Panama Payroll and Benefits Guide

What global businesses need to know about payroll in Panama

Panama is undoubtedly most famous from a business perspective for the Panama Canal, which opened in 1914. It enables safe passage for shipping between the Atlantic and Pacific Oceans, cutting out the long and dangerous voyage around Cape Horn at the tip of South America. As such, it has a major part to play in global trade, far beyond what would normally be expected from a country of around four million people.

Panama has used the United States dollar as its main currency since 1904, and has a service-heavy economy (82% of GDP) thanks in part to the relative stability the dollar provides. Finance, insurance and, unsurprisingly, shipping all have a major presence in the country, and many businesses take advantage of the Colon Free Trade Zone near the canal.

On the other hand, levels of skills and education among the indigenous workforce are relatively low, while there are still problems with fraud and corruption which can make for a challenging environment for foreign businesses to get started in. That’s why it’s key to approach any Panamanian expansion with as much local expertise and know-how as you can get, especially regarding employment and payroll. This guide gives you a great starting point.

Getting Started

Because of government corruption, launching business operations in Panama is challenging. The government of Panama tends to favor foreign investors with at least $2 million to spend in the country. This baseline is a result of the 1998 Investment Stability Law, which guaranteed foreign investors at and above this baseline equal treatment to domestic companies. 

Those under the baseline face an understaffed and possibly contentious process of registering a business within the country. But in any case, you will need the help of a registered agent who understands the ins and outs of Panamanian regulations throughout this process.

Most larger businesses register in Panama as corporations (SAs), which doesn’t come with a statutory minimum share capital level, although starting with at least $10,000 (approx. £7900; €9250) is recommended. The first step is to draft the company’s constitution and by-laws, and get them notarized by a Panamanian notary public. From this, the company can be formally registered and, once approved, a tax identification number can be applied for.

With the tax ID in hand, a Panamanian bank account can be opened, the necessary commercial licenses can be obtained from the relevant local municipalities, and an employer’s inscription number can be obtained for social security purposes.

Employment Considerations

Panama has some strict rules concerning foreign labor. At least 90% of the workforce of any business must be Panamanian, or foreigners who have either married a Panamanian or been a legal resident for at least ten years. Additionally, Panama does not allow employment contracts to extend beyond a single year, and foreign national work permits must be renewed after a year in the country. Employers may require medical examinations along with other background checks. Collective bargaining agreements are common, but only within transportation, construction, and manufacturing.

Working hours are relatively long in Panama. The standard working week is 48 hours, over six eight-hour shifts. Employees under 16 cannot work more than 36 hours a week. Overtime is limited to a maximum of three hours per day or nine per week, and is not permitted in any job roles considered hazardous. Overtime is paid at 125% of the normal rate, rising to 150% between 6 pm and 6 am, or 175% for any hours carried over as a result of working at night.

Notice periods are generally 30 days, but can be defined in employment contracts up to a maximum of three months. Payment in lieu of notice is permitted. Similarly, probation periods can run for up to three months and should be set out contractually.

Compensation, Bonuses & Severance

Panama’s minimum wage rates vary substantially, according to the size of the business, where it operates, and the industry it operates in. The latest increases took effect in January 2024; the lowest rate applies to employees of small agricultural companies and stands at $341 per month (approx. £270; €315). The highest rate, for some skilled workers in larger companies, is $1015 per month (approx. £800; €940). The overall average as of 2024 is $636.80 per month (approx. £505; €590). Generally speaking, the minimum wage in Panama is reviewed every two years, which means the next increase should occur at the start of 2026.

The payment of a 13th-month bonus is mandatory in Panama, and should be made in three equal installments on April 15, August 15 and December 15.

Severance pay gradually increases with length of service, starting at half a month’s salary for those terminated within the first six months of employment. This rises to three-quarters of a month’s salary after six months, one month’s salary after nine months, three months after a year, and 4.5 months after two years. It continues to rise through more bands to a maximum payment of 14.8 months of salary for those with more than ten years of service.

Tax and Social Security

Income tax is relatively straightforward in Panama. The first $11,000 earned per year (approx. £8700; €10,200) is exempt, after which a rate of 15% applies. A higher rate of 25% applies to earnings over and above $50,000 per year (approx. £39,500; €46,200).

Corporation tax in Panama is 25%. The ITBMS (the Panamanian equivalent of VAT) is 7%, rising to 10% for alcohol and hotels, and 15% for tobacco.

There are four types of social contribution in Panama:

  • Social security: 12.25% employer, 9.75% employee
  • Unemployment: 1.92% employer
  • Education contribution: 1.5% employer, 1.25% employee
  • Accident insurance: 0.98-5.67% employer

Holidays and Leave

Panama is relatively generous in its paid leave entitlement at 30 days per year, once employees have at least a year of service. Employers are required to advance holiday pay to employees at least three days before the time off starts. There are 12 days of public holidays in Panama each year, and holidays that fall on Sundays are normally moved to the following Monday for ‘day off in lieu’ purposes.

Maternity leave is 14 weeks, six before the birth and eight after it. This is covered at full pay by the social security system for employees who have made at least nine full monthly payments into the social security system before the seventh month of pregnancy. Employers must cover maternity pay for those who have failed to do so. Employers must also cover three days of paid paternity leave post-birth.

Sick pay is covered by the employer at full pay for the first three days, and then by social security at 70% thereafter, up to a maximum of 26 weeks.

In Summary

The stability of the Panamanian economy, thanks in no small part to its use of the dollar, makes it a top choice for a Latin American expansion. But there are still issues around corruption, as well as complexity in its minimum wage rates, which makes local expertise absolutely essential. As well as working with Spanish-speaking legal professionals in the country, you should also work with a global payroll partner who can help keep you on the right side of compliance.

This article is for informational purposes only and not intended to convey or constitute legal or any other advice. It is not a substitute for advice from a qualified professional.

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