LOVILL

In the last few decades, the Republic of Panama has developed into a multicultural hub for finance and innovation projects in the midst of the Americas. This multicultural environment and the benefits of administering the Panama Canal place the country as a vibrant market for commerce and direct international investments. These investments, along with the companies that have located their operations in the country, have had an immediate effect on the amount of employment in the market. This situation has also directly impacted the improvement of legal stability and convenience of the Panamanian labour legislation over other jurisdictions in the region. In this context, more than 50 years ago, the country developed a Labour Code that regulates the labour relationships in the whole territory of Panama and functions as a successful mechanism for solving the conflicts that arise in any labour relationship. In summary, the Labour Code contains provisions that promote equality between parties and secure the stability of the companies as they invest in Panama. On this matter, the Republic of Panama created a balanced labour legislation that protects both the employees’ and the companies´ interests. For example, under Panamanian labour legislation, when an employer has paid their employees the last three vacation periods, in the event of a claim, the labour courts will assume that the previous periods have been duly compensated unless the employee proves the opposite. On the other hand, if a person demonstrates that he or she has continuously offered his or her services to the company, the labour courts will assume that there is a labour relationship unless the company proves the opposite. In spite of the events and consequences of the Covid-19 Pandemic, the Labour Code proved to be a fundamental tool for easing social anxiety and mitigating the economic crisis that occurred in the country. In the first ten months of the Pandemic, many companies were forced to close or suspend their commercial operations due to the significant decrease in sales and because of the lockdowns that the National Government enforced to prevent coronavirus proliferation among the inhabitants of the country. In that context, along with supplementary regulations that were issued, the Labour Code was a key element that allowed employers to avoid dismissing their employees by granting them the possibility to furlough the effects of the labour contracts until the lockdowns had officially ended. Furthermore, even after the lockdowns were over and businesses were back in operation, the incomes of many service and entertainment companies, such as hotels, casinos, restaurants, and bars, were particularly affected by the decrease in the financial capability of the population of Panama. Panamanian authorities appropriately addressed this situation by using the provisions of the Labour Code. This legislation provides that when notorious economic causes affect businesses, companies may request authorization from the Ministry of Labour to furlough the effects of the labour contracts of their employees for up to five months. This allowed companies to maintain a financial balance between their income and their operating expenses. Hence, when the worst moments of the Pandemic had already passed, the employees returned to their jobs with the protection of a stable salary and the cover of a social security fund partially funded by their employers. Adding to the efforts made by the Ministry of Labour to mitigate the effects of the pandemic, the Social Security Institution (Caja de Seguro Social), the national authority for social security, held workshops with labour law specialists in 2020 to identify fair measures that could still protect furloughed employees who were pregnant or on maternity leave during the pandemic. These workshops relied on the expertise of labour lawyers and our experience advising clients on their daily operations to be able to identify mutually favorable strategies for these employees while still protecting the financial stability of the companies that employ them. In summary, the above mentioned reasons have been considered proof that even after five decades, the Labour Code is a fully functional body of law that protects the employees and strengthens the Legal Security and stability of those companies that invest in Panama. Nonetheless, those 50 years of age have not gone unnoticed. The Republic of Panama and the world have changed, and with them, the ways to do commerce and the modalities of employment. The globalized world has modified the international economic relationships between countries and has inserted new characters in that context, such as multinational and transnational companies. In the context of the Covid-19 Pandemic, Panamanian authorities have taken measures to secure being at the forefront of labour legislation developments. As recent as February 2020, even before the beginning of the Covid-19 Pandemic, the National Assembly passed a bill that includes cutting-edge standards for labour relationships in the context of remote work in Latin America and regulates the rights of every employee under that modality. An example of its innovative characteristics is that Law No. 126 of 2022 allows employers in Panama to acces a significant number of benefits, such as increased productivity from its employees, less absenteeism, and the saving of money in office space and equipment. Moreover, it offers the employees the right to be protected in this new era and be disconnected during their leisure hours, even under the remote work modality. Furthermore, the National Assembly has passed several bills regarding paternity leave, protection of the employment of disabled people, and the protection of employees during the economic crisis caused by Covid-19. These changes are a consequence of the attractive environment the country provides to multinational companies, as their establishment in Panama is not only beneficial economically for the country but it also contributes to the development of adaptable corporate cultures, as per these companies’ international labour codes. The demand of flexible working methods and employee benefit packages has increased for local companies because of this, increasing, in turn, the demand for legal advice on the arrangements of these benefits as part of the labour relation between employers and employees. In the last two decades, investments in the Republic of Panama have increased, with more and larger companies arriving in the country due to a successful formula of legal stability and economic incentives of special legal regimes. One of Panama's most known special legal regimes is the Multinational Companies Headquarters regime (known for its abbreviation in Spanish as “SEM Regime”). The SEM Regime has incentivized the incorporation of more than 150 “executive back-office” companies that actively manage and coordinate the operation of their subsidiaries and affiliate companies in a multinational economic group. The incentives offered by this special regime vary, ranging from reduced annual income tax to special provisions regarding the labour and immigration rules applicable to SEM employees. In summary, the most relevant immigration rules under this regime are the possibility to submit residence permit requests at a special office dedicated exclusively to attending Multinational Companies and being able to work without the necessity of any work permit from the Ministry of Labour. Similarly, the country recently passed a bill creating the Multinational Companies for Manufacturing Regime (known for its abbreviation in Spanish as “EMMA Regime”) to promote the establishment of logistics centers for light manufacturing and repackaging in Panama. Among the most relevant tax benefits of this regime, it is essential to mention that companies are exempt from the payment of Value Added Tax for services provided to subsidiaries and are exempt from import tax on all types of merchandise, products, and equipment in general, used for the provision of services related to manufacturing. Furthermore, on the immigration aspect, the EMMA Regime offers benefits similar to the SEM Regime and allows their employees to get a removable 5-year residence permit. Moreover, Panama recently approved the creation of a digital nomads visa for attracting these innovative modalities to the country. In addition to this, the Republic of Panama created the Panama Pacifico Special Economic Area Regime for those companies that locate in this geographic area and undertake certain types of commercial activities, such as call center locations, manufacturing, aviation-related services, and others. This legal regime includes the exoneration of income tax for those companies that maintain authorization to operate under it. It also provides that remuneration for extraordinary work hours must be compensated with only a 25% charge over the regular hourly salary. This places the companies that operate under this regime in an advantageous situation compared to others in the country that must pay a charge of up to 50% over the regular hourly salary under certain conditions. Moreover, the country has constituted a friendly environment for international employees by passing laws regarding the access of many foreign individuals to our territory. In summary, throughout its history, Panama has been a place where businesses and people connect and invest due to a beneficial legislation system that provides the country with a multicultural and modern business environment. As mentioned above, the Labour Code regulates diverse areas in the relationships between employers and employees, such as indefinite-term and fixed-term labour contracts, maternity leaves, legal protection against dismissals, and the maximum number of hours an employee may offer his or her services. However, there is still a long path ahead for Panamanian labour legislation. Every day new challenges arise with the latest technological and social developments. Matters such as proper paternity leaves, smart contracts, work environment, and reform of the union regulations are still pending. All these are fundamental issues that must be addressed in the years to come to maintain and promote the Republic of Panama as a hub for innovation and economy while protecting the fundamental rights of employees in a competitive environment. The Future of our Labour Legislation The country has many challenges ahead regarding labour legislation and its effects on the business market. The post-pandemic era and its consequences still constitute a great challenge for the economic recuperation of many companies. Likewise, even after the measures that the National Government took, the informal economy increased due to many people losing their jobs and establishing independent ventures to gain the possibility to cover their living expenses. Therefore, reducing the informal economy is of the utmost importance for the country. People in the informal economy do not have the Social Security Fund coverage; therefore, many do not have access to the social benefits that the Social Security Fund offers to its members. As a result of this, many people are at risk of being unable to access the Social Security System and retiring when they get to a certain age. Nonetheless, Panama is currently developing different strategies to address these problems. For this purpose, authorities are taking influence from the International Labour Organization (ILO) and local labour experts who can bring insights regarding the measures and initiatives that they have implemented with their clients and are proven to have made an impact in their workforces to build better, more structured corporate environments. In conclusion, the goal is to create more jobs and attract investments due to cutting-edge legislation that provides companies with the security that their investments in Panama are safe. The country is undergoing a digital transformation, and Panamanian authorities are actively searching for ways to promote Panama as an international hub. During the last couple of years, labour legislation has been affected by these changes as court proceedings are available online, and new special regimes arise to facilitate investments and employment in the jurisdiction. The country looks forward to improving the employment environment, and further related legislation is expected in the near future to secure the functionality of the jurisdiction and to make sure that the Labour Code continues to be a key element in the country for the years to come. About the Firm LOVILL provides specialized legal advice in labour and immigration law to international and local clients. The team has a track record of excellent service and high technical knowledge applied to every stage of a labour relation involving local and foreign talent. Head of practice Jeannette Bravo is also vastly experienced in advising clients in connection with Diversity and Inclusion matters, including but not limited to training for executives and HR Management, implementation of D&I initiatives and policies, and compliance with international labour standards.   Jeannette Bravo Senior Associate, LOVILL E: [email protected]