The Severance or Unemployment Fund is a legal Institution introduced in our labor legislation in order to ensure or guarantee workers the effective and complete payment of their seniority bonuses and their relevant compensation whenever the employment relationship comes to an end.

In very simple terms, the Severance Fund is a pool of capital that the employer is obliged to constitute through a trust, where the employer must deposit or record on a quarterly basis, the amount of money corresponding to i) the seniority premium accumulated for each worker in the respective quarter, and ii) 5% of the monthly share of the compensation that each worker could be eligible to.In principle, all companies based in Panama are required to establish a Severance Fund and make the respective quarterly deposits or contributions, except for the following companies:

  • Cooperative associations.
  • Agricultural or livestock companies with ten (10) or fewer workers.
  • Agribusiness enterprises with twenty (20) or fewer workers.
  • Manufacturing companies with fifteen (15) or fewer workers.
  • Establishments engaging in retail sales or companies with five (5) or fewer workers, except in the case of financial institutions, real estate and insurance companies.

Constituting and contributing to the Severance Fund  is compulsory only for the workers hired for an indefinite term, such that workers hired for a definite term or for a specific work (or work phase) are excluded from the Severance Fund and, consequently, the employer is not required to make any contribution to the Severance Fund for these workers.

Inasmuch as Article 17 of the Labor Code limits the hiring of foreigners for definite-term or permanent employment contracts, foreign workers are excluded from the Severance Fund and, accordingly, the employer is not required to make any contribution to the Fund with respect to these workers.

The existing rules on this subject do not include explicit penalties for employers who fail to comply with their obligation to establish and make contributions to the Severance Fund. Nevertheless, Article 219 of the Labor Code expressly states that an employer who is convicted (for unfair dismissal) to reinstate and pay three (3) months of back wages to a worker who started work in the company after the 14th of August 1995, can avoid the employee’s reinstatement by paying the employee the three (3) months of back wages, the worker’s full compensation, plus a 25% surcharge on such compensation, provided that the employer is not up to date with his contributions  to the Severance Fund.

Therefore, if the employer has made all necessary contributions to the Severance Fund, he shall be exempted from paying the 25% surcharge on the aforementioned compensation. Conversely, if the employer fails to constitute the Severance Fund or has failed to deposit his contributions to the said Fund, the employer shall then have to pay the 25% surcharge on the compensation when refusing to reinstate a worker. This could be considered as a penalty for employers who fail to comply with their legal obligation to provide and maintain their Severance Fund.

In addition, under the provisions of Article 1064 of the Labor Code, in the event that an inspector from the Ministry of Labor and Workforce Development visits the office of an employer and requests or requires evidence of the existence of the Severance Fund, the company runs the risk of being penalize, as a result of each visit, with a fine of B/.200.00, which of course could increase for the employer in case of reoccurrence. 

There is no doubt that the failure by employers to comply with their obligation to provide a Severance Fund could cause actual sanctions that result in fines and in an increase of the cost of some of their lay-offs or terminations.