In the case of Panama, acquirers should be aware that, as a general rule, under the Panama Labor Code, employment relationships may terminate in any of the following manners:

  • Mutual Consent: by mutual consent of the parties, in writing which does not involve waiver of any rights accrued by the employee;
  • Expiration of Term: upon expiration of the agreed term if the employment is for a definitive term;
  • Dismissal or Resignation: upon dismissal with just cause or the resignation of the employee; and
  • Unilaterally by Employer: by the unilateral decision of an employer, within the formalities and limitations established by the Labor Code, such as employees with indefinite period contracts with less than two years of continuous services.

In the context of an M&A transaction structured as an asset sale, it is more likely that the employment relationships would terminate either by mutual consent of the parties, or unilaterally by the employer. In the event that an employee is fired for just cause, and contests the termination, the cause would have to be proved in a labor proceeding, or the company will be ordered to reinstate the employee, with any applicable fees and penalties associated with the unjustified termination; or payment of indemnity, backpay, and surcharges if the company does not wish to reinstate them.

Our suggestion in a transaction of this type, and in relation to those employees that will not be assumed/transferred to the acquirer’s entity(ies), would be for them to be terminated by mutual consent (“mutuo acuerdo“) if there is no justified cause for termination. The likely components of the termination payment in this scenario would be:

  • Seniority bonus (prima de antiguedad): the payment for seniority bonus is equal to one week for every year of employment.
  • Thirteenth month (décimo tercer mes): under Panama law, employees are to be paid a thirteenth month every year, equal to one month’s salary. This is payable in three installments, every four months.
  • Vacations (vacaciones): employer must pay any accrued and unpaid vacation time.
  • Bonus/indemnity: although not mandatory, and subject to negotiation, in order to induce an employee to agree to a termination by mutual consent, it is typical to pay a “bonus” or “indemnity” payment in addition to the accrued benefits listed above. This is roughly equal to one month for every year of employment.

An employee cannot waive payment of bullet points one to three above. Bullet point four is subject to negotiation. In all cases, termination will be subject to a case-by-case analysis based on the particulars of each employment relationship.

In the context of an M&A transaction, structured as a share sale, the target company is transferred together with its current employees.

Additionally, it is becoming more common to see golden parachute arrangements (both by way of the issuance of shares or cash), which typically include a premium for the CEO and certain key employees, payable upon the completion of a business combination. These arrangements require careful review at the moment of a business combination because depending on how they are structured may lead to labor liabilities going forward.

Learn more in our Corporate / Mergers & Acquisitions Guide prepared by partner Eloy Alfaro B. and senior associate Rita de la Guardia – Originally published by Chambers & Partner.