACTION CODE: ACT or MONITOR

Puerto Rico’s government passed sweeping legislation intended to improve the island’s competitiveness by reducing employment costs and making the regulations on workforce management more flexible. As a U.S. commonwealth, Puerto Rico’s employment is governed by Federal laws such as the Fair Labor Standards Act (FLSA) and Employee Retirement Income Security Act (ERISA), but local laws may improve protections under those laws.

The Labor Transformation and Flexibility Act of 2017 took effect on January 26, 2017. The Act amends a number of statutes on a variety of subjects including working time, compensation and benefits. Prior rights and entitlements of employees under the various statutes are grandfathered in for individuals employed prior to the law’s effective date. The new terms and conditions introduced under the Act apply only to individuals starting employment on or after the effective date of the law, with the exception of those changes that improve on or establish new rights and entitlements that apply to all employees.

KEY DETAILS

Working time

  • Flexible worktime arrangements are permitted that reduce the normal, five-day workweek to four days, with 10-hour workdays, provided working time does not exceed 10 hours per day or 40 hours per week.
  • The normal workday is now redefined as eight hours in a calendar day rather than eight hours over a 24-hour period.
  • Employees with at least one year of service who work 30 or more hours per week can request flexible working time arrangements to which employers must constructively respond within 20 days.

Overtime

  • Work on a Sunday is no longer considered overtime unless working time exceeds eight hours for the day or 40 hours for the week.
  • Overtime pay is standardized at 150% of pay for normal working time, eliminating provisions under which companies covered by local overtime law rather than the FLSA had to pay 200% of pay for overtime.

Christmas bonus

  • Minimum service for eligibility for an annual Christmas bonus is increased from 700 hours to 1,350 hours. During the first year of employment, the bonus payable will be 50% of the full bonus. (Eligibility is based on service for the 12-month period from October 1 to September 30.)
  • The statutory Christmas bonus amount is reduced from 6% to 2% of pay for companies with 20 or more employees, subject to a maximum tax-free benefit to the employee of US$600. For smaller companies, the maximum tax-free bonus is US$300.
  • Payment of other bonuses can be credited against the Christmas bonus entitlement, provided the employee is informed in writing beforehand.

Paid annual/sick leave

  • The minimum number of working hours to qualify for paid vacation and sick leave increased from 115 to 130 hours per month.
  • Annual leave will accrue at .5 days per month of service in the first of year of employment, .75 days from year two; one day from year six and 1.25 days from year 15. For companies with 12 or fewer employees, the entitlement is fixed at .5 days per month of service.
  • Paid sick leave will accrue at one day per month of service.

Probationary employment

  • New employees are subject to an automatic nine-month probation period; 12 months for employees categorized as executives, administrators and professionals under the FLSA or under local law. There is no requirement to put the trial period in writing.

Severance

  • Severance is simplified and reduced from two, three or six months’ basic salary plus one, two or three weeks’ pay per year of service (respectively) to three months’ salary plus two weeks’ pay per year of service up to a maximum of nine months’ salary.
  • The definition of basic salary for the purposes of calculating severance is clarified as composed of basic salary and commissions excluding other types of pay such as deferred compensation and share grants.
  • Statutory severance payments will be entirely exempt from income tax in Puerto Rico.

Miscellaneous

  • The minimum hourly pay rate of US$11.50 for work on Sunday after 11:00 a.m. is abolished.
  • New mothers are entitled to one hour of paid time off per day to breastfeed or pump milk in a private and hygienic space that includes facilities for saving breastmilk.

Cafeteria plans

  • An amended list of qualified benefits eligible for inclusion in a cafeteria plan under the P.R. tax code now includes health, hospital indemnity and cancer plans; dental policies; health savings accounts; long-term disability benefits; accident insurance including AD&D, adoption and dependent care assistance; and any other qualified benefits under Section 125 of the Federal Internal Revenue Code (IRC).

EMPLOYER IMPLICATIONS

As noted, the Act amends numerous statutes. This is only a brief summary of some of the notable changes under the Act. The issues involved are many and complex and will require close examination by employers with their legal and tax advisors. As an example, cafeteria plan provisions were initially incorporated in the P.R. tax code in 2004 in line with Section 125 of the U.S. IRC, but their development was ultimately forestalled by tax and regulatory barriers that were never addressed. The Act is intended to restart interest in cafeteria plans locally, among other things, but further legislative and regulatory action on the part of the P.R. government and regulatory agencies will be required for that to happen.

Grandfathering will make it necessary for employers to maintain separate records and administration on employees hired before and after the Act’s effective date. The law expressly prohibits measures to terminate and rehire employees or otherwise attempt to circumvent grandfathered protections.