Puerto Rico Act No. 41 leaves employers uncertain about labor obligations

As discussed in our prior Client Alert, Puerto Rico Act No. 41 of June 20, 2022 (Act No. 41) introduced several changes to labor laws in Puerto Rico, in many cases reversing the changes introduced by the 2017 Labor Reform. While the law’s provisions state that it takes effect on July 20, 2022 for large businesses and September 18 for micro, small and medium businesses (SMEs), the law’s implementation remains unclear because Puerto Rico’s Oversight Board maintains that the Government of Puerto Rico has not been able to certify that Act No. 41 is consistent with the Fiscal Plan as required by law. This alert discusses the current status of Act No. 41 and what it means for employers. While the law may be struck down, many employers are implementing the changes in practice until the current impasse is resolved.

Act No. 41 introduces changes to labor law

Act No. 41 amends a number of employment statutes, providing additional rights to employees in the private sector in Puerto Rico, including, among other things, reincorporating statutory benefits that were previously eliminated, liberally interpreting employment agreements in favor of employees, expanding meal and rest period requirements, expanding accrual benefits for vacation and sick leave, revising the statutory formula for severance and certain bonuses and reestablishing rebuttable presumptions of dismissal without just cause, as well as the assumption that unjust dismissals are motivated by discriminatory acts.

The law’s effective date depends on the size of the employer.  For SMEs, the provisions of Act No. 41 apply as of September 18, 2022. Act No. 41 refers to the following definitions of SMEs contained in Act No. 62:

• Micro business: a business or enterprise that generates a gross income of less than $500,000 per year and has 7 employees or fewer
• Small business: a business or enterprise that generates a gross income of less than $3 million per year and has 25 employees or fewer
• Medium business: business or enterprise that generates a gross income of less than $10 million per year and has 50 employees or fewer

Businesses outside of these limits are deemed to be large employers, to which the provisions of Act No. 41 apply as of July 20, 2022.

Act No. 41’s implementation is uncertain

The applicability of Act No. 41 depends on the Financial Oversight and Management Board, which has the power to review laws passed by the Puerto Rico legislature insofar as they may have an impact on the Fiscal Plan for Puerto Rico.

Pursuant to Section 204 of the Puerto Rico Oversight, Management, and Economic Stability Act (PROMESA), the Government must submit to the Board a formal estimate of the impact of any law approved by the Legislative Assembly on the Government of Puerto Rico’s expenditures and revenues within seven business days after the approval of any law. It must also submit a certification confirming that the law is either consistent or inconsistent with the Fiscal Plan.

On June 13, 2022, prior to the approval of Act No. 41, the Board warned the Government that the law could impact the Fiscal Plan. On July 19, the Board objected to the information submitted by the Government on the grounds that it was insufficient to comply with Section 204 and reiterated its position that Act No. 41 does not comply with the Fiscal Plan. The Board further instructed the Government to "totally suspend the application and enforcement of Act No. 41 so that it is not applicable to any private employer" until the Government complied with the provisions of Section 204 to the Board's satisfaction.

In response, the Government publicly stated that it would comply with the Board's requests for additional information but would not suspend the terms of Act No. 41 while the information was being evaluated. According to Secretary of Labor and Human Resources Gabriel Maldonado, the Board “cannot prevent or paralyze the effects of a newly enacted law by sending a letter to the Government.”

On July 30, 2022, following the July 20 effective date for large businesses and submission of additional information by the Government, the Board stated its view that Act No. 41 does impact the Fiscal Plan and therefore cannot take effect. Citing Section 108(a) of PROMESA, it further disagreed with the Government’s contention that the Board does not have the power to suspend implementation of Act No. 41. The Board concluded that the Government’s actions currently leave it with no other option than to "initiate an action to nullify the law and request other appropriate measures to deter future violations." It similarly deemed the Government’s submission of further information in early August insufficient to remedy deficiencies.

In an attempt to avoid litigation, the Board has invited the Government of Puerto Rico to suspend the effects of the law while the parties determine whether Act No. 41 is salvageable, a proposal that the Government of Puerto Rico has rejected in the past.

Takeaways for Puerto Rico employers

Act No. 41 has technically taken effect for large employers and will take effect for SMEs on September 18, 2022. However, the Board may file a legal action to nullify Act No. 41, creating more uncertainty for employers.

In the meantime, employers are urged to consider implementing those provisions of Law No. 41 that went into effect immediately, including changes related to employee compensation, leave accruals, hiring terms and probationary periods.

For more information, please contact either of the authors or your DLA Piper relationship attorney.