All questions

Discontinuing employment

i Dismissal

Employees who have served continuously for less than two years can be dismissed without cause. In this case, the employer must give notice of the unjustified dismissal to the employee 30 days in advance or pay a sum equivalent to 30 days' salary and, in addition, pay the employee severance for unjust dismissal that is equivalent to 3.4 weeks of salary for each year of service, assessed pro rata. The salary for this purpose will be the average monthly salary of the last six months of employment.

On the other hand, employees who have served continuously for more than two years can only be dismissed based on just cause as provided by law. If an employer decides to terminate the contract of an employee who has served for more than two years, without cause, he or she will normally try to negotiate a mutual termination agreement, in which compensation similar to that applicable to unjust termination will be offered to the employee.

There are three types of justified causes that empower an employer to terminate the employment relationship without severance.

First, the Labour Code sets forth 16 causes of a disciplinary nature, including the following:

  1. if the employee engages, while on duty, in acts of violence, threats or ill treatment against the employer, his or her family, or members of the management of the undertaking or his or her fellow workmen and women, except in cases of self-defence;
  2. if the employee, without the authorisation of his or her employer, discloses technical, commercial or industrial secrets or other information of a confidential nature that may cause damage to the employer;
  3. if the employee, while on duty, performs serious dishonest or dishonourable actions or criminal actions against property to the detriment of the employer; and
  4. if the employee fails to arrive for work, without permission from the employer or without justified cause, on two Mondays during the course of a given month, six in a given year, or three consecutive days or alternate days in any one-month period.

The second group of just causes for termination by the employer contemplates situations of a non-imputable nature, notably the following:

  1. a properly verified mental or physical disability of the employee that makes it impossible for him or her to perform the work;
  2. the expiration of one year, starting from the date of suspension of the contract, owing to the employee's illness or non-employment-related accidents; and
  3. force majeure or acts of God that provoke as a necessary, immediate and direct consequence, the definitive stoppage of the employer's activities.

The third group consists of causes of an economic nature, namely the following:

  1. the insolvency or bankruptcy of the employer;
  2. the closing of the enterprise or definite reduction of work because of the evident unprofitability of the enterprise;
  3. the definitive suppression of the work inherent to the worker's contract; and
  4. an evident reduction of the employers' activities owing, for instance, to a serious economic crisis, partial failure to meet operating costs because of a properly established decrease in production, innovations in the industrial process or revocation or lapse of an administrative concession, cancellation or decrease in sales orders, or any other similar cause duly verified by the competent authority.

Notice of termination must be always in writing and it must specify the reasons for termination. In case of termination for economic reasons, the employer must obtain authorisation from the Labour Ministry authorities and prove prima facie the valid economic reasons for termination. If upon the passing of 60 calendar days from the date when the authorisation is requested, the labour authorities have not ruled on the petition, the employer can proceed to execute the dismissals. In this instance, the employer shall nevertheless pay the dismissed employees severance as provided in the first paragraph of this subsection.

The employment relationship may also be terminated by mutual consent provided it is expressed in writing and does not involve the waiver of acquired rights; by expiration of the term of the contract, provided the employment relationship has been validly stipulated for a definite period; and by the resignation of the employee, provided that the same is in writing and has been ratified before an administrative labour authority.

Employees protected by union immunity, as described in Section X, or maternity immunity cannot be dismissed without the prior authorisation of a labour court based on a justified cause provided in the law. Maternity immunity is granted to female employees during pregnancy and for one year from the date the employee returns from maternity leave.

ii Redundancies

Collective dismissals are regulated under the Labour Code and are considered justified based on economic reasons, as set out in subsection i, above. For an employer to be able to dismiss its workforce collectively, it requires previous authorisation from the Ministry of Labour, as it must prove that the company is facing at least one of the economic situations described above. In the event of dismissals based on economic reasons, the following rules shall be applied:

  1. dismissals shall begin with employees of the lowest seniority within the various labour categories;
  2. after application of the previous provision, Panamanian employees shall be given preference in determining the retention of those who are not Panamanian, unionised employees over those who are not unionised and the most efficient over those who are less efficient;
  3. pregnant employees, even if they are not given preference under the previous provisions, shall be the last to be dismissed and only if their dismissal is absolutely necessary and after compliance with legal formalities; and
  4. after the previous provisions are applied, under equal circumstances, employees with union immunity shall have preference over others for retention of employment.

Even though the cause for the dismissal is justified under the Labour Code, given that the dismissal is not attributable to the employee, it must be compensated with a severance payment that is equivalent to 3.4 weeks of salary per each year of service, calculated pro rata. The salary for this purpose will be the average monthly salary of the last six months of employment.

Other than the notification to the Ministry of Labour, no other notifications are required, and there is no requirement to provide prior notice to the employees.

Mutual termination agreements may be used for collective dismissals; however, it is most likely that the employee will demand the payment of severance, three months' salary and a 25 per cent surcharge on the severance.

Individual redundancies are not regarded as justified under the Labour Code, but the employer may try to terminate the employment relationship by offering the employee a mutual termination agreement offering the payment of severance, unless the employee has less than two years of service, in which case they may be dismissed with the payment of severance and 30 days' prior notice or payment in lieu.