Reforms to Puerto Rican Labor Law Reinstate Employee-Friendly Measures

On June 20, 2022, Puerto Rico’s governor signed into law Act No. 41-2022 (“the Act”). The Act rolls back certain changes brought about by the Labor Transformation and Flexibility Act (“LTFA”). The LTFA was enacted in 2017 in an effort to reenergize the island’s economy following its effective bankruptcy.

As described in more detail below, the changes made by the Act relate to accrual of sick and vacation leave and Christmas bonus eligibility, presumptions related to just cause and discrimination, the formula for calculating severance pay, probationary periods, the statute of limitations for various causes of action, the interpretation of employment contracts, and meal breaks.

  • Increased Rate for Accrual of Sick and Vacation Leave: Under the Act, the number of hours non-exempt employees must work in order to accrue sick and vacation leave has again been lowered to 115 hours per month. Employees who work at least 115 hours per month will accrue 1-¼ vacation days per month and 1 sick day per month. Accrual is capped at 15 days of vacation leave and 12 days of sick leave per year. These accrual rates apply only to employers with more than 15 employees over 26 weeks in a consecutive two-year period. Further, the Act removes the requirement that employees have 10 days of accrued unused vacation in order to cash out leave.
  • Changes to Eligibility Requirements for Christmas Bonuses: The Act lessens the number of hours employees must work in order to be eligible for receipt of Christmas bonuses to 700. Employees of microbusiness (i.e., businesses with a gross annual income of less than $500,000 and seven or fewer employees), and small (i.e., businesses with a gross annual income of less than $3 million and 25 or fewer employees), and medium-sized businesses (i.e., businesses with a gross annual income of less than $10 million and 50 or fewer employees), must work at least 900 hours in order to be eligible for such bonuses.
  • Presumption of Lack of “Just Cause” and Discrimination: The Act reintroduces a rebuttable presumption that all terminations lack just cause and that any employment action lacking just cause is a result of illegal discrimination.
  • Formula for Calculating Severance Pay: The Act amends the formula for statutory severance as follows:
    • If termination occurs within the first 15 years of employment, employees are entitled to three months’ salary, plus two weeks’ salary for each year of employment.
    • If termination occurs after 15 or more years of employment, employees are entitled to six months’ salary, plus three weeks’ salary for every year of employment. Further, severance payments are no longer capped at the equivalent of nine months’ salary as they were under the LTFA.
  • Reduced Probationary Period: The Act reduces the probationary period for both exempt and non-exempt employees to three months, subject to extension upon notification of the Puerto Rico Secretary of Labor and Human Resources.
  • Increased Statute of Limitations: The Act increases the statute of limitations for wrongful termination claims, wage claims, accrued vacation and sick leave claims, and claims arising out of employment agreements from one year to three years.
  • Interpretation of Employment Contracts in Favor of Employees: The Act reimposes a standard that construes ambiguities in employment contracts in favor of employees.
  • Changes to Meal Period Timing: The Act provides that non-exempt employees must take their meal periods between the end of the third and beginning of the sixth hour of work unless the employer and employee agree otherwise in writing. Employers must now provide employees who work more than 10 hours in a single day with a second meal period. The Act also eliminates a provision of the LTFA that denied meal periods to employees who were scheduled to work less than six hours in a day.

The Act will become effective 30 days after of signing; however, microbusinesses and small and medium-sized businesses have an additional 90 days to come into compliance. The Secretary of Labor and Human Resources will issue regulations interpreting the Act within 90 days of approval of the law. That being said, the future of the Act is not entirely clear as the Financial Oversight and Management Board for Puerto Rico (“FOMB”) has said it plans to challenge the new law on the grounds it is inconsistent with the island’s fiscal plan.