The LTFA amends the Puerto Rico Internal Revenue Code of 2011 (the “PR Code”) to exclude from gross income and wages, any compensation or indemnification received by an employee for reason of his/her dismissal, without having to determine there was or was not just cause for dismissal.  

Welcome to the Compliance Center

Labor Transformation and Flexibility Act (LTFA)

Mar 29, 2017

Background on the Final Rule and Details of the Change:

The LTFA amends the Puerto Rico Internal Revenue Code of 2011 (the “PR Code”) to exclude from gross income and wages, any compensation or indemnification received by an employee for reason of his/her dismissal, without having to determine there was or was not just cause for dismissal. The exclusion applies to statutory indemnity amounts under Act 80. The product must continue to apply FICA and Medicare withholding on payments made under Act 80.

The new law includes many changes that affect employers doing business in Puerto Rico including:

  • defines tips and service charges
  • amends the Department of Labor’s regulation for Annual/Christmas bonus requirements for employees hired after it’s effective date, and
  • amends the Puerto Rico Internal Revenue Code of 2011 to exclude from gross income and wages the amount the employee could have received under Act 80 or the cap of nine-months pay for new employees, whichever is less

Here is a summary of the changes:

During the first year of employment employees are only entitled to 50 percent of the required bonus. Hours for eligibility and bonus rates are based on employee hire dates and company size. The LTFA amends the eligibility and payment requirements as shown below. The total amount of the bonus cannot exceed 15 percent of the employers' annual net profit

Employers who employ 20 or fewer employees

  • Are exempt from paying the annual bonus to employees hired after the affective date.
Employees hired after January 26, 2017
Must work 1,350 hours to be bonus eligible
Bonus amount is 2% of the total wages paid during the relevant period
Maximum/cap paid is $300
Employees hired on or before January 26, 2017
Must work 700 hours to be bonus eligible
Bonus amount is 3% of the total wages paid during the relevant period
Maximum/cap paid is $300

EEmployers who employ more then 20 employees

  • Employers who have employed more than 20 employees for more than 26-weeks during the period of October 1 of any calendar year to September 30th of the subsequent calendar year.
Employees hired after January 26, 2017
Must work 1,350 hours to be bonus eligible
Bonus amount is 2% of the total wages paid during the relevant period
Maximum/cap paid is $600
Employees hired on or before January 26, 2017
Must work 700 hours to be bonus eligible
Bonus amount is 6% of the total wages paid during the relevant period
Maximum/cap paid is $600

General Impact to Employers:

In some sections of the LTFA the preexisting law permitted grandfathering of certain rights to employees in certain industries, which is no longer in effect. However, the new law does provide superior benefits for certain employees, but whether these benefits apply and to which employees, is something the customer will need to determine with their counsel. Employers will need to review all affected policies and procedures and make necessary changes to comply. In addition, they will need to be aware of court interpretations of changes and modify policies as appropriate.