An increasing number of U.S. companies are tapping into Puerto Rico’s talent pool, aiming to benefit from the island's strategic location, tax incentives, and lower operational costs. Hiring in Puerto Rico can also offer businesses access to a bilingual workforce, fluent in both English and Spanish, enabling seamless communication with customers and partners throughout the Americas. However, you need to understand the difference between the U.S. and Puerto Rico employment laws.
Many people ask us, “Do US laws apply in Puerto Rico?” While the benefits are numerous, employers must keep in mind that rules for hiring and managing staff in Puerto Rico are not identical to the mainland U.S. Although it’s a U.S. territory, employment laws, labor regulations, and cultural norms differ from America in some important ways. Overlooking these nuances can lead to costly missteps and compliance issues for companies expanding their operations to the island.
In this article, we'll guide you through some of the legal and cultural considerations to help you smoothly hire and expand your business to Puerto Rico.
Understanding Puerto Rican employment laws
In general, U.S. employment laws will apply in Puerto Rico. For instance, Title VII of the Civil Rights Act, the Americans with Disabilities Act (ADA), and the Fair Labor Standards Act (setting minimum wage and overtime pay), are the same for Puerto Rico as the U.S. mainland.
However, the island does enjoy a certain degree of autonomy in legal matters and has set additional protections for workers, covering areas like sick leave, vacation time, pregnancy discrimination, maternity leave, etc. Below are a few examples:
- Unlike in the mainland United States, all employees in Puerto Rico are entitled to two weeks of paid leave after one year of service.
- Labor law in Puerto Rico also requires employers to provide a one-hour food break after every six consecutive hours of work. This meal period is considered part of the workday and must be compensated.
- Employers must provide employees with one day of paid sick leave for every month worked, up to a maximum of 12 days per year. This is in addition to the unpaid sick leave required by the federal Family and Medical Leave Act (FMLA).
- Puerto Rico requires employers to pay eligible employees a mandatory Christmas bonus. It can be between 2% and 6% of the employee’s wages, depending on the size of the company and some other factors, up to a maximum bonus of $600.
- Maternity leave is also an area where Puerto Rican employees enjoy additional protections. Pregnant employees are entitled to eight weeks of paid maternity leave, four before childbirth and four after. Public sector employees are entitled to 16 weeks.
Complying with these additional labor protections is essential for a smooth hiring experience and a satisfied workforce.
If you need help expanding your business to the island and hiring staff there, take a look at our dedicated Employer of Record (EOR) services for Puerto Rico.
Differences Between U.S. and Puerto Rico Employment Laws
So, let’s look at Puerto Rico laws vs U.S. laws. There are some key differences between Puerto Rico employment law and labor regulations in the U.S. For American businesses seeking to hire employees in Puerto Rico, we outline two of the most important differences to consider:
1. Paid leave accrual and carryover
Full-time employees in Puerto Rico accrue vacation leave at a rate of 1.25 days for every month worked, up to a maximum of 15 days per year. On the other hand, sick leave is accrued at one day per month, totaling 12 days per year.
Any unused vacation time must be paid out by the employer at the end of each year, and employees are not allowed to carry over unused vacation days to the next year (although sick leave can be carried over). Unused vacation days are compensated at a rate equal to the employee's standard hourly wage earned in the month when the leave was accrued.
In contrast, in the mainland United States, there is no federal law that requires employers to provide paid vacation leave to employees. Vacation policies, including accrual rates and carryover rules, are generally determined by the employer and specified in the employment contract. And many employers in the U.S. permit employees to carry over some of their unused vacation days from the previous year, within certain limitations.
There are also no fixed federal regulations regarding the payout of unused vacation time upon termination of employment in the U.S.
Puerto Rico, on the other hand, makes it mandatory for employers to pay employees the total vacation leave they’ve accrued at the time of termination. Hence, these differences in vacation leave accrual and carryover rules can have a great impact on payroll calculations for U.S. companies hiring in Puerto Rico.
2. At-will employment
Most states in the U.S. follow at-will employment. This principle permits either the employer or the employee to terminate the employment relationship at any time, without the need to cite any specific reason. A few exceptions exist for situations like discrimination or violation of public policy.
Puerto Rico does not have at-will employment, but rather a ‘just cause’ termination system. A Puerto Rican employee on the island will typically have an ‘indefinite term contract’ after the probation period, and to terminate this contract the employer will need to demonstrate ‘just cause’.
This is a legitimate and non-discriminatory reason for termination. Such as misconduct or poor performance on the part of the employee. Or economic necessity on the part of the employer, including redundancy due to business closure.
When terminating an employee for a just cause, employers must demonstrate a documented history supporting their decision. Failure to do so would mean the employee being fired will be entitled to compensation in the form of severance pay. This could encompass a minimum of two months’ salary, plus extra compensation based on their length of service.
For companies planning on hiring in Puerto Rico, the need to demonstrate just cause for termination will mean that additional documentation and procedures have to be implemented. This could also have a financial impact, leading to increased legal and operational costs, budgeting for severance payments, etc. There’s also a risk of reputational damage for businesses unfamiliar with this aspect of Puerto Rican employment law.
Employing a U.S. national in Puerto Rico
Hiring a U.S. national in Puerto Rico offers advantages, but the process can be somewhat complex. Mentioned below are some of the important steps:
- If you want to employ U.S. nationals in Puerto Rico, your business must first register as an employer with the relevant Puerto Rican government agencies and obtain an employer identification number. This includes registering with the Puerto Rico Treasury Department, the Department of Labor, and more.
- Next, your company will need to set up a Puerto Rico payroll system to properly calculate and process all salary payments, Christmas bonuses, and vacation leave accruals. You must also set up the processes for calculating Puerto Rico taxes and the applicable withholdings.
- You will need to draft employment contracts compliant with Puerto Rico labor and employment laws, as well as with federal laws. These contracts should accommodate provisions for paid leave entitlements, ‘just cause’ termination requirements, etc. Also, the contracts should ideally be written both in English and Spanish.
TopSource Worldwide’s EOR solutions for Puerto Rico
To ensure employment law and payroll compliance, you could consider partnering with a reliable provider of EOR services in Puerto Rico, such as TopSource WorldWide. We handle everything from registration to payroll management, leaving your company’s internal staff free to focus on business-critical and revenue-generating activities.
Puerto Rico presents an enticing fusion of cultures and traditions, making it an attractive hub for U.S. businesses looking to expand their talent pool. Despite its compact size, this Caribbean Island boasts modern infrastructure, a well-educated workforce, and a regulatory framework based on that of the U.S., offering access to the mainland's vast consumer market.
TopSource offers local expertise and payroll management services, allowing businesses to expand into the region, hire a workforce there and employ U.S. nationals in Puerto Rico without having to set up a local entity. This expertise can help your business efficiently navigate Puerto Rican employment regulations while remaining compliant with all local and federal laws. Explore our tailored services or contact us to speak to our global employment and HR specialists.
