Bonuses, Incentive and Allowances: When Do They Constitute Salary in Panama?

Laura Céspedes, Associate at ARIAS PANAMA and expert in Labor Law, presents this article on the key considerations employers should take into account when establishing bonuses, incentives and other variable compensation arrangements.

In Panama, determining the employment-related effects of a payment made in addition to base salary requires looking beyond its label. The Labor Code provides a broad definition of salary, which includes, among other concepts, gratuities, bonuses, premiums, commissions and any other compensation received as a result of employment; however, it also establishes specific rules for certain types of payments.

In particular, production premiums, bonuses and gratuities are subject to specific treatment. The law provides that they are considered salary only for purposes of calculating vacation, maternity leave and seniority premium, while the same provision establishes exclusions for other employment-related effects. The Labor Code also allows variable compensations components linked, for example, to performance, production or sales.

Accordingly, when designing incentive plans, employers should clearly define the nature of the payment, the conditions under which is granted, the criteria used to determine it and the employment benefits on which it may have an impact. How these elements are structured and documented may have significant consequences for the employer.

Is your current allowances, bonus or incentive scheme properly structured under Panamanian labor law?

A preventive review of these arrangements can help determine their applicable treatment, anticipate and reduce potential employment-related contingencies.