Avoiding Misclassification of Service Contracts in Panama

María Paula Orsini, Associate in ARIAS Panama, presents this article on how, in Panama, many companies enter into service agreements without intending to create an employment relationship; however, if these contracts reflect employment characteristics, they may be reclassified by labor authorities, causing significant legal consequences.

In Panama, many companies enter into service agreements with individuals or legal entities for specific tasks, without the intention of establishing an employment relationship. However, if these agreements are not properly structured—or if, in practice, they reflect characteristics typical of an employment relationship—they may be subject to reclassification by labor authorities. This can lead to significant legal consequences, including retroactive payment of employment benefits and penalties.

What does Panamanian law consider?
Panamanian labor law establishes that the existence of an employment relationship is determined not by the title of the agreement, but by the actual nature of the relationship between the parties. If, in practice, the three key elements that define an employment relationship are present, the agreement may be considered an employment contract, regardless of how it is drafted.

• Establishing a fixed schedule or requiring daily reporting.
• Providing work equipment (laptops, corporate email, internal systems).
• Referring to "vacation,” "leave,” or "benefits” in the contract or agreement.
• Paying a fixed monthly fee without linking it to specific deliverables.
• Prohibiting the contractor from working with other clients.