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Employing in Puerto Rico

Puerto Rico offers a fascinating blend of cultures and traditions that make it an enjoyable place to do business. And although Puerto Rico has struggled through financial turbulence in recent years, this small yet well-developed Caribbean island still has much to offer those interested in global expansion.

Thanks to its status as a US Commonwealth, the island has modern infrastructure and an institutional framework guided by the US, including laws governing intellectual property. Because of the island’s proximity to the US mainland, it also enjoys well-established transportation networks — serving as an access point to the vast US consumer market.

Yet, despite sharing a regulatory framework with the US, Puerto Rico retains its own favourable foreign tax structure — a major competitive advantage for businesses looking to expand overseas. Combined with its well-educated, largely bilingual workforce and lost cost of doing business, this competitive tax system and Puerto’s Rico’s robust infrastructure make it one of the more attractive markets for investment in the Caribbean region.

An employer of record, sometimes known as an international PEO can help you quickly hire and onboard workers in Puerto Rico – often with just two weeks’ notice. Establishing your own local entity without risk and saving costs, this type of service makes an EOR in Puerto Rico worth checking out!

Country Guidelines

An overview of employing in Puerto Rico

As an unincorporated territory of the United States, Puerto Rico is subject to US federal laws, including federal labour and employment laws.

The information contained within these guidelines relates to employees hired after January 26, 2017. For employees hired prior to this date, different statutory requirements may apply. Please also be advised that the Puerto Rico Legislature is currently considering significant amendments to employment laws through a proposed Senate Bill 91 which may impact the information contained within this document.

The Federal Labor Standards Act (FLSA) recognises exempt and non-exempt employees.
Exempt employees are excluded from minimum wage, overtime regulations and must be paid on a salary basis.
Non-exempt employees qualify for minimum wage, overtime regulations and are often paid an hourly wage.

Please note, for the purpose of this document, we’re focusing on exempt employees as under the PEO/co-employment relationship regime, it’s predominantly salaried employees that we’re covering.

Employers must make mandatory contributions to cover the main statutory insurances: unemployment tax, non-occupational disability insurance and workers’ compensation. This is in addition to the healthcare and social security contributions, vacation and sick leave accrual.

Employer cost Description Percentage
SUTA State unemployment tax 5.4%*
FUTA Federal unemployment tax 0.6%
SINOT Non-occupational disability insurance 0.3%
Workers’ compensation 1.0%
Vacation accrual *Payable over salary 5.77%
Sick leave accrual 4.62%

*The SUTA tax is on the first $7,000 of wages paid to an employee each calendar year.

Employers are subject to taxes imposed by the Federal Insurance Contributions Act (FICA).

FICA taxes consist of:

  • Social security taxes
  • Medicare taxes

Employers must withhold the employee portion of FICA taxes from an employees’ wages and contribute the employer portion of FICA tax.

FICA Tax Employer contributions Employee contributions
Social security 6.2% 6.2%
Medicare 1.45% 1.45%

Employers whose wages exceed the maximum threshold of $200,000 are required to pay an additional Medicare tax. Employers are responsible for withholding the 0.9% additional Medicare tax from the employee’s wages; however, there’s no employer match.

Puerto Rico has its own state social security administration (SSSA); however, it’s covered under the US social security system (SSA).

USD $

For exempt employees, there’s no statutory requirement in terms of pay intervals but, customarily, it would not exceed one-month intervals. We currently observe a biweekly pay schedule with our employees in Puerto Rico.

A mandatory Christmas bonus (Act No. 148 of June 30, 1969) is payable by employers who have more than 20 employees during more than 26 weeks within the 12-month period from 1 October to 30 September of the following calendar year.

In the case where a company does not meet these requirements, it’s customary to accrue for the Christmas bonus.

This bonus is payable to any employee who has worked a minimum of 1,350 hours during this period. The bonus should be equal to 2% of the total wages earned, up to USD 300.

PEO in Puerto Rico

Contractual Provisions

Contract of employment

The contract can be executed electronically and should be provided in a language that the employee understands and has sufficient knowledge of in order to understand the documentation.

Medical examinations and drug testing are not a statutory requirement in Puerto Rico; however, it’s customary practice for private companies to establish these procedures as part of their onboarding process.

For onboarding, Puerto Rico requires employers to establish certain mandatory policies:

  • Domestic violence protocol
  • Unpaid leave and reasonable accommodation for victims of abuse
  • Substance abuse policy (required if the employer will be conducting drug tests)
  • Video surveillance (required if the facilities will have video surveillance in the workplace)

Rules of registration

Pursuant to Puerto Rico’s Special Child Support Act, every employer who hires or rehires a person must provide the following information to the Child Support Administration: employee’s name, address and social security number and employer’s federal employer identification number. The forms may be sent by mail or by magnetic or electronic media. The form may also be submitted through the Puerto Rico Department of Labor.

Employers are required to report this information no later than 20 days after the date on which the employer hires or rehires the person — or twice per month with a lapse of no less than 12 days or more than 16 days between transmissions if the information is submitted electronically or magnetically.

New hires are also required to complete the Department of Homeland Security U.S. Citizenship and Immigration Services Form I-9, Employment Eligibility Verification, as well as a Puerto Rico Department of Treasury Form 499 R-4.1, Withholding Exemption Certificate.

Probationary period

An automatic probationary period applies to all employees in Puerto Rico unless a shorter period is agreed by the employer and employee.

  • Exempt employees: 360 days
  • Non-exempt employees: 270 days

This, however, is not applicable to employees on a temporary contract, hired through an employment agency.

No extensions are permissible should the performance be unsatisfactory. The probationary period is automatically extended by the employee taking statutory leave of absence and continues for the remaining period once the employee returns to work.

There are no statutory periods of termination during the probationary period.

Working hours

There’s no minimum or maximum statutory requirement for the number of working hours.

Rest breaks

It’s customary to give a one-hour unpaid meal break to all employees.

Non-exempt employees are required by federal law to take a one-hour meal break when scheduled to work for more than five consecutive hours and longer than six hours.

Overtime

Exempt employees are not entitled to overtime pay.

Non-exempt employees are entitled to overtime pay under the following circumstances:

  • Employers are required to pay for all overtime hours worked in excess of 40 during any week at 1.5 times the regular rate of pay.
  • Employers must also pay daily overtime (excess of eight hours in a calendar day) at 1.5 times the regular rate of pay.
  • Employers are also required to pay for work performed on an employee’s day of rest at 1.5 times their regular rate of pay.

The day of rest, also known as the seventh day, is a calendar period of 24 consecutive hours during which no work should be performed if any work has been carried out during all of the previous six calendar days. The day of rest need not fall on any particular calendar day.

Vacation allowance

Exempt employees are not entitled to statutory vacation.

Non-exempt employees accrue vacation in months in which they work at least 130 hours, at four different rates depending on years of service:

Years of service Days per month Maximum days per year
One 0.5 Six
Two to five 0.75 Nine
Six to 15 One 12
15+ 1.25 15

 

Vacation benefits are not accrued during the first six months of employment; however, once an employee completes six months of employment, they’ll accrue vacation leave retroactively to the first day of employment. It’s important to note that vacation accrual is payable over salary.

Termination

Pursuant to Act No. 80 of 30 May, 1976, terminations from employment must be with just cause and, usually, by following a progressive discipline process.

Holiday & Leave

There’s no statutory holiday entitlement. An employer may provide holiday entitlement on a voluntary basis. It’s customary to honour Good Friday as a holiday for employees.

There’s currently no legislation requiring private sector employers to close their businesses on government and/or nationally observed public holidays.

Employers are not required to pay any compensation should they require their employees to work on these days*.

*Please note: the only exception applies to retail establishments, whereby any employees working on Good Friday or Easter Sunday should be paid overtime at 1.5 times their regular rate.

Sick leave entitlement for exempt employees is not mandated federally. However, salaried employees who don’t have sick leave benefits stipulated in their contracts can generally take sick leave where necessary.

Non-exempt employees are covered by the Minimum Wage, Vacation and Sick Leave Act. This entitles them to accrue one day of paid sick leave for each month in which the employee works for a minimum of 130 hours.

Applies to both exempt and non-exempt employees with a catastrophic illness listed in the Puerto Rico Health Insurance Administration’s (PRHIA) special coverage. Entitlement is an additional paid sick leave of up to six days once they’ve exhausted their accrued regular sick leave.

The Puerto Rico Working Mothers Protection Act entitles all female employees to a period of up to eight weeks’ paid leave (up to four weeks before and four weeks after birth).

In August 2020, this law was extended to women who adopt children over the age of six.

Employee withholdings must be made regarding FICA (social security and Medicare), income tax and federal income tax, as applicable.

  • Saturday 1 January – New Year’s Day
  • Thursday 6 January – Three King’s Day
  • Monday 17 January – Martin Luther King Jr. Day
  • Monday 21 February – President’s Day
  • Monday 21 February – National Hero’s Day
  • Wednesday 2 March – American Citizenship Day
  • Tuesday 22 March – Emancipation Day
  • Friday 15 April – Holy Friday
  • Sunday 17 April – Easter Sunday
  • Sunday 8 May – Mother’s Day
  • Monday 30 May – Memorial Day
  • Sunday 19 June – Father’s Day
  • Monday 4 July – US Independence Day
  • Monday 5 September – Labor Day
  • Monday 10 October – Columbus Day
  • Friday 11 November – Veterans Day
  • Saturday 19 November – Discovery Day
  • Thursday 24 November – Thanksgiving
  • Saturday 24 December – Christmas Eve
  • Sunday 25 December – Christmas Day

Statutory insurances

Unemployment insurance

Unemployment insurance is mandatory at state and federal level. Employers are entitled to contribute a maximum of 5.4% of annual wages to the state (SUTA) and 0.6% to the federal unemployment tax (FUTA)

Workers’ compensation

The Puerto Rico Compensation System for Work-Related Accidents Act provides certain economic benefits and job reinstatement rights to employees who become temporarily disabled due to work-related illness or injury.

Employers are required to pay mandatory premiums of 1% of the employee’s salary to a public corporation known as the State Insurance Fund Corporation (SIFC), based on the total amount of salaries paid and the types of risks involved.

In addition to economic benefits, the SIFC also provides the medical and rehabilitation services that ill and or injured employees may need. This government system may not be substituted with private coverage. In exchange for payment of the mandatory premiums, employers are generally granted immunity from any civil action and damages resulting from employee work-related accidents.

Non-occupational disability insurance

SINOT (Act No. 139 of 26 June, 1968) provides up to 12 months (equivalent to 360 days) of protected leave and certain economic benefits to employees who become temporarily disabled due to non-occupational illness or injury.

SINOT coverage is compulsory for all employees, exempt and non-exempt.

For purposes of computing the disability period, paid vacation and/or sick leave cannot be deducted from the maximum period of benefits.

PEO in Puerto Rico

Keen to engage an EOR in Puerto Rico? At TopSource Worldwide, we work with local experts to help you navigate the various admin and cost obstacles you may come across along your expansion journey

To find out how we can help your business with our employment solutions, contact us today.

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