Firing in Panama: Severance Calculations to Avoid Lawsuits

What are the core employment law rules employers must follow in Panama?

Panama requires written employment contracts, strict respect for minimum benefits, and adherence to formal termination rules under the Labor Code. Employers who dismiss workers casually or without documented cause almost always lose unjustified dismissal claims and must pay significant compensation.

Key framework points for Panama:

• Main statute: Código de Trabajo (Labor Code of Panama).
• Main authority: Ministerio de Trabajo y Desarrollo Laboral (MITRADEL).
• Currency: US dollars (USD) and Panamanian balboas (PAB) at a 1:1 rate; employment payments are effectively in USD.

Core employer obligations

• Written contract in Spanish:
  • Required for almost all workers, including domestic staff.
  • Should specify position, salary, work schedule, workplace, contract term, and probation if any.
• Social Security (CSS) registration:
  • Every employee must be registered with the Caja de Seguro Social (CSS).
  • Employer contributes roughly 12 percent - 15 percent of salary (check current exact rate) for social security and other payroll charges.
• Minimum wage and benefits:
  • Minimum wage varies by sector and region; domestic work has its own minimum wage band.
  • Standard benefits include paid annual vacation, 13th month, weekly rest, and seniority premium at termination.
• Working time and rest:
  • Daytime shift is normally up to 8 hours per day / 48 per week; nighttime and mixed shifts have lower limits.
  • Domestic workers have some special rules but still must receive weekly rest and vacation.
• Non-waivable rights:
  • Employees cannot waive minimum rights in advance, even if they sign a contract clause saying so.
  • Any clause that reduces legal minimums is usually void.

Common mistakes by foreign employers

• Paying domestic workers "informally" in cash with no contract or CSS registration.
• Dismissing employees verbally or by WhatsApp message, with no formal letter or legal cause.
• Not paying the full liquidación on the same day of termination or within an agreed very short period.
• Trying to label a dismissal as "resignation" or "mutual agreement" without any real negotiation or written document.
• Ignoring special protections (pregnancy, union leaders, workplace accident victims) and firing without prior authorization.

What are valid legal grounds for termination under Article 212 of Panama's Labor Code?

Valid "just cause" for dismissal in Panama is limited to the specific grounds listed in Article 212 of the Labor Code. To rely on these grounds, you must clearly state the chosen cause in the dismissal letter and prove the underlying facts if the worker challenges the dismissal.

Main categories of just cause under Article 212

Article 212 sets out an exhaustive list of reasons that allow the employer to terminate without severance. The exact text is technical, but in practice, the grounds fall into these categories:

• Fraud or misrepresentation at hiring:
  • For example, the worker used false documents, lied about essential skills, or concealed a serious disqualification that would have prevented hiring.
• Dishonesty, violence, or serious misconduct:
  • Theft, fraud, embezzlement, or serious breach of trust.
  • Physical aggression, serious insults, or grave threats against the employer, managers, coworkers, or family members at the workplace.
• Damage to employer's property or reputation:
  • Intentional damage or very serious negligence causing losses (equipment destruction, major accidents, etc.).
  • Serious defamation or actions that intentionally harm the company's reputation.
• Disclosure of secrets or confidential information:
  • Revealing trade secrets, client lists, or confidential data to competitors or third parties to the employer's detriment.
• Unjustified absences or abandonment:
  • Unjustified absence for more than a set number of days (for example, more than 2 consecutive days or several days in a month).
  • Leaving work without authorization in a way that clearly shows abandonment of duties.
• Repeated disobedience or breach of internal rules:
  • Serious and repeated failure to follow lawful instructions or company policies that have been communicated to the worker.
  • Refusal to perform essential tasks in the job description.
• Serious negligence or imprudence:
  • Conduct that shows serious carelessness in safety-sensitive roles, leading to accidents or risk to others.
• Criminal conduct or loss of qualifications:
  • Worker is convicted of a crime that makes continued work impossible or incompatible.
  • Loss of a mandatory license or professional authorization (for example, a driver loses their license).
• Persistent poor performance with prior warnings:
  • Severe and habitual non-compliance with contractual obligations, usually supported by written warnings, evaluations, or performance improvement plans.

Key procedural rules when invoking Article 212

• Specific cause in writing:
  • The dismissal letter must cite the specific cause (or causes) from Article 212 and briefly describe the facts.
  • You generally cannot later change to a different cause in court; the judge will examine only what you alleged in the letter.
• Time limit to act:
  • You have a short window (typically 30 days) from when you learn of the misconduct to dismiss for that cause.
  • If you wait too long, the cause is considered "forgiven" and cannot be used.
• Burden of proof is on the employer:
  • You must prove both that the facts occurred and that they fit a specific Article 212 cause.
  • Witness statements, emails, CCTV, signed warnings, and HR records are critical.
• If you cannot prove just cause:
  • The court will treat the dismissal as unjustified.
  • You must then pay the severance indemnity plus other benefits, and in some cases, the employee can seek reinstatement.

How do you legally dismiss an employee in Panama without triggering an unjustified dismissal claim?

You minimize unjustified dismissal risk by following a clear procedure: verify if you have Article 212 cause, document everything, issue a compliant written letter, calculate and pay the liquidación correctly, and handle special categories (pregnant, union, injured) with prior authorization. If you lack solid just cause, you should either negotiate a mutuo acuerdo or be prepared to pay full severance.

Step-by-step dismissal process

1. Review the employee's status and protections
   • Check if the worker is pregnant, on maternity leave, a union leader or representative, or recently injured at work.
   • These categories usually have "fuero laboral" (special protection) and require prior authorization from a labor court or MITRADEL before dismissal, even for cause.
2. Assess whether you have valid Article 212 cause
   • List the misconduct or performance problems and match them to specific Article 212 grounds.
   • If you cannot clearly fit the facts into one of those causes, treat the termination as without cause and plan for severance or mutual agreement.
3. Gather evidence
   • Collect contracts, job descriptions, emails, written warnings, attendance records, CCTV, and witness statements.
   • Prepare a concise internal memo: what happened, when you learned of it, what rule it violates, and the Article 212 ground.
4. Draft the dismissal letter
   • Write it in Spanish, on company letterhead.
   • Include: employee name and ID, date, reference to the specific Article 212 ground(s), a concise description of the facts with dates, and an effective termination date (often same day).
   • State when and how the employee will receive their liquidación and provide a breakdown.
5. Deliver the letter and document receipt
   • Ideally meet with the employee in person with an HR witness, read and hand over the letter, and obtain their signature on a copy acknowledging receipt.
   • If they refuse, have witnesses sign a note that the employee refused to sign, or use a notary or certified mail service.
6. Pay the liquidación promptly
   • Calculate all amounts: salary to date, unused vacation, 13th month accrual, seniority premium, and severance if applicable.
   • Pay by bank transfer or check and obtain a signed acknowledgment or settlement receipt listing each concept.
7. Notify authorities if required
   • Depending on the case, you may need to notify MITRADEL or the Social Security (for example, to deregister the worker or confirm end of employment).
   • Keep proof of all filings and receipts for at least several years.

When you lack strong just cause

• If your evidence is weak or the situation is more about restructuring, personality conflict, or moderate performance issues, forcing an Article 212 dismissal is risky.
• In these cases, you should:
  • Consider offering a mutual agreement with enhanced benefits, or
  • Accept that you are making an unjustified dismissal and pay the full statutory severance up front.
• Trying to disguise an unjustified dismissal as "resignation" without evidence is one of the fastest paths to an employee victory in court.

How is the liquidación (final settlement) calculated for employees in Panama?

The liquidación in Panama usually includes: unpaid salary, accrued but unused vacation, accrued 13th month, seniority premium, and, in unjustified dismissal, a statutory severance indemnity. You calculate each component separately, using the employee's last regular salary as the base.

Main components of the liquidación

• 1. Unpaid salary
  • Pay all days worked in the last pay period up to the termination date.
  • Include overtime that has been worked but not yet paid.
• 2. Accrued vacation (vacaciones)
  • Employees earn 30 calendar days of paid vacation for every 11 continuous months of work.
  • At termination, pay any unused vacation days, calculated based on the last salary.
  • If the person did not complete 11 months, pay the proportional part.
• 3. Accrued 13th month (décimo tercer mes)
  • The 13th month equals one additional month of salary per year, paid in three installments: April 15, August 15, and December 15.
  • At termination, you must pay the proportional 13th month from the date of the last installment up to the termination date.
• 4. Seniority premium (prima de antigüedad)
  • In general, this equals one week of salary for each year of service, plus the proportional part for fractions of a year.
  • Calculate the weekly salary as monthly salary x 12 / 52.
  • Some employers deposit this into a severance fund during the employment; if so, you may only owe the remaining balance.
• 5. Severance indemnity (indemnización por despido injustificado)
  • This applies when the dismissal is unjustified (no valid Article 212 cause) or when the employer chooses to pay severance instead of litigating cause.
  • The Labor Code provides a table based on length of service; in practice, it is roughly a few weeks of salary per year of service, up to a statutory maximum.
  • The exact factor and caps change with reforms, so verify with your lawyer or payroll advisor for the current schedule before calculating large settlements.

Sample liquidación calculation (illustrative only)

Assume:

• Monthly salary: USD 800
• Time with company: 3 years and 4 months
• Vacation used in the last cycle: 10 days out of 30
• Unjustified dismissal (no Article 212 cause)

This example is only to show structure. For actual terminations in Panama, especially with several years of service, you should obtain a formal calculation from a Panama payroll specialist or labor lawyer using the current legal severance table.

How does the 13th month (décimo tercer mes) work in practice?

The 13th month is a mandatory extra payment equal to one month of salary per year, split into three equal installments. All employees, including domestic workers, are entitled to it.

• Payment dates: April 15, August 15, and December 15.
• Base for calculation:
  • Use the total ordinary salary earned in each 4 month period, divided by 12.
  • Include fixed salary and regular, guaranteed bonuses; usually exclude purely discretionary bonuses.
• At termination:
  • Calculate the proportional amount since the last installment date.
  • Include it in the liquidación and show it as a separate line in the breakdown.

What is "mutuo acuerdo" (mutual agreement) and how can it reduce litigation risk?

Mutuo acuerdo is a termination by genuine mutual consent, where both employer and employee sign an agreement ending the contract and settling payments. It is a widely used strategy in Panama to avoid fighting over "just cause" and to significantly reduce the risk of future lawsuits.

When to use a mutual agreement

• You lack strong Article 212 cause, or proving it in court would be costly and uncertain.
• You are restructuring, eliminating positions, or need to separate from an employee for reasons not recognized as "just cause" (for example, change of strategy, personality fit).
• The relationship is strained but not disastrous, and the employee is open to a negotiated exit.

Key elements of a solid mutuo acuerdo

• Voluntary consent:
  • The employee must genuinely agree; avoid coercion, threats, or "sign now or else" tactics.
• Written agreement in Spanish:
  • Include employee and employer details, effective termination date, and a clear statement that the contract ends by mutual agreement under the Labor Code.
• Detailed payment breakdown:
  • List each concept: unpaid salary, vacation, 13th month, seniority premium, and any additional agreed amount (for example, "extra compensation for mutual agreement").
  • State payment method and exact payment date(s).
• Confirmation of receipt and settlement language:
  • Include a clause that the employee acknowledges receipt (or scheduled receipt) of all legal and contractual amounts owed up to the termination date.
  • Add a clause where the employee declares they have no more claims arising from the employment relationship, except for nonpayment of the amounts listed.
• Ratification at MITRADEL or before a notary:
  • The safest practice is to have the mutual agreement ratified by MITRADEL or signed before a notary, especially for higher wage employees or long tenure.
  • Ratification makes it harder for the employee to later argue that the agreement is invalid.

Negotiation strategy for employers

• Calculate the full liquidación as if the dismissal were unjustified.
• Offer at least the full legal minimum amounts plus an additional incentive (for example, part of the severance you might otherwise dispute) in exchange for a signed mutual agreement.
• Be transparent about the numbers and provide the employee with a written breakdown they can review.
• Allow the employee a short time (a day or two) to think or consult someone; this improves the enforceability of the agreement.

What special labor rules apply to domestic workers (maids, gardeners, drivers) in Panama?

Domestic workers in Panama are protected by the Labor Code and enjoy rights to written contracts, minimum wage, social security, weekly rest, vacation, and 13th month. They can also claim unjustified dismissal and obtain liquidación if you fire them without cause or proper procedure.

Who counts as a domestic worker?

• People who work in a household providing services that are not linked to a commercial or profit-making activity, such as:
  • Maids (empleadas domésticas)
  • Live-in or live-out nannies
  • Gardeners working at a private residence
  • Private drivers who mainly serve the family
• If the person works for your business (for example, office cleaner hired by a company), they are usually not treated as domestic workers but as regular employees.

Core rights of domestic workers

• Written contract:
  • Specify work schedule, tasks, salary, rest days, and whether the worker will live in the home.
• Minimum wage:
  • Domestic work has a specific minimum wage by region; verify the current amount with MITRADEL or the most recent minimum wage decree.
• Social Security (CSS):
  • You must register the worker with CSS and pay monthly contributions.
  • Failure to register often becomes a major issue if there is an accident, pregnancy, or dispute.
• Working hours:
  • Live-in domestic workers may have a slightly longer daily schedule, but they must receive adequate rest and sleep.
  • They must have at least one full day of rest per week, usually Sunday.
• Vacation and 13th month:
  • Same general rules: 30 days paid vacation for 11 months of work, and a 13th month in three installments.
• Housing and food (if live-in):
  • You must provide safe lodging and decent meals.
  • The value of room and board may sometimes be considered part of compensation, but you still must respect the minimum cash wage rules.

Firing a domestic worker legally

• Avoid verbal dismissals:
  • Do not simply tell the maid "you are fired, leave today" with no paperwork.
  • Issue a written letter, in Spanish, even for domestic staff.
• With cause (Article 212):
  • Causes such as theft, serious disrespect, or repeated unjustified absences can apply to domestic workers.
  • You still need to document events and state the specific cause in the letter.
• Without cause:
  • Calculate and pay the full liquidación: salary, unused vacation, 13th month, seniority premium, and severance if applicable.
  • Pay on the last day of work where possible, keep a signed receipt, and strongly consider a simple mutual agreement document.
• Mutual agreement with domestic staff:
  • Often the cleanest solution is to propose a mutual agreement that clearly lists all payments.
  • For long-serving domestic workers or high conflict situations, consider ratification with MITRADEL.

Typical expat mistakes with domestic helpers

• Paying below the legal minimum wage "because we also give food and lodging".
• Never registering the worker with CSS, then facing claims for unpaid contributions and medical costs.
• Firing staff in anger after a dispute, with no letter or documentation, and without paying the liquidación.
• Keeping the worker for many years without any written documentation, then trying to claim they were "just occasional help".

When should you hire a Panamanian labor lawyer or expert?

You should involve a Panama labor lawyer or experienced payroll advisor as soon as you anticipate a termination that is not obviously amicable or low risk. The cost of proper advice is usually far lower than the cost of losing an unjustified dismissal case.

Situations where expert help is strongly recommended

• Before firing any employee with more than 1 year of service or a salary significantly above the minimum wage.
• When dismissing domestic workers who have worked for you more than a few months or who lived in your home.
• If the worker is pregnant, recently gave birth, is a union representative, or suffered a workplace accident (fuero protection).
• When you plan to invoke Article 212 cause and expect the employee might fight back.
• When restructuring, closing a business unit, or terminating several employees at once, to manage collective risk and messaging.
• If the employee has already threatened or filed a complaint with MITRADEL.

Typical costs in Panama

Costs vary by firm and complexity, but as a rough guide:

These ranges are indicative only; always request a clear fee proposal from your chosen advisor.

What are the next steps for employers managing staff in Panama?

To manage employment and labor risk in Panama, you should immediately regularize contracts, payroll, and procedures, and then implement a structured approach to performance and termination decisions. This significantly reduces the chance of costly unjustified dismissal claims.

Practical action checklist

1. Audit your current workforce
   • List all employees and domestic workers, with start dates, salaries, and whether they are registered with CSS.
   • Identify anyone without a written contract or with outdated terms.
2. Regularize documentation
   • Put written contracts in place, in Spanish, for everyone, including domestic helpers.
   • Ensure copies are signed and stored securely.
3. Implement basic HR procedures
   • Set up templates for warning letters, evaluation forms, and dismissal letters.
   • Train at least one person to document performance issues and absences consistently.
4. Create a termination playbook
   • Define when you will seek legal advice, who drafts letters, who delivers them, and how you will calculate the liquidación.
   • Prepare a standard mutual agreement template for negotiated exits.
5. Review compliance yearly
   • Once a year, verify that minimum wage changes, benefit rules, and severance tables have been updated in your payroll and HR policies.
   • Review at least one or two terminations per year with a lawyer to confirm your practices remain aligned with current case law.
6. Act early when problems arise
   • At the first signs of serious misconduct or recurring performance issues, start documenting and consult an expert rather than waiting until the situation explodes.

Using this structured, law-aligned approach in Panama protects both your business and your workers, and greatly reduces the likelihood of expensive labor disputes.