Downsizing: Risks and Best Practices in Panama
Laura Céspedes, Associate Attorney at ARIAS Panama and expert in Labor Law, presents this article on Employment Termination due to Corporate Restructuring.
In the context of corporate reorganizations, decisions related to employment terminations require a strategic approach under Panamanian law to avoid significant legal contingencies.
- Is downsizing a valid legal cause for termination in Panama?
Corporate streamlining does not constitute a justified cause for termination under the detailed causes set forth in the Labor Code. While justified termination is based on specific legal grounds established in Article 213 of the Labor Code, downsizing responds to business decisions that must be handled under a different approach. Therefore, relying solely on an imminent cut back may be legally insufficient and shaky for the company.
- What are the risks of labor reductions?
An improper classification may lead to claims for unjustified dismissal, which could result in severance payments, surcharges and interests together with other labor-related liabilities, as well as potential reputational impact for the company.
- What alternatives may be considered instead of unilateral termination?
Depending on the circumstances, termination by mutual agreement may represent a more sound, effective and lower-risk alternative, provided it is properly structured and documented.
- What other elements should be considered?
The consistency of the business decision, as well as the preparation of key documentation, may be critical to mitigate risks in the event of a claim. In particular, it is advisable to anticipate different scenarios, including the possibility that the employee may refuse to accept a mutual agreement. This includes preparing other pre-structured mechanisms that allow the termination to be managed in an orderly manner and mitigate legal risks.