On January 26, 2017, the Governor of Puerto Rico approved the Labor Transformation and Flexibility Act (“the Act"). The Act makes substantial changes to virtually all existing Puerto Rico employment laws, including those governing unjustified dismissal, wage-and-hour, vacation and sick leave, workers' compensation, unemployment, lactation leave, employment discrimination and employee benefits. An in-depth analysis of the almost 80-page Act is beyond the scope of this article. The below provides a quick overview of the Act and highlights the noteworthy changes that will alter decades-old statutes. It remains to be seen how these changes will play out in their application and how they will be interpreted by the courts.

Effective immediately, the Act provides for the following changes:

  • Sets forth definitions of specific terms and rules of interpretation for employment contracts, and the concepts of employee, employer and independent contractor.
  • Recognizes electronic signatures and notices as having the same effect as those made in writing.
  • Establishes that every employment-related Puerto Rico law or regulation that refers to a similar issue regulated by an analogous U.S. law or regulation shall be interpreted in a manner consistent with those federal norms, unless Puerto Rico law expressly establishes otherwise.
  • Provides a list of employee rights and responsibilities.
  • Establishes a conflicts-of-law rule applicable to employees assigned to work in Puerto Rico for less than three consecutive years when they maintain a relationship with their employer from another jurisdiction.
  • Establishes that the statute of limitations for claims arising from an employment contract, or the benefits thereunder, shall be one year from the moment the cause of action arises, unless otherwise provided by special law or in the employment contract, except that causes of action arising before the effective date of the Act will be subject to the statute of limitations period that existed at the time.
  • Establishes the right to participate in religious services and addresses religious accommodation.
  • Substantially modifies Puerto Rico wage-and-hour legislation by redefining the concept of overtime hours and workweek, eliminating 24-hour overtime and, in a significant departure from what has been the standard in Puerto Rico, permitting alternative 40-hour work schedules and the make-up of time not worked due to personal reasons. The Act establishes a procedure for employee requests to change work shifts, working hours and place where work is performed, and identifies specific time frames for the employer to respond to the same. The Act defines the concepts of "tips" and "service charges" and, under Puerto Rico law, expressly excludes from the definition of "wages" any such amounts received in excess of those used to comply with the payment of the legal minimum wage. Further, the Act implements important changes to the timing of meal periods and the payment of meal period penalties, and eliminates the need for a written agreement in cases where the second meal period can be obviated.
  • Repeals the “Closing Law,” eliminating retail industry restrictions on operating between 5:00 am and 11:00 am on Sundays, including the premium rates previously applicable for employees working on Sundays. Nevertheless, the Act establishes that retail establishments not previously excluded by the repealed Closing Law continue to be precluded from opening on Good Friday and Easter Sunday.
  • Increases the minimum number of hours an employee must work each month to be entitled to accrue vacation and sick leave, from 115 to 130 hours. The Act also establishes four different rates of vacation accrual, depending on years of service, for employees hired after its effective date.
  • For employees hired after the Act's effective date, the law increases the number of work hours required for employees to qualify for the annual bonus, commonly known as the "Christmas Bonus," and reduces the amount employers must pay for the same. Moreover, as to all employees, regardless of their hire date, the Act changes the period during which the bonus may be paid and incorporates into the Act the procedural framework employers need to follow in order to request exemption from paying the bonus. Employers may also now credit against the Christmas Bonus “any bonus” paid to the employee during the year for “any concept,” provided the employee is given written notice of the employer's intention to do so.
  • Amends the Puerto Rico Internal Revenue Code of 2011 (the "PR Code"), to exclude from gross income and wages any compensation or indemnification received by an employee for reason of his/her dismissal, without having to determine whether there was just cause for the same. The exclusion applies to any amount equal to the amount that the employee could receive under Act 80, Puerto Rico’s Unjustified Dismissal Act.
  • Amends the term "qualified benefits" to include health and dental plans; Health Savings Accounts; dependent care assistant programs; long-term disability benefits; accident insurance, including life and dismemberment; adoption assistance; and any other qualified benefit authorized by Section 125 of the U.S. Tax Code. PR law did not previously recognize some of these as "qualified benefits" under what is commonly referred to as a "cafeteria plan."
  • Promulgates new definitions of what constitutes full-time and part-time employment for purposes of lactation leave, and extends lactation leave requirements to part-time employees who work at least four consecutive hours.
  • Coins the concept of “Flexisecurity,” and amends several provisions of the Puerto Rico Employment Security Act. It requires the PR Secretary of the Department of Labor and Human Resources to enact regulations establishing a formula to determine the average weekly salary for purposes of unemployment compensation, and to determine any additional premiums to be paid by employers based on an “experience system,” as said concept is therein defined, up to a maximum of the first $10,500.00 in wages paid to each employee during the tax year. These additional premiums are to be implemented in stages at the discretion of the Secretary, taking into consideration the economic data of the Economic Development and Commerce Department as well as the fiscal health of the unemployment fund.
  • Adopts a new formula for calculating the statutory severance (or "mesada") under Act 80. This change, however, applies to employees hired after the Act’s effective date. For these employees, the severance is three months' plus two weeks' salary for each year worked. Also, for employees hired after the Act’s effective date, the severance is capped at nine months' salary. The Act also reduces the statute of limitations for claims under Act 80 from three years to one year from the date of termination. Nevertheless, terminations that occurred prior to the Act’s effective date still have a three-year statute of limitations, to be counted from the date of the termination. Notably, the Act eliminates language contained in Act 80 regarding the employer's burden to plead in its answer to the complaint the facts that led to the dismissal, and to prove that it was justified in order to be exempted from payment of the statutory indemnity. Moreover, the Act also now expressly states that while an employee may not prospectively waive his/her rights to the indemnity provided under Act 80, wrongful termination claims and statutory severance amounts can be negotiated for amounts lower than the actual statutory severance. Further, the amount of such payment can be settled once the employer either announces its intent to terminate or executes the termination, assuming all contractual elements for the settlement contract are satisfied. The Act also expressly provides that any termination payments can be offset against a future severance obligation.
  • The Act establishes an automatic probationary period of 12 months for employees classified as executives, administrators and professionals under the FLSA, and of 9 months for all other employees. Notably, written agreements to this effect are no longer necessary. Moreover, probationary periods shall be automatically tolled during a probationary employee's authorized leave of absence.
  • The Act reduces to six months the employee job reserve provisions of the Non-Occupational Disability Insurance Act (in Spanish, "SINOT") and the Puerto Rico Compensation System for Work-Related Accidents Act (commonly known as "Fondo"), for employers with 15 or fewer employees.
  • The Act eliminates the presumption of discrimination in dismissals without just cause and expressly adopts the interpretative standards and norms available under federal anti-discrimination law, harmonizing Puerto Rico employment discrimination law with the prevailing federal law and ensuring consistent interpretations where appropriate unless the local legislation expressly requires otherwise. Similarly, while retaining the automatic doubling of damages provision of local discrimination legislation, the Act adopts, for all local employment discrimination statutes, the federal under Title VII of the Civil Rights Act of 1964 and the Americans with Disabilities Act damages caps for compensatory and punitive damages based on the number of employees (i.e., $50,000 for fewer than 101 employees; $100,000 for employers with 101 to 200 employees; $200,000 for employers with 201 to 500 employees; and $300,000 for employers with more than 501 employees).

As noted, Puerto Rico employers should bear in mind that there are several contexts where the Act differentiates between employees hired before and after its effective date—e.g., overtime, vacation, sick leave, "Christmas Bonus" and Act 80's statutory indemnity. These distinctions require the immediate attention of employers that are actively hiring. Moreover, employers seeking to best take advantage of the changes brought about by the Act should consider revising employee handbooks and procedures as soon as possible.