The Governor of Puerto Rico signed into law new labor reform legislation – but its implementation is unclear

On June 20, 2022, Governor Pedro Pierluisi signed into law House Bill No. 1244, Act No. 41-2022 (Act No. 41), which amends and partially repeals the Labor Transformation and Flexibilization Act, Act No. 4-2017 (Act No. 4 or Labor Reform of 2017) as well as amends several other employment statutes.

In essence, Act No. 41 reincorporates statutory benefits that were eliminated by Act No. 4, granting employees in the private sector in Puerto Rico more rights, such as the following:

• Interpretation of ambiguities in employment agreements­ shall be liberally interpreted in favor of employees.
• The meal period shall be taken after the third but before the sixth hour of work. The employer and the employee may agree in writing that the meal period will be taken after the second hour of work. Employees who work less than six hours in the workday may no longer waive the meal period.
• Non-exempt employees who work on their day of rest shall be paid time and a half for hours worked during that day. In addition, non-exempt employees who are high school, college or postgraduate students shall be paid twice their hourly rate for hours worked on a resting day, except if they work for microbusinesses or small- or medium-sized employers, in which case hours worked on a resting day shall be paid at time and a half. For purposes of Act No. 41, microbusinesses have a gross annual income of less than $3 million and employ 25 or fewer employees. Medium-sized businesses have a gross annual income of less than $10 million and employ no more than 50 employees.
• Vacation and sick leave accrual benefits are expanded:
  • Non-exempt employees working for employers with 12 or more employees, who work more than 20 hours a week but less than 115 hours a month, shall accrue a half day of vacation and a half day of sick leave per month.
  • Non-exempt employees working for employers with 12 or more employees, who work more than 115 hours in a month, shall accrue 1.25 vacation days per month and one sick day per month.
  • Non-exempt employees working for smaller employers who work more than 20 hours a week but less 115 hours a month shall accrue a quarter of a vacation day and a half day of sick leave per month.
  • Non-exempt employees working for smaller employers who work more than 115 hours in a month shall accrue a half day of vacation and one day of sick leave per month.  In addition, upon written request by the employee, the employer may liquidate accrued and unused vacation leave totally or partially. Although it remains that employers may not penalize non-exempt employees for making justified use of their sick leave, employers are now allowed to establish incentive programs based on their employees’ assistance.
• The statutory formula for eligibility to receive an annual Christmas bonus has been adjusted. Employers with 20 or more employees -for more than 26 weeks from the period of October 1 to September 30 of the following year- are required to provide bonuses that are equivalent to 3 percent of an employee’s annual salary, capped at $600 for those employees who worked at least 700 hours in that time period. Smaller employers are required to provide bonuses that are equivalent to 3 percent of an employee’s annual salary, capped at $300 for those employees who worked at least 700 hours in that time period. Microbusinesses or small- or medium-sized employers shall provide Christmas bonuses to employees who work 900 hours or more during the same period.
• The formula for the statutory dismissal severance indemnity under the Puerto Rico Unjust Dismissal Act has been modified to three months of salary plus two weeks of salary for every year of service.  Employees with over 15 years of service are entitled to 6 months of salary plus 3 weeks of salary for every year of service. In both instances, there is no longer a cap. Any separation indemnity, up to the total amount of the statutory severance, shall be tax-free for the employee.
• Some of the definitions of dismissal with just cause under the Puerto Rico Unjust Dismissal Act were reverted to those in place prior to the Labor Reform of 2017.
• The probationary employment period shall be an automatic term of three months for both exempt and non-exempt employees. The Secretary of Labor can extend the period for an additional three months upon notice of the employer. Once the notice is received, the extension shall be automatically granted.  Until regulation is promulgated, there is no requisite of form for this notice. For unionized employees, an extension of up to six months without the Secretary of Labor’s approval can only be stipulated via a collective bargaining agreement or a written agreement between the union and the employer.
• Rebuttable assumptions of dismissal without just cause were reestablished, as well as the assumption that unjust dismissals are motivated by discriminatory acts. Therefore, the employer has the burden of proving that the dismissal was justified pursuant to the standard set forth by the Puerto Rico Unjust Dismissal Act, and that non-discriminatory, legitimate business reasons supported the termination of the employment.
• The statute of limitations for legal actions under the Puerto Rico Unjust Dismissal Act for wage, vacation and sick leave claims and for breach of employment contract claims is extended from one to three years.

Act No. 41 shall come into effect 30 days after enactment (ie, July 20, 2022).  For microbusinesses or small -or medium-sized employers, it will become effective 90 days after enactment (ie, September 18, 2022).  Pursuant to the Puerto Rico Oversight, Management and Economic Stability Act (PROMESA), the Governor must submit before the Puerto Rico’s Fiscal Oversight Board a formal estimate and certification addressing the economic impact of Act No. 41 within seven business days (ie, June 27, 2022).

However, on June 13, the Oversight Board warned the Governor in writing that this labor reform is significantly inconsistent with the Commonwealth of Puerto Rico Certified Fiscal Plan.  In order to prevent the implementation of, and to nullify, legislation signed into law, such as Act No. 41, the Oversight Board could present a civil action before the United States Federal District Court for the District of Puerto Rico.  If the Oversight Board presents such action, the Government of Puerto Rico will likely face an uphill battle defending the reform’s validity before the Federal Court.

Not only has the Oversight Board been clear about its objection to the enactment of Act No. 41, but a recent decision by the First Circuit Court of Appeals, 2022 U.S. A.p.p. Lexis17172, upheld the power of the Oversight Board to review and block the implementation of local laws enacted by the legislature if their objection is not capricious and arbitrary and the legislation impairs the purposes of PROMESA. 

If you have any questions, please contact the author or your DLA Piper relationship attorney.