Regulations about dismissing employees and paying severance

July 21, 2017

Learn about the conducts that can be cause for dismissal and what regulations apply after the approval of the Labor Reform.

As a business owner, you know that good performance by your employees is one of the main keys to your business’ success. That’s why you need a team you can rely on, that you know and that is committed to the objectives of your business.

Among the changes and issues addressed by the new Labor Transformation and Flexibility Law (the “Law”), commonly known as the Labor Reform, is the issue of dismissing an employee. Attorney Mariela Rexach, a partner in the law firm of Schuster Aguiló, LLC, provided the following information about these issues:1

General Concept of Just Cause for dismissal:

The Labor Reform incorporated certain opinions issued by the Puerto Rico Supreme Court and expanded the general concept of just cause for dismissal, defining it as “that which is not motivated by legally prohibited reasons and is not due to mere whim of the employer.” Additionally, the Labor Reform defined improper and disorderly conduct.

Improper or disorderly conduct

The Labor Transformation and Flexibility Law defines improper and disorderly conduct as:

  • Improper conduct – The employee does not follow rules and instructions, thus affecting the employer.
  • Disorderly conduct – The employee disturbs the peace, order and respect in the work setting.

The attorney told us that some of the employee conducts recognized in the Law as possible cause for dismissal are:

  • Incurring in a pattern of inefficient, unsatisfactory, poor, tardy or negligent performance;
  • Violates standards of quality or security;
  • Reduces productivity;
  • Incurs in a lack of competitiveness or ability to perform the job. 


Another aspect revised under the Labor Reform is the weight given to employee seniority at the time of layoffs due to a reorganization or reduction of the work force. Currently, under the Law, the employer can evaluate all employees equally, observing a “reasonably clear or obvious difference in ability, productivity, performance, competence, efficiency or conduct history among compared employees,” Rexach noted. 

Severance pay for unjustified dismissal

As an employer, you may have a case where you dismiss an employee and the employee is able to show the court that the action was not justified. In these cases, the Labor Reform significantly changes the so-called severance pay for unjustified dismissal of employees hired after the Law took effect, as follows:

  • If the employee was hired after the Labor Reform took effect, the employee is entitled to receive a severance of:
    • Three months and two weeks’ salary for each year of service completed, up to a maximum of nine months’ salary.
  • If the employee was hired before the Labor Reform took effect on January 26, the computation of the severance will be based on Law 80:
    • Two months and one week per year of service if the dismissal occurred during the first five years.
    • Three months and two weeks per year of service if the dismissal occurred between five and 15 years.
    • Six months and three weeks per year of service if the dismissal took place after 15 years.

It is important to note that Law 80 does not cover employees in a probationary period, those subject to collective bargaining agreements, government employees or independent contractors.

These are just some of the changes in the Labor Transformation and Flexibility Law. We encourage you to read it here for more details.

This article is part of an educational series prepared by our Business Banking Division. We invite you to read the article: Flexible work hours under Labor Reform. Remember that our goal is the help you successfully manage your business.



1 Banco Popular de Puerto Rico, its subsidiaries or affiliates do not provide legal, tax or accounting advice. The information provided in this material should be used only as a guide and not as a source of legal advice. The information provided here is current as of April 26, 2017, and does not consider, or will consider, any change that could have occurred or may occur in the future. The law firm Schuster Aguiló, LLC, and Popular, Inc., and/or its subsidiaries, affiliates, or related entities are not responsible for losses or damages (direct or indirect) that may be incurred by any institution, company, entity, business or person from the information contained here. All information provided in this material or any other related topic should be confirmed and corroborated with your legal advisor.