Circuit Court affirms nullity of Puerto Rico’s 2022 Labor Reform

On August 10, 2023, the US Court of Appeals for the First Circuit issued an opinion and judgment affirming the Federal District Court of Puerto Rico’s March 3, 2023 ruling that invalidated Puerto Rico Act No. 41-2022 (Act 41).

As discussed in earlier client alerts dated June 28, August 24, and October 18, 2022, as well as March 7, 2023, Act 41 introduced several important changes to Puerto Rican private employment law, in many cases reversing changes which were introduced by the 2017 Labor Reform.

Background

On March 3, 2023, the Federal District Court of Puerto Rico ruled that Act 41 was approved in violation of the Puerto Rico Oversight, Management, and Economic Stability Act (PROMESA), and that the changes to local employment statutes instituted by the Act are null and void ab initio. Both the Puerto Rico Legislature and the government’s executive branch appealed the decision.

In essence, the Court of Appeals affirmed the conclusion that the Puerto Rico Governor failed to comply with Section 204 of PROMESA by not providing a formal estimate with regard to the impact of Act 41 in Puerto Rico’s economy, in order to certify the law’s consistency with the fiscal plan of Puerto Rico’s Fiscal Oversight and Management Board (FOMB).

The Puerto Rico government has announced that it is considering whether it will seek review from the US Supreme Court. Although the Circuit Court’s decision provides private employers in Puerto Rico more certainty as to the law’s implementation, it is still unclear whether litigation regarding the nullification will continue and whether the government will try to establish the provisions of the 2022 Labor Reform by other means, including new legislation.

Act 41 took effect on July 20, 2022 for large businesses and on September 18, 2022 for micro, small and medium businesses (SMEs), but the FOMB publicly stated since its approval that the law was void, and it finally filed a complaint to nullify it on September 1, 2022.

In its opinion, the Circuit Court concluded that the “Board’s section 204(a) claim […] falls within the ambit of Title III’s [PROMESA’s] jurisdictional grant.” The Court limited its jurisdictional scope to address only whether “this dispute – regarding the application of PROMESA's fiscal plan compliance rules to newly enacted legislation – ‘relates to’ the Commonwealth's Title III case.” The Court concluded that FOMB’s efforts to enforce the Commonwealth’s certified fiscal plan through section 204(a) are, at a minimum, “related to” the Title III case.

The Circuit Court also found that section 204(a)(2)(A) required an estimate of impact the proposed legislation may have on revenues and stated that the referenced section did not provide exceptions for economic analysis that may be “difficult to perform” due to “competing macroeconomic factors,” as described by the Puerto Rico Governor. The Court further found the Governor failed to demonstrate that the effects of Act 41 were entirely unforeseeable or immeasurable through economic modeling.

Thus, the Court emphasized that, where it is clear that a law could have an impact on revenues, an estimate of such impact is required, even though the law applies only to the private sector.

Takeaways for Puerto Rico employers

The Circuit Court affirmed the District Court’s Opinion and Order instructing the Government of Puerto Rico that Act 41, and any actions that have been taken to implement it, are null and void ab initio.

The Court’s ruling is still not final as the parties may seek review from the US Supreme Court, but it is currently binding. Therefore, all employment statutes revert to the language established by the 2017 Labor Reform.

Employers who had made changes to comply with the 2022 Labor Reform may revert to benefits offerings that comply with minimum requirements established by the 2017 Labor Reform, or may continue offering benefits pursuant to the 2022 Labor Reform. Employers are in no event precluded from providing more benefits than those required by law.     

For more information or assistance on potential courses of action, please contact the authors or your DLA Piper relationship attorney.