What Severance Pay Rules Must Employers Follow in Panama?

Which Employees Qualify for Severance Pay?

• Employees hired under indefinite-term contracts who are dismissed without just cause generally qualify for statutory severance and seniority premiums.
• Fixed-term or project-based employees may qualify if terminated before the agreed end date without a legally valid reason.
• Employees who resign for employer breach or serious cause recognized by law can be treated similarly to unfairly dismissed employees for severance purposes.
• Employees separated due to economic redundancies, restructuring, or role elimination usually qualify unless a lawful exception applies.
• Employees dismissed for a legally proven just cause under the Labour Code typically do not qualify for severance, but still keep accrued benefits.
• Probationary or very short-service employees may have reduced entitlements but can still be owed accrued wages, unused vacation, and seniority premiums.

What Are the Legal Timelines for Paying Severance?

In Panama, you should aim to pay all severance-related amounts on the effective termination date or within a very short period afterward, typically aligned with the final payroll cycle. The Labour Code expects prompt settlement of wages, accrued vacation, the seniority premium, and any indemnity for unjust dismissal. In practice, many employers finalize payments within a few business days to avoid disputes and inspections. If the calculation is complex, document the basis clearly and share it with the employee. Any delay should be objectively justified and kept as short as possible to reduce legal and reputational risk.

What Penalties Apply if Severance Is Not Paid Correctly?

If your company fails to pay severance correctly in Panama, you risk labor claims, inspections, and financial sanctions. The Ministry of Labor and the labor courts can order payment of all outstanding amounts, plus additional costs and, in some cases, reinstatement. Non-compliance can also affect your ability to operate smoothly and may trigger broader audits of your employment practices.

• Courts can order payment of unpaid severance, seniority premiums, and accrued benefits.
• You may be liable for interest and monetary adjustments on late payments.
• Legal fees and court costs can be awarded against your company.
• Reinstatement orders or compensation in lieu may be imposed in certain dismissal disputes.
• Repeated non-compliance can increase scrutiny from labor authorities and damage your employer brand.

Does Outsourcing Employment via an EOR Change Severance Liability?

Using an Employer of Record (EOR) such as https://www.playroll.com/employer-of-record does not remove the underlying obligation to follow Panamanian labor law. The EOR is typically the legal employer on paper and is responsible for calculating and paying severance in line with the Labour Code. However, your company, as the client, usually bears the commercial and financial responsibility under the service agreement. If severance is mishandled, both the EOR and your business can face claims, so you should align on termination grounds, documentation, and exact payout calculations before ending any assignment.

Be 100 Percent Compliant in Offering Severance with Playroll

Panama’s severance rules combine statutory indemnity, seniority premiums, and accrued benefits, so getting the numbers right can be tricky for internal teams. Playroll helps your company interpret the Labour Code, distinguish between justified and unjustified terminations, and apply the correct formulas based on contract type and tenure. You stay in control of business decisions, while we translate them into compliant, documented payouts.

With Playroll as your global employment partner, you can plan exits confidently, knowing that timelines, payslips, and filings are handled in line with Panamanian requirements. Our team coordinates with you before any termination, models potential severance scenarios, and ensures employees receive clear, timely payments. That reduces the risk of disputes, inspections, and surprise liabilities for your company.