Hire and pay employees in Puerto Rico quickly and compliantly

Complying with labor and employment laws in Puerto Rico

Puerto Rico’s labor laws form a distinct legal landscape that blends US federal statutes with island-specific regulations. Employers must navigate a unique framework that differs in important ways from both mainland US laws and international norms, including regulations around employment contracts, labor unions, probationary periods, and more.

Whether you’re hiring your first employee in Puerto Rico or scaling a team, staying compliant with these laws is crucial to avoiding penalties and building a positive local presence. To simplify compliance, consider partnering with Rippling EOR, which ensures your employment practices are aligned with Puerto Rico’s legal requirements so your business stays current with changes in the latest laws.

Employment contracts in Puerto Rico

An employment contract in Puerto Rico outlines the terms of the relationship between the employer and employee, though the law does not generally require it to be in writing. That said, written agreements are highly recommended, especially for terms that involve non-standard arrangements such as alternate workweeks, remote work, or non-compete clauses, which must be documented in writing to be enforceable.

Fixed-term contracts are allowed in Puerto Rico. Following the enactment of Law No. 4 of 26 January 2017, temporary contracts are no longer required to be written, though it’s still advisable to document them in writing. A fixed-term contract should specify the project or purpose, duration of employment, and be signed within the first 10 days of work (particularly for hires via staffing firms). 

Typically, temporary contracts are presumed valid for up to three years. If the employee continues working beyond the agreed period, they may be considered a regular employee under the law.

Labor unions in Puerto Rico

Unions play a relatively limited role in Puerto Rico’s current labor landscape. While around 15% of the overall workforce is unionized, the majority of union activity is concentrated in the public sector. Private sector union density is notably low, estimated at under 1.7% as of 2020.

Historically, Puerto Rico’s labor movement has been shaped by colonial dynamics and economic challenges, leading to fluctuating levels of union influence. Still, there have been recent efforts to organize new groups of workers, including successful unionization among power plant employees.

Mitigating permanent establishment risk in Puerto Rico

A permanent establishment (PE) is a tax concept used to determine whether a foreign company has a sufficient presence in a jurisdiction to trigger local tax obligations. Typically, this involves maintaining a fixed place of business or conducting significant activities that amount to operating a trade or business within that territory.

Puerto Rico’s Tax Code does not explicitly define PE, but a foreign corporation may be considered to have one if it maintains an office or fixed place of business on the island. PE risk is assessed based on specific facts and circumstances, and companies should proceed with caution when establishing a physical presence.

Act No. 154 creates additional complexity by applying sourcing rules to certain transactions between related entities. If a non–Puerto Rican company purchases goods or services from a Puerto Rico–based related entity that meets specific revenue thresholds, part of the purchaser’s income may be treated as Puerto Rican income, exposing it to local tax obligations.

Companies expanding to or doing business in Puerto Rico can mitigate their PE risk by:

• Avoiding maintaining offices or fixed places of business in Puerto Rico unless necessary
• Carefully documenting the nature and structure of transactions with Puerto Rican entities
• Consulting a local tax advisor, especially when related-party transactions or agency arrangements are involved

Probationary period in Puerto Rico

A probationary period allows employers to evaluate a new hire’s performance before full employment protections apply. Under Law No. 4 of 26 January 2017, employees hired in Puerto Rico are automatically subject to a probation period—12 months for exempt executive, administrative, and professional roles, and nine months for all other employees. No written agreement is required to enforce this.

An attempt to shorten these periods under Law No. 41-2022 was overturned in 2023, leaving the original probation durations in place. During the probationary period, employers may terminate the employee without having to show just cause under the Unjust Dismissal Act.

Local laws in Puerto Rico

Employers operating in Puerto Rico must comply with a unique blend of US federal laws and Puerto Rico–specific labor regulations. Understanding the full legal landscape is essential for building a compliant, trustworthy, and sustainable business presence on the island.

Here are some important legal areas foreign employers should be aware of:

• Equal employment opportunity: Puerto Rico’s laws, namely the Anti-Discrimination Act of 1959, mirror US protections against discrimination based on race, gender, age, religion, and disability—but also include local provisions that ban discrimination based on marital status and hairstyles.
• Paid leave protections: Local law mandates paid vacation and sick leave accruals for most employees, often at more generous rates than in many US states.
• Data protection: While Puerto Rico follows US federal standards like HIPAA and the Federal Trade Commission Act, it also has local data breach notification laws. Employers must take reasonable measures to safeguard employees’ personal information and report security breaches promptly.

Worker classification and misclassification in Puerto Rico: Contractors vs. employees

When hiring in Puerto Rico, it's essential to determine whether your workers should be classified as independent contractors or employees. This decision impacts everything from payroll taxes and benefits to legal liability—and misclassification can carry serious consequences.

Puerto Rico uses a version of the Common Law Test, guided by Act 139-1968, to evaluate classification. Key factors include the degree of control the hiring entity has over the worker, the level of independence in scheduling and tools, whether the worker owns their business, and whether the work is integral to the company.

Learn more about the differences between employees and contractors and the risks of misclassification below.

Worker classification in Puerto Rico: Key differences between contractors and employees

Consequences of misclassification in Puerto Rico

Misclassifying employees as independent contractors in Puerto Rico can result in severe legal and financial repercussions. Employers must comply with both local labor laws and US federal regulations such as the Fair Labor Standards Act (FLSA), which guarantees overtime pay and benefits to non-exempt employees.

Key classification risks include:

• Back wages and benefits: Employers may be required to pay missed wages, overtime, and benefits the worker would have received if properly classified.
• Liquidated damages: In many cases, employers must also pay an equal amount in liquidated damages, effectively doubling the liability.
• Interest and legal fees: Unpaid wages and taxes may accrue interest, and employers could be held responsible for the employee’s legal costs if a case goes to court.

In Puerto Rico, legal action can lead to substantial costs. In one case, a security company was ordered to pay over $166,000 in back wages and damages to 243 misclassified workers. In another, $106,000 in overtime wages was recovered for 136 misclassified security guards.

Wages and payroll in Puerto Rico

As a company expanding into a new market like Puerto Rico, managing wages and payroll can be one of the most intricate aspects of local compliance. From understanding Puerto Rico’s mandatory Christmas bonus to navigating payroll frequency and minimum wage requirements, payroll involves far more than just issuing paychecks.

Whether you’re hiring in San Juan, Ponce, or elsewhere on the island, here’s what employers need to know about wages, pay frequency, and running payroll compliantly in Puerto Rico.

Minimum wage in Puerto Rico

Effective July 1, 2024, Puerto Rico’s minimum wage is $10.50 per hour for most non-exempt employees covered by the federal Fair Labor Standards Act (FLSA). The Minimum Wage Evaluation Commission typically reviews minimum wage raises based on economic indicators, such as inflation, cost of living, and corporate tax data, as mandated by Act No. 47-2021 (Act 47).

The increase does not apply to the following groups:

• Agricultural workers
• Exempt executive, administrative, and professional employees
• Employees covered by a collective bargaining agreement establishing a higher wage
• Governmental employees, including those in executive agencies, the legislature, the judiciary, and municipalities (excluding public corporations and other public entities that operate as private corporations)

Employers who fail to comply with Puerto Rico’s minimum wage decree may face fines ranging from $500 to $10,000, depending on the severity and frequency of violations.

Payroll frequency in Puerto Rico

In Puerto Rico, employers generally pay employees on a biweekly, semi-monthly, or monthly basis. However, employees must receive their payments by the 15th of each month. Payroll cycle standards may vary depending on the industry and employment type of the employees.

Employers must also issue a detailed pay statement for each period, outlining gross pay, deductions (including income tax, Social Security, and other withholdings), and net pay.

13th month pay in Puerto Rico

In Puerto Rico, 13th month pay is legally mandated. Known locally as the Christmas bonus, this payment provides employees with additional income at the end of the year. Employers must disburse 13th month pay in December.

The bonus amount depends on the employer’s workforce size:

• Companies with more than 21 employees must pay 2% of an employee’s annual wages, capped at $600.
• Companies with 20 or fewer employees must also pay 2%, but the cap is $300.

Employers should budget for this mandatory bonus as part of their annual payroll planning.

Run payroll compliantly in Puerto Rico

Running payroll in Puerto Rico requires careful compliance with both local and US federal regulations. Employers must accurately calculate and withhold applicable taxes—including Puerto Rico and federal income taxes, Social Security, and Medicare—and ensure all withholdings are submitted on time. They must also maintain detailed payroll records for each employee, including pay stubs, hours worked, wage agreements, and tax filings, in accordance with both local and federal requirements.

Given the complexity of managing dual-layered compliance, many companies choose to partner with an employer of record (EOR) like Rippling. An EOR service handles payroll processing, tax remittance, and benefits administration, helping businesses stay compliant while focusing on growth.

Employer and employee taxes in Puerto Rico

Understanding Puerto Rico’s tax system is critical for businesses hiring on the island. Because Puerto Rico is a US territory, employers must comply with both US federal tax laws and Puerto Rico’s local tax regulations, overseen by the Puerto Rico Department of the Treasury.

From withholding the correct income taxes and social security contributions to remitting local payroll and unemployment taxes, employers need to stay diligent to ensure full compliance.

Here are the key things to know about employer and employee tax obligations in Puerto Rico.

Employer taxes in Puerto Rico

Here are the mandatory employer payroll taxes in Puerto Rico:

*Puerto Rico operates its unemployment insurance program in compliance with federal law, so the FUTA tax rate is reduced by 5.4%. 

Employee taxes in Puerto Rico

The following contributions must be deducted from employees’ paychecks as a percentage of their income: 

In addition to the contributions above, employees also pay progressive income tax in Puerto Rico:

Penalties for not paying taxes in Puerto Rico

Failing to meet payroll tax obligations in Puerto Rico can lead to serious financial penalties. Employers who do not deposit or pay withheld taxes on time may face penalties ranging from 25% to 50% of the unpaid amount, as outlined in the Puerto Rico Internal Revenue Code. For repeat offenders, penalties may rise to 100% of the tax deficiency, in addition to other legal consequences.

To mitigate risk, many employers rely on an employer of record (EOR) to handle payroll taxes in Puerto Rico. An EOR ensures your taxes are calculated correctly, deposited on time, and in full compliance with local tax laws—freeing you to focus on growing your business.

Employee benefits in Puerto Rico

Offering a well-rounded employee benefits package can give your company a competitive edge, especially in Puerto Rico’s evolving job market. Some benefits are legally required, including programs like Medicare, workers’ compensation, and unemployment insurance. Many employers also go beyond the basics by offering optional perks such as health insurance, retirement plans, and extra paid time off to attract and retain top talent.

Below, we break down the mandatory and optional benefits for employers hiring in Puerto Rico.

Mandatory benefits in Puerto Rico

Mandatory benefits are those required by law, and employers in Puerto Rico must provide them to eligible employees. These benefits include paid leave (covered in the next section), as well as:

• Medicare: Both employers and employees contribute to Medicare, which provides hospital and medical insurance to individuals ages 65 and over. Puerto Rican residents have limited access to certain Medicare benefits compared to mainland US citizens. 
• Workers’ compensation: Employers are responsible for offering workers’ compensation insurance to cover employees’ work-related injuries and illnesses.
• Unemployment insurance: Paid for by employers and employees, this benefit covers eligible individuals who are impacted by job loss due to no fault of their own.
• Disability benefits: Employers must contribute to the Disability Insurance Fund, which provides employee benefits for non-work-related injuries and illnesses.

Optional benefits in Puerto Rico

To attract and retain top talent, many employers in Puerto Rico offer optional and fringe benefits beyond the statutory requirements. While not mandatory, these perks can significantly enhance your competitiveness as an employer. Deciding which ones to offer can depend on your budget, industry norms, and workforce expectations. Here are some of the most common optional benefits in Puerto Rico:

• Health insurance: While not legally mandated, many Puerto Rican employers offer private health insurance, including medical, dental, and vision, as a benefit.
• Life insurance: Employers may offer life insurance policies that provide financial support to an employee’s beneficiaries in the event of death, often as part of a broader benefits package.
• Retirement plans: Some employers offer retirement savings options such as 401(k) plans or similar programs.
• Transportation allowance:  To offset commuting costs, employers may provide a transportation stipend or reimburse public transit expenses, especially in urban areas like San Juan.
• Additional paid leave: Beyond the statutory minimum, employers may grant extra paid vacation days, personal days, or floating holidays to improve employee satisfaction and retention.

Working hours, overtime, and leave in Puerto Rico

When expanding into new markets, navigating local rules around working hours, overtime, and employee leave can be one of the most complex aspects of global employment. Puerto Rico’s regulations often differ from those in the mainland US, and misunderstanding or misapplying them can expose your business to potential compliance issues.

In Puerto Rico, labor laws are shaped by a combination of local statutes and US federal standards, with an emphasis on protecting worker rights and ensuring adequate rest and personal time. Whether you're hiring in San Juan or building a distributed team across the island, understanding these requirements is key to staying compliant and fostering a healthy work environment. Here’s what employers need to know.

Standard working hours in Puerto Rico

Under Puerto Rico Act No. 379, the standard workweek for non-exempt employees is capped at 40 hours, typically structured as eight hours per day over five days. This framework applies across most industries, except for those that require 24/7 operations.

Overtime laws in Puerto Rico

In Puerto Rico, any work beyond eight hours in a calendar day or 40 hours in a workweek is considered overtime and must be paid at 1.5 times the employee’s regular rate.

Recent guidance from the Puerto Rico Department of Labor clarifies that employers may require overtime work without limitation, so long as employees are compensated appropriately. While prior interpretations placed conditions on mandatory overtime, such as requiring advance notice or limiting it to exceptional circumstances, these restrictions are no longer valid. However, employers are still encouraged to consider employee health and safety risks when assigning overtime hours.

Rest period and break laws in Puerto Rico

According to Puerto Rico’s laws, most employees are entitled to a one-hour mandatory meal break when their workday exceeds five consecutive hours. This break must begin after the second hour and before the sixth hour. However, if the entire workday does not exceed six hours, the meal period may be waived. Employees working more than ten hours in a day are entitled to a second meal break, unless the total work time does not exceed twelve hours and the first meal break was not waived.

Employers and employees may enter into a written agreement to reduce the meal break to no less than 30 minutes, or 20 minutes for certain roles such as croupiers, nurses, and security guards, as long as the reductions are authorized by the Puerto Rico Secretary of Labor.

Leave laws in Puerto Rico

Puerto Rico labor law outlines a range of leave entitlements to help employees manage personal needs, health issues, and family responsibilities while maintaining job security.

Here are the types of leave employees are entitled to receive in Puerto Rico:

• Annual leave: As long as an employee works 115 hours a month, they accrue 1.25 days of paid vacation leave for each month they work, up to a maximum of 15 days per year.
• Sick leave: Employees accrue one day of sick leave for each month they work.
• Maternity leave: Pregnant employees are entitled to eight weeks of paid maternity leave, typically divided into four weeks prior to the birth and four weeks after. If a pregnant employee experiences complications, they may be eligible to extend their leave up to 20 weeks (though the additional 12 weeks are likely unpaid). If an employee adopts a child aged five or younger, they’re also entitled to eight weeks of maternity leave but must provide a 30-day notice before beginning leave.
• Paternity leave: While paternity leave is not a mandatory benefit for private sector employees, fathers may take up to 15 days of unpaid, job-protected leave following the birth of their child.
• Parental leave: Parental leave in Puerto Rico falls under the US Federal Family and Medical Leave Act (FMLA). Employers with 50 or more employees must offer up to 12 weeks of unpaid leave for family-related reasons, which include the birth or adoption/fostering of a child.
• Military leave: Private employees who are also members of the US Armed Forces are entitled to receive unpaid leave for the duration of their service. Upon returning, the employee must receive a position with similar pay and rank.
• Public holidays: Puerto Rico celebrates 18 public holidays, which include:
• New Year’s Day
• Epiphany
• Martin Luther King Jr.’s Birthday
• Presidents’ Day
• American Citizenship Day
• Emancipation Day
• Good Friday
• Memorial Day
• Juneteenth
• Independence Day
• Puerto Rico Constitution Day
• Birthday of José Celso Barbosa
• Labor Day
• Columbus Day
• Veterans’ Day
• Discovery of Puerto Rico
• Thanksgiving Day
• Christmas

Work permits in Puerto Rico

Employers expanding into Puerto Rico and hiring foreign talent must ensure that all workers have valid authorization to work in the territory. While US citizens, nationals, and permanent residents can work in Puerto Rico without a permit, foreign nationals are subject to different regulations—meaning they must obtain the appropriate US work visa before beginning employment.

Navigating visa categories, processing times, and documentation—even for US employers—can be complex in Puerto Rico. Employers should do their due diligence and follow the correct legal process to avoid potential compliance risks, including fines or immigration-related penalties.

Here’s what employers need to know about work permits in Puerto Rico.

Who needs a work visa in Puerto Rico?

US citizens and nationals do not require a visa or work permit to live and work in Puerto Rico, as it is a US territory. The same applies to lawful permanent residents (green card holders), who are authorized to work without additional documentation.

However, foreign nationals, including those from outside the US without permanent resident status, must obtain valid work authorization to be legally employed in Puerto Rico. This typically means holding a non-immigrant work visa or a similar employment-based visa. Employers are responsible for ensuring that any non-US workers have the correct documentation in place before they begin work.

How long does it take to get a work visa in Puerto Rico?

Processing times for work permits and employment-based visas in Puerto Rico can range from a few weeks to several months, depending on the visa type and the individual applicant’s circumstances. For example, H-1B visas often take three to six months, while L-1 visas may be processed more quickly in some cases. Expedited processing is available for certain visa categories and can significantly reduce wait times, subject to an additional fee.

Because timelines can vary and delays are not uncommon, it’s essential to initiate the visa process as early as possible to ensure your new hire can start work on time.

Types of work visas in Puerto Rico

Since Puerto Rico is a US territory, foreign nationals must obtain US work visas to be employed legally on the island. The most common visa types for employment-based roles include:

• H-1B Visa: For specialty occupations requiring a degree or equivalent experience; valid for up to 6 years with extension
• L-1 Visa: For intra-company transfers of executives, managers (L-1A), or employees with specialized knowledge (L-1B)
• O-1 Visa: For individuals with extraordinary ability in fields like science, arts, education, or business
• TN Visa: For Canadian and Mexican professionals in qualifying occupations under the USMCA agreement

Each visa has specific requirements and timelines, so employers should choose the appropriate option based on the role and candidate.

Termination and redundancy in Puerto Rico

When hiring your first employee in Puerto Rico, termination may not be top of mind, but understanding the territory’s strict dismissal laws is essential to avoid costly mistakes later on. From just-cause rules to severance calculations and protected employee rights, Puerto Rico’s framework for offboarding is far more structured than in at-will jurisdictions (like the US).

Here’s what to know about termination and redundancy in Puerto Rico.

Does at-will employment exist in Puerto Rico?

At-will employment is a legal concept that allows either the employer or the employee to terminate the employment relationship at any time, for any reason, and without prior notice (as long as the reason is not illegal).

Puerto Rico does not recognize at-will employment. Indefinite employment is governed by the Unjust Dismissal Act (Act No. 80), which requires just cause for termination. Just cause can include misconduct, poor performance, or legitimate business reasons, such as restructuring.

While written notice is not required, employers must pay employees a statutory severance payment based on their length of service upon termination.

Notice periods in Puerto Rico

A notice period is the time given by either the employer or the employee before ending an employment relationship. While it helps both parties manage the transition, Puerto Rico law does not require employers to provide advance notice of termination for indefinite-term employees—even in cases of just cause—under Act No. 80.

However, federal law may apply in certain cases. The US Worker Adjustment and Retraining Notification (WARN) Act requires employers with 100 or more employees to provide 60 days’ notice before mass layoffs or plant closures. This notice must be given to employees, local officials, and the Puerto Rico Department of Labor.

Although not mandatory, offering notice is a common practice for maintaining goodwill with your workforce.

Severance pay in Puerto Rico

Severance pay is required in Puerto Rico for indefinite-term employees who are terminated without just cause, as defined under the Unjust Dismissal Act. For employees hired on or after January 26, 2017, the severance amount is equal to three months’ salary, plus two weeks’ salary for each year of service, capped at nine months total.

Employees hired before that date are subject to a different formula that increases the benefit based on seniority and prior earnings, with no cap on the amount.

How to terminate employees compliantly in Puerto Rico

Terminating an employee in Puerto Rico requires careful adherence to Act No. 90, which mandates just cause for dismissals and severance pay based on service length. While employers are not required to give advance notice, documenting the reason for termination and following a progressive discipline process—especially for non-severe offenses—can help demonstrate compliance and reduce legal risk.

Given the complexity of Puerto Rico’s termination rules, many businesses choose to work with an employer of record (EOR). An EOR can help ensure compliance with all local regulations, from initial hiring to compliant offboarding, keeping you out of hot water with legal authorities.

FAQs about hiring in Puerto Rico

Can I hire employees in Puerto Rico without my own legal entity?

Yes, you can hire employees in Puerto Rico without setting up a local legal entity by partnering with an employer of record (EOR). An EOR serves as the legal employer on your behalf, managing employment contracts, payroll, tax withholdings, and compliance with both Puerto Rico labor laws and US federal regulations. This allows your business to operate in Puerto Rico and manage employee performance directly, without the administrative burden of establishing a legal presence.

Partnering with an EOR like Rippling can help you scale quickly in Puerto Rico, access top local talent, and reduce the risks and complexities of international compliance.

What does a company need to hire employees in Puerto Rico?

To hire employees in Puerto Rico, a company must be authorized to operate as an employer, which typically means registering with the Puerto Rico Department of State, obtaining a Puerto Rico employer identification number (EIN), and enrolling with local agencies for payroll tax and insurance contributions.

Once authorized to hire in Puerto Rico, you’ll need to complete essential hiring steps like drafting a compliant employment contract, enrolling employees in payroll systems, and managing onboarding tasks. The hiring process also includes conducting background checks, collecting legal documentation (such as a Social Security number or valid work visa), and introducing the employee to your company’s tools, policies, and team.

What is the difference between an independent contractor and an employee in Puerto Rico?

In Puerto Rico, the difference between an independent contractor and an employee depends on the level of control the hiring company has over the worker. An employee typically works under the employer’s direct supervision, follows set hours, performs work integral to the business, and is entitled to benefits such as paid leave, unemployment insurance, and statutory protections under the Unjust Dismissal Act. By contrast, an independent contractor operates with more autonomy, sets their own schedule, and is responsible for handling their own taxes and benefits. Misclassifying employees as contractors can result in serious penalties, including back pay, liquidated damages, legal fees, and in some cases, criminal liability.

What are the legally required employee benefits in Puerto Rico?

Puerto Rican employers must contribute specific percentages to Medicare, workers’ compensation, unemployment insurance, and disability benefits. Additionally, they must offer employees several types of leave, including annual leave, maternity leave, and sick leave. If an employer terminates an employment relationship, they must also pay severance based on the length of the employee’s service.

Can US citizens legally work in Puerto Rico?

Yes, US citizens can legally work in Puerto Rico without a visa or special work authorization. Since Puerto Rico is a territory of the United States, US citizens and US nationals have the same right to live and work there as they do in any US state. No additional paperwork is required beyond standard hiring documentation, such as a completed I-9 form and valid identification.

How much does it cost to hire an employee in Puerto Rico?

Beyond an employee’s salary and recruitment expenses, employers in Puerto Rico must budget for statutory employment costs, including payroll taxes and mandatory contributions. On average, these additional costs amount to approximately 18.95% of an employee’s gross salary. This includes contributions to programs like Social Security, Medicare, unemployment insurance, disability insurance, and workers’ compensation insurance.

How does a US company pay a foreign employee in Puerto Rico?

Paying employees in Puerto Rico requires legal compliance with both US federal and Puerto Rico local tax and labor laws. US companies typically have three options:

1. Register as an employer in Puerto Rico, establish a local tax presence, and run payroll according to Puerto Rican law.
2. Partner with an employer of record (EOR) that acts as the legal employer and manages payroll, benefits, and compliance on your behalf.
3. Use a global payroll provider that supports Puerto Rico-specific payroll regulations and integrates payments across multiple jurisdictions.
   

Choosing the right option depends on your long-term hiring plans and internal resources.

Disclaimer: Rippling and its affiliates do not provide tax, legal, or accounting advice. This material has been prepared for informational purposes only, and is not intended to provide, and should not be relied on for, tax, legal, or accounting advice. You should consult your own tax, legal, and accounting advisors before engaging in any related activities or transactions.