Amendments to 2017 Puerto Rico Labor Reform Annulled

Puerto Rico Act No. 41-2022 (Act 41), which amended and repealed certain more employer-friendly sections of the 2017 Labor Reform, was declared void by a federal judge on March 3, 2022. The decision renders Act 41, and any actions taken to implement it, null and void from the beginning, thus restoring certain employer-friendly provisions that had been brought about by the 2017 Labor Reform.

Act 41’s 2022 Amendments to 2017 Labor Reform

The Labor Transformation and Flexibility Act of 2017 (2017 Labor Reform) was passed with the goal of stimulating Puerto Rico’s economy through employer-friendly provisions intended to attract new business to Puerto Rico while also facilitating operations for existing enterprises. On June 20, 2022, Puerto Rico Governor Pedro Pierluisi signed Act 41 into law, reversing some of the changes brought about by the 2017 Labor Reform. The amendments took the following actions, among others:

• Revised the statutory formula for statutory severance for employees unjustly terminated under Law 80.
• Amended Law 80’s definitions of “just cause” for employment termination.
• Reduced automatic probationary periods to three months.
• Revised meal break provisions.
• Revised vacation and sick time entitlements.

March 2023 Decision

On September 1, 2022, the Puerto Rico Fiscal Oversight and Management Board (Oversight Board) brought suit in the US District Court for the District of Puerto Rico seeking to overturn Act 41. While litigation remained pending, the Puerto Rico Department of Labor and Human Resources indicated that it would enforce the provisions of Act 41.

On March 3, 2022, Judge Laura Taylor Swain, who presides over cases related to Puerto Rico's bankruptcy, granted the Oversight Board’s motion for summary judgment, declaring Act 41 void. In particular, the court found that it was undisputed that no estimate of the impact on commonwealth revenues and expenditures over the period of its 2022 fiscal plan had ever been provided for Act 41 despite requests and directions by the Oversight Board pursuant to Section 204(a)(2)(A) of the Puerto Rico Oversight, Management, and Economic Stability Act (PROMESA) to do so.

The court found that the submissions that Governor Pierluisi did submit did not provide sufficient context or analysis to support the certifications’ assertion of consistency with the fiscal plan for the island as required by Section 204(a) of PROMESA. The court also noted that Governor Pierluisi declined to provide documentation beyond the Section 204(a) certification supplement, even though the Oversight Board provided him several opportunities to cure the perceived deficiencies in his submissions.

The court stated:

The Governor’s argument that the required fiscal impact assessment is impossible and his suggestion that the law remain in place while the Oversight Board and the Government take a “wait and see” approach to assessing its impact fall far short of the requirements of PROMESA, and are unavailing. Nor is there any merit in the contention that the failure can be laid at the feet of the Oversight Board because the Oversight Board did not lay out complete details and underlying data in support of its conclusion that Act 4-2017 labor reforms should stay in place.

Implications for Employers

The nullification of the Act 41 amendments brings significant changes to employers throughout Puerto Rico by reinstating many of the employer-friendly provisions that the 2017 Labor Reform enacted. Employers should immediately revise their Puerto Rico employment policies and practices to ensure compliance with these new provisions.