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Recent amendments to Puerto Rico’s Employment Transformation and Flexibility Act of 2017

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On June 20, 2022, Puerto Rico Governor, Pedro R. Pierluisi Urrutia, signed into law Law 41-2022 (P. de la C. 1244), which amends the “Employment Transformation and Flexibility Act” of January 26, 2017 (“Law 4-2017”), reverting certain legal provisions that prevailed prior to, or were abolished or modified by Law 4-2017.

Law 41-2022 is still subject to be reviewed by the Financial Oversight & Management Board for Puerto Rico (“FOMB”) under the provisions of the Puerto Rico Oversight, Management, and Economic Stability Act (“PROMESA”). Pursuant to Section 204(a)(1) of PROMESA, the Governor must submit any new law to the FOMB for review within seven (7) business days of its enactment, with a formal cost estimate of its impact of expenditures and revenues of the Commonwealth and a certification that it is consistent with the Certified Fiscal Plan for the fiscal year at issue, now governed by the Amended Plan of Adjustment approved by the PROMESA court.

If the FOMB considers that Law 41-2022 is inconsistent with the plan or is missing a cost estimate, the FOMB may take such actions as it considers necessary, including preventing the enforcement or application of the law, pursuant to Section 204(a)(5) of PROMESA. Moreover, if the FOMB determines that Law 41-2022 impairs or defeats PROMESA’s purposes, the Commonwealth is barred from implementing it, pursuant to Section 108(a)(2) of PROMESA. Considering its statement of June 13, 2022, the FOMB may take action to prevent the implementation of Law 41-2022.

Notwithstanding the above, following are the most relevant changes included in Law 41-2022. It is not intended to be an exhaustive analysis of this recently enacted legislation

1. Employment Contracts

  • Law 41-2022 restores the liberal interpretation of ambiguous provisions in an employment contract in favor of the employee, and, furthermore, such liberal interpretation is extended to policies or rules established by the employer. However, in cases where the employer reserved its right to interpret its policies or rules, such right will be recognized, provided that the interpretation is reasonable, not arbitrary or capricious, or otherwise established by a special law.
  • The statute of limitations for claims and benefits derived of an employment contract is increased to three (3) years, from the moment the cause of action arises, unless otherwise stated by a special law or by the employment contract. Moreover, this new statute of limitations will also apply to claims which arose prior to the effective date of Law 41-2022.

2. Overtime

  • Daily overtime will continue to be paid at 1½ the hourly rate of pay and be considered as follows:
    • a) daily overtime in excess of eight (8) hours a day which will be computed based on a calendar day. No longer may the employer propose an alternate 24-hour cycle, as previously allowed under Law 4-2017.
    • b) the hours an employee works in excess of forty (40) in any week of employment.
    • c) the hours that an employee works during the days and hours in which the establishment should remain closed to the public by mandate of law. However, the hours worked on Sundays, when by mandate of law the establishment should be closed to the public, will not be considered overtime for the mere fact of the employee having worked during that period.
    • d) the hours worked by an employee on the weekly day of rest, as established by law.
    • e) the hours the employee works in excess of the daily maximum of hours established in a collective bargaining agreement.

3. Meal Period

  • Law 41-2022 reverts the meal period to commence not before the conclusion of the third hour of work or after the beginning of the sixth consecutive hour of work and abolishes the waiver of the meal period in those cases in which the total of hours worked by an employee is no more than six (6) hours a day.
  • The meal period can be enjoyed between the second and third consecutive hour of work if agreed in writing between the employee and the employer.
  • In the case of meal periods enjoyed outside of the regular work shift, they can be waived upon written agreement between the employee and the employer, without the Puerto Rico Secretary of Labor and Human Resources’ (the “Secretary of Labor”) intervention.
  • A second meal period must be provided to an employee whose work shift exceeds ten (10) hours per day. When the employee does not work for more than twelve (12) hours a day, the second meal period may be waived, provided that the first meal period was enjoyed, and there is a written agreement between the employee and the employer.
  • As a general rule, meal periods within or outside the regular work period will continue to be of one (1) hour. The meal period, as an exception, may be reduced to no less than thirty (30) minutes, upon written agreement between the employee and the employer.
  • Reduction of the meal periods for unionized employees can only be achieved through the collective bargaining agreement or by written agreement between the union and the employer. Neither the individual consent from the employee nor approval from the Secretary of Labor would be required.

4. Day of Rest

  • All employees of any profit or not-for-profit business are entitled to one (1) rest day for each six (6) days of work. The rest day will be comprised of 24 consecutive hours.
  • Double pay of the employee’s regular salary is required for a student employee, when working during a rest day. The employee must be enrolled as a student, in high school, university and/or any post-graduate education system.
  • An employer who is considered a “microenterprise”, small or medium enterprise, as defined in Law 62-2014 (known by its Spanish acronym as the “PyMEs” law, hereinafter referred to as PYMES), may pay at a rate of 1 ½ their regular hourly rate.
    PYMES employers are defined as follows: (a) Microenterprise, as a business or enterprise that generates a gross income of less than $500,000.00 per year, and that has seven (7) employees or less; (b) Small Enterprises, as a business or enterprise that generates a gross income of less than $3,000,000.00 per year, and that has twenty-five (25) employees or less; and (c) Medium Enterprise, as a business or enterprise that generates a gross income of less than $10,000,000.00 per year, and that has fifty (50) employees or less.
  • All employees with rights to superior benefits prior to the effective date of Law 4-2017, will preserve the same.

5. Vacation and Sick Leave

  • Law 41-2022 reverts to the accrual rates for both vacation and sick leave, as well as the minimum number of hours an employee must work in a month in order to accrue vacation and sick leave days, existing prior to the enactment of Law 4-2017. Also, part-time employees will now accrue vacation and sick leave days.
  • Vacation and Sick Leave will now be accrued as follows:
    • a) for employees who work not less than 20 hours a week, but less than 115 hours a month, they will accrue half (½) day per month for vacation leave, and half (½) day per month for sick leave.
    • b) for employees who work not less than 115 hours a month, they will accrue 1¼ day per month for vacation leave, and one (1) day per month for sick leave.
    • c) Nevertheless, as an exception, for employers residing in Puerto Rico who do not have more than twelve (12) employees in the payroll, those employees who work not less than twenty (20) hours a week, but less than 115 hours a month, will accrue one fourth (¼) day per month for vacation leave, and half (½) day per month for sick leave, while those employees who work not less than 115 hours a month, will accrue half (½) day per month for vacation leave, and one (1) day per month for sick leave. This exception will only be available while the employer’s number of employees does not exceed twelve (12) and will cease the next calendar year after the employer’s payroll exceeds fifteen (15) employees during more than twenty-six (26) consecutive weeks in each of the two (2) consecutive calendar years.
  • Upon written request from the employee, the employer can partially or completely liquidate the employee’s accrued vacation leave, no longer conditioned to be in excess of ten (10) days.
  • The statute of limitations for wage and hour claims will again be three (3) years, instead of one (1) year, as established by Law 4-2017.

6. Christmas Bonus

  • The minimum of hours that an employee must work for an employer, in order to be paid the Christmas Bonus will now be 700 hours, and no longer the minimum of 1,350 hours set by Law 4-2017.
  • Employers must pay each employee who has worked at least 700 hours during the period from October 1 of any calendar year until September 30 of the subsequent calendar year, a Christmas bonus amounting to 6% of the total wages paid during the same period, computed up to the first $10,000.00 earned.
  • Employers who employ 12 employees or less during more than 26 weeks within the 12 months comprised between October 1st to September 30th of the subsequent calendar year, will pay the Christmas Bonus equivalent to 3% of the amount earned up to $10,000.00 to employees working at least 700 hours within said period.
  • For employees hired on or after January 26, 2017- the effective date of Law 4-2017- employers who employ more than twenty (20) employees during more than 26 weeks within the 12 months comprised between October 1st to September 30th of the subsequent calendar year, will pay to employees who have worked at least 700 hours during such period, a Christmas Bonus equivalent to 3% of the amount earned up to $600.00, increasing it from 2% as set by Law 4-2017.
  • For employees hired on or after January 26, 2017, the effective date of Law 4-2017, employers who employ 20 or less employees during more than 26 weeks within the 12 months comprised between October 1st to September 30th of the subsequent calendar year, will pay to employees who have worked at least 700 hours during such period, a Christmas Bonus equivalent to 3% of the amount earned up to $300.00, increasing it from 2% as set by Law 4-2017.
  • The Christmas Bonus described in the preceding two (2) paragraphs, applies to a PYMES employer, who is a microenterprise, small or medium enterprise as defined in Law 62-2014, nonetheless the minimum of hours that an employee must work during such period is 900 hours.
  • October 1st of the previous year will now be the date set for the commencement of the period to be considered for the computation of the annual net earnings of the employer. The total amount of payment for Christmas bonuses of the year may not exceed 15% of the annual net earnings from October 1st of the previous year to September 30th of the year in which the Christmas Bonuses will be paid.
  • Abolishes the faculty to pay only 50% of the Christmas Bonus during the first year of employment. Furthermore, any ambiguity in the provisions of this Article (Art. 1 of Law 148-1969, as amended by Law 4-2017) will be liberally interpreted in favor of the employee.

7. Unjust Dismissal

  • The severance payment for unjust dismissal (Law 80-1976), in addition to the salaries earned by the employee, will now be as follows:
    • (a) An amount equivalent to three (3) months’ salary, when the dismissal occurs within the employee’s fifteen (15) years of service, and to six (6) months’ salary, when the dismissal occurs after fifteen (15) years of service; and
    • (b) An additional progressive compensation equivalent to two (2) weeks of salary for each completed year of service, when the dismissal occurs within the employee’s fifteen (15) years of service, and to three (3) weeks of salary for each completed year of service, when the dismissal occurs after fifteen (15) years of service.
  • There is no longer a maximum total amount of severance payment under Law 80-1976 of nine (9) months, as established by Law 4-2017.
  • The years of service to be considered in the computation of the severance payment will include all periods worked by the employee before the dismissal, excluding those periods for which the employee was compensated for previous dismissal or termination, or were object of a judicial determination.
  • Any amount paid in excess of the severance payment or indemnification provided by Law 80-1976 will now be subject to the payment of income tax.
  • Various statutory causes for just dismissal have now been amended.
  • The definition of “dismissal” (“despido”) was reverted to the one prior to the enactment of Law 4-2017. The current definition of dismissal is an indefinite suspension for a term that exceeds three (3) months, except for employees of seasonal industries, or a resignation from employment motivated by the acts of the employer aimed at inducing or forcing the employee to resign, like imposing or attempting to impose working conditions that are more onerous, reducing the salary, a demotion or subject the employee to vexations or humiliations of fact or word.
  • The automatic probationary period will be three (3) months, without any distinction between exempt and non-exempt employees, unless there is a notification from the employer to the Secretary of Labor explaining the reasons why the nature of the position requires a longer probationary period. Once such notification is submitted, it will be understood that the probationary period is extended to an additional three (3) months, for a total of six (6) months. The previous automatic probationary period of nine (9) months, along with the exception of exempt employees pursuant to the Fair Labor Standards Act, of an automatic probationary period of twelve (12) months, established by Law 4-2017, have been abolished.
  • In the case of unionized employees, the extension of the probationary period may be stipulated to extend to a maximum of six (6) months, either in the collective bargaining agreement or written agreement between the union and the employer, without the need to notify the Secretary.
  • The probationary period will not limit the accrual of vacation leave. Hence, the provision that these employees would accrue vacation leave after six (6) months of employment, retroactive to the date of hire, was also abolished.
  • The burden of proof in unjust dismissal cases has shifted back to the employer, which now must allege in the responsive pleading, the facts that gave reason for the dismissal and prove that it was justified under Law 80-1976.
  • The statute of limitations for the filing of unjust dismissal claims will now be three (3) years after the effective date of the dismissal, increasing it from one (1) year, thus, reverting to the term that existed prior to the enactment of Law 4-2017.

8. Discrimination Claims

  • There will now be a presumption that any of the discriminatory acts included in Law 100-1959, as amended, were committed in violation of said statute, when carried out without just cause. This presumption, however, can be controverted.

9. Severability and Supremacy Clause, Date of Effectiveness

  • Law 41-2022 contains a severability clause, wherein it states that the law will be interpreted in accordance with the Constitution of Puerto Rico and the United States Constitution. Any part of this law, which may be nullified or declared unconstitutional, will not affect, harm nor invalidate the rest of its provisions, limited them to the part of the law subject of judicial decree. The same norm will apply in the event that, the application of part of the law to a person or of a circumstance is determined to be invalid or unconstitutional, such judicial decree will not affect nor invalidate the application of the rest of the provisions of this law, when enacted, to those persons or circumstances where it will be validly applied.
  • The provisions of Law 41-2022 will prevail over any other statute, regulation or norm that is not in harmony with them.
  • Law 41-2022 will become effective thirty (30) days after its enactment. Nevertheless, PYMES’ employers, as defined in Law 62-2014, will have ninety (90) days to comply and implement the provisions of the law, as enacted.
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