Employer of Record in Panama

Hiring independent contractors has boomed in popularity because of the cost savings and flexibility they offer. It can be a great option if you require niche skills or short-term project support. Contractors allow businesses to access specialized skills quickly, without the time and cost of setting up a local entity.

However, it’s important to know the limits of this model: contractors are not a substitute for full-time employees. Relying on them for ongoing, long-term roles can create serious compliance risks, including employee misclassification, which can lead to fines, back taxes, and reputational damage.

Playroll’s contractor management solutions make it simple to compliantly engage, onboard, and pay contractors around the world. We provide clear visibility into agreements, streamline payments, and reduce compliance risks – so you can focus on getting the work done. And when you’re ready to take the next step, we can help seamlessly convert contractors into full-time employees through our global Employer of Record service.

Businesses can only operate smoothly in Panama if they comply with local labor laws including drafting compliant employment contract agreements and meeting taxation and payroll obligations. Learn more about the employment laws and regulations in Panama below, to avoid any compliance issues.

Employment Contract Requirements

In accordance with Panama's Labour Law, employment contracts must be in Spanish or a mutually understandable language. Employers are obliged to provide a written contract specifying

• The identification of both parties
• Commencement date
• Employee's salary and other benefits
• Workplace

Onboarding Process

We can help you get a new employee started in Panama quickly, with a minimum onboarding time of just 1-2 working days. The timeline starts once the employee submits all required information onto the Playroll platform and completes any necessary local authority registrations.

For non-nationals, the Right to Work assessment (if applicable) may add up to three extra days. Additional time may be needed for follow-ups on this assessment. Please note, payroll cut-off dates can impact the actual start date. Playroll's payroll cut-off date is the 10th of each month unless otherwise specified.

Working Hours in Panama

The regular workday is eight hours, and a full workweek extends up to 48 hours in Panama. Those under 16 years old have a maximum work week of 36 hours.

Overtime in Panama

In Panama, overtime is restricted to three additional hours per day or nine hours per week. Compensation for overtime exceeding 48 hours per week ranges from 125% to 175%, based on the timing of the hours.

Probation Period in Panama

Panama's work contracts or collective agreements lay out the probation period, which typically spans up to three months.

Setting up a local legal entity in Panama can be time-consuming and expensive. It often involves complex paperwork, local representation, banking, registrations, and ongoing tax filings, which isn't cost-effective if you're simply looking to hire a few employees or test the market. An Employer of Record removes these barriers entirely. Instead of spending months establishing a presence, an EOR lets you hire and onboard employees within days while staying fully compliant.

This enables faster market entry and greater agility. Whether you’re launching a pilot program, supporting a regional client, or adding specialized talent, you don't need to commit to long-term infrastructure to explore new business opportunities. The EOR handles local employment logistics while you retain day-to-day oversight of your hires. This model lets you scale up or down based on business needs, giving you more flexibility with less overhead and risk.

Employers in Panama must navigate various payroll taxes, including social security contributions (12.25% for employers, 9.75% for employees), educational insurance tax (1.50% for employers, 1.25% for employees), professional risk insurance (0.33%-6.25%, depending on the type of industry), income tax withholding, and the 13th-month salary. Understanding and complying with these obligations is essential to avoid penalties and maintain positive employee relations.

Using payroll management software, such as Playroll, can help employers streamline payroll processing, ensure compliance, and reduce administrative burdens.

As of January 1, 2025, Panama's minimum wage is set at PAB 300 per month for workers in rural areas and PAB 400 in urban areas.

One of the biggest risks in global hiring is payroll mismanagement. In Panama, even small errors in tax reporting or social contribution payments can trigger audits, fines, or reputational damage. For companies without in-country expertise, the risk isn’t worth taking. An Employer of Record removes this burden by owning the legal responsibility of payroll, executing every step with built-in compliance.

Key Ways an EOR Supports Payroll in Panama:

• Mitigates Compliance Risk: Oversees all legal obligations for payroll, tax filings, and recordkeeping.
• Local Regulatory Expertise: Interprets and applies Panama’s latest labor and tax changes in real time.
• Free Processing: Reduces mistakes in wage calculations and reporting through built
• Payroll Record Management: Maintains compliant payroll audit trails and documentation for each employee.

In Panama, employers looking to hire foreign nationals must comply with defined procedures to secure the appropriate work permits and visas. These include the Professional Foreigner Visa for specialized professionals, the Temporary Work Permit for short-term assignments, and the Digital Nomad Visa for remote workers employed by foreign companies.

The application process involves preparing documentation, adhering to employment quotas, and understanding processing times, which can range from 1 to 5 months. Employers should engage legal experts and apply early to ensure compliance with Panamanian labor regulations.

Mandatory Leave Entitlement in Panama

The annual leave entitlement in Panama is 30 days for a full time worker. These can include public holidays on top of that or within those days, which would otherwise be unpaid.

Public Holidays In Panama

Panama observes 12 national holidays:

Paid Time Off in Panama

In Panama, employees are entitled to 30 days of paid annual leave after a year of work, earned at a rate of 1 day per 11 days worked. Employers must provide payment for this leave three days in advance, and it cannot be substituted with compensation.

Maternity Leave In Panama

Maternity leave in Panama lasts for 14 weeks: six weeks before and eight weeks after the expected delivery date. Eligibility requires a medical certificate indicating the expected delivery date and nine social security contributions in the 12 months before the seventh pregnancy month.

Paternity Leave In Panama

Employees in Panama receive three fully paid days of paternity leave after their child's birth, compensated by the employer.

Sick Leave In Panama

In Panama, employees receive 18 days of paid sick leave annually, covered by employers with a doctor's note required. Additional sick days are paid by the Social Security Fund.

Parental Leave In Panama

Panama does not have a separate shared parental leave policy.

In Panama, benefits play a central role in attracting and retaining top talent. Employees often expect more than just a paycheck – they're looking for stability, healthcare coverage, pension plans, and other perks that show a company is invested in their well-being. If you're not familiar with what’s standard or required, you risk falling short. An Employer of Record helps bridge that gap by administering a locally competitive benefits package that meets both legal requirements and employee expectations.

An EOR doesn't just check boxes, they make sure your employees receive benefits that are timely, properly communicated, and well-managed from the moment they’re onboarded. From managing healthcare contributions to adjusting for regional differences in leave or bonus entitlements, an EOR acts as both a legal and operational partner. The result is a better employee experience, less administrative burden on your internal team, and greater confidence that your offer is aligned with what top candidates in Panama actually want and need.

Termination Process in Panama

In Panama, termination after the probation period requires just cause, with no at-will termination. Employees who believe their termination is unfair have 60 days to seek reinstatement. Termination methods include:

1. Resignation
2. Mutual agreement
3. Dismissal with valid cause
4. Contract expiration

Notice Period in Panama

In Panama, the minimum notice period is 1 month. Salary payment may sometimes substitute for the notice period.

Severance in Panama

Indemnity payments in Panama are not an inherent labor right but become payable only when a labor court rules a dismissal unjustified or a resignation justified, in financially driven layoffs pre-authorized by the Ministry of Labor, in dismissals under Article 212 for employees with under two years’ service, or when lump-sum severance is negotiated in mutual terminations. The amount is based on the employee’s average salary over the last six months (or, if more favorable, the last 30 days) and varies by hire date and length of service: those employed before April 1972 follow fixed month-of-salary tiers up to seven months; hires between April 1972 and August 1995 accrue cumulative weekly pay multiples per quarter, semiannual, or annual service increments; and employees starting after August 1995 receive 3.4 weeks’ pay per year for the first ten years plus one additional week for each subsequent year.