Background and Details of the Change:
The new Labor Transformation and Flexibility Act includes many changes that affect employers doing business in Puerto Rico. The LTFA 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.
A. Tips and Service Charges:
The amounts received in excess of the amount used to comply with the payment of the legal minimum wage must be excluded from "wages" for the purposes of Puerto Rico law. However, employers will need to track tips and service charges as wages for FICA tax calculations.
B. Annual/Christmas Bonus (Amends Act No. 148 of June 30, 1969)
Act No. 148 requires employers to pay an annual bonus to employees who have worked more than the applicable hours during the 12 month qualifying period starting on October 1st of each year and ending on September 30th of the following year. Bonuses must be paid between November 15 and December 15 of each year. Amount paid to the employee in excess of Act 80 will be considered taxable income not subject to withholding at the source.
- 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
- The LTFA adopts a new formula for calculating the statutory severance (or “mesada”) under Act 80
Employers who employ 20 or fewer employees
- Are exempt from paying the annual bonus to employees hired after the affective date
Employers 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.
C. Termination of Employment
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.
General Impact to Employers:
Employers will need to maintain existing functionality for employees hired before the effective date and add functionality for employees hired after the effective date. 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.
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