Employer of Record in Panama

Hiring employees in Panama in 2025 involves navigating a specific set of local regulations and administrative processes. Companies looking to expand their operations or access the skilled workforce in Panama have several strategic approaches, each carrying distinct legal and operational implications. Understanding these pathways is essential for ensuring compliant and efficient talent acquisition within the country.

Your options for employing talent in Panama include:

• Establishing a local entity: This traditional method requires incorporating a company within Panama, which involves significant upfront investment, time, and a thorough understanding of the country's corporate, tax, and labor laws.
• Through an Employer of Record (EOR) service: Partnering with an EOR like Rivermate allows your company to compliantly hire and manage employees in Panama without the need to establish your own local legal entity. The EOR legally employs the individuals on your behalf, handling all local employment responsibilities.
• Hiring independent contractors: Engaging individuals as independent contractors can offer flexibility, but it comes with a substantial risk of misclassification if the working relationship resembles that of a traditional employer-employee dynamic. Misclassification can lead to significant penalties under Panamanian labor law.

How an EOR Works in Panama

An Employer of Record (EOR) in Panama serves as the legal employer for your workforce, assuming all the associated compliance and administrative responsibilities. This model allows your company to manage the day-to-day tasks and strategic direction of your employees while the EOR handles the local regulatory burden. Specifically, an EOR in Panama will take care of:

• Payroll processing: Ensuring accurate and timely payment of salaries, including all necessary deductions and contributions in accordance with Panamanian law.
• Tax withholdings and remittances: Managing all local income tax, social security, and educational insurance (Impuesto de Seguro Educativo) contributions to the relevant Panamanian authorities.
• Benefits administration: Facilitating mandatory employee benefits such as social security, paid leave, and any other statutory entitlements.
• Labor law compliance: Adhering to Panama's labor code concerning employment contracts, working hours, termination procedures, and severance payments.
• HR administration: Handling employment contracts, onboarding, and other essential administrative tasks as required by local legislation.

Benefits of Using an EOR in Panama

For companies looking to hire talent in Panama without the complexities and costs of establishing a local entity, an EOR offers several compelling advantages:

• Rapid market entry: Launch your operations and onboard employees in Panama quickly, circumventing the typically lengthy process of local company registration.
• Reduced costs and administrative burden: Avoid the significant expenses and resources associated with legal entity formation, registration, and maintaining a dedicated local HR and payroll department.
• Guaranteed compliance: Mitigate the risk of penalties, fines, and legal challenges by leveraging the EOR's expert knowledge of Panamanian labor laws, tax regulations, and social security requirements.
• Focus on core business: Delegate all employment-related administration and compliance to the EOR, allowing your internal teams to concentrate on strategic growth and operational objectives.
• Enhanced flexibility and scalability: Easily scale your workforce up or down in Panama without the permanent commitment and administrative complexity of a direct local presence.

Rivermate's transparent pricing model eliminates complexity with a single, competitive monthly fee per employee. Unlike traditional PEO providers, our pricing in Panama includes comprehensive HR support, benefits administration, compliance management, and access to our proprietary dashboard for real-time workforce analytics. No hidden costs, no setup fees—just straightforward pricing that scales with your business needs while ensuring full legal compliance in Panama.

Panama's territorial tax system taxes income earned within the country, with foreign income generally exempt. Employers must contribute to social security (CSS) at 9.75% of gross salaries, plus occupational risk rates (0.9%-5.7%) and a 1.25% education tax. Employers are also responsible for withholding income tax from employees' salaries, based on progressive rates: 0% up to $11,000, 15% for $11,001–$50,000, and 25% over $50,000.

Employees can deduct social security contributions (8%), educational expenses, mortgage interest, medical expenses, and allowances for dependents to reduce taxable income. Employers must report and pay social security and income tax withholdings monthly (by the 10th of the following month) and file an annual income tax return by March 31. Foreign workers and companies face additional considerations like tax treaties, residency rules, and transfer pricing, requiring professional advice for compliance.

Panama's salary landscape is influenced by its role as a regional trade and finance hub, with significant variation across industries and regions. Salaries in Panama City tend to be higher, with typical annual ranges such as $18,000–$30,000 for accountants and up to $50,000 for software developers. Key roles like Human Resources Managers earn between $35,000–$70,000 annually, while entry-level positions like customer service agents earn around $12,000–$20,000.

Minimum wages are regulated by industry and region, with large companies in Panama City paying $500–$600 per month, and smaller firms around $450–$550. Employers must also provide mandatory bonuses, notably the thirteenth month salary paid in three installments, along with allowances for transportation, meals, and education. Payroll is typically processed bi-weekly or monthly via direct deposit, with deductions for social security, income tax, and education tax.

In Panama, employees are entitled to a minimum of 30 days of paid annual vacation leave after eleven months of continuous employment, with the leave to be taken within the following year. Public holidays are observed throughout the year, and employees generally receive paid time off; working on these days often warrants additional compensation. Key public holidays include New Year’s Day, Labor Day, Independence Day, and Christmas, among others.

Employees also have rights to sick leave, maternity, paternity, and adoption leave, with specific durations and benefits. For sick leave, the employer pays for the first three days, after which the Social Security Fund (CSS) covers 60% of the salary. Maternity leave lasts 14 weeks, with benefits provided by CSS, while paternity leave is typically eight days. Additional leave types include bereavement, study, and sabbatical leave, with the latter two often depending on employer policies.

Panama's labor laws mandate core employee benefits including social security contributions, education tax, occupational risk insurance, 30 days of paid annual vacation, paid public holidays, a mandatory thirteenth-month bonus, and severance pay for unjustified dismissals. Employers and employees contribute to the social security system, which covers health, disability, and retirement benefits, with employer contributions typically higher.

Beyond legal requirements, many employers enhance compensation with optional benefits such as private health insurance, life insurance, pension plans, meal and transportation allowances, and wellness programs. Private health insurance is highly valued, especially in high-skilled industries, with costs varying based on coverage and employee factors. Employers often contribute significantly to pension plans, offering both social security and private options, sometimes with tax advantages.

Benefit offerings vary by company size and industry, with larger firms generally providing more comprehensive packages. For example:

Employers should tailor benefits to local expectations and industry standards to attract and retain talent effectively.

Panama's labor laws mandate written employment agreements that specify terms, protecting both parties and ensuring legal compliance. Agreements must follow the Labor Code, covering wages, hours, benefits, and termination procedures, with non-compliance risking penalties. Employers should draft contracts carefully and seek legal advice when needed.

There are several contract types recognized in Panama:

All employment agreements must include essential clauses such as identification, job description, work location, hours, salary, benefits, start date, contract type, termination conditions, and applicable collective agreements. These provisions ensure clarity and legal compliance, reducing disputes.

Panama is emerging as a favorable destination for remote work due to its strategic location, stable economy, and expanding technological infrastructure. The country’s legal framework is adapting to support remote work, emphasizing employees' rights to request flexible arrangements and employers' obligations to ensure safe, resource-equipped work environments. While specific remote work legislation is still developing, existing labor laws require compliance with working hours, benefits, and contractual clarity, which should be formalized through written agreements.

Flexible work options in Panama include remote work, telecommuting, and hybrid models, allowing tailored arrangements for companies. Key legal and practical considerations involve respecting labor code provisions, ensuring employee safety, and establishing clear contractual terms. The country’s growing remote work ecosystem offers opportunities for both local and international employers seeking to leverage Panama’s infrastructure and legal environment.

This environment offers a promising landscape for companies aiming to implement flexible work policies in Panama.

Terminating an employee in Panama involves strict adherence to labor laws, which differentiate between terminations with and without just cause. For dismissals without just cause, notice periods vary by employment length: none for under 3 months, 1 week for 3-6 months, 2 weeks for 6 months-2 years, and 1 month for over 2 years. Terminations with just cause require no notice but demand thorough investigation and documentation of misconduct such as dishonesty, violence, or repeated unexcused absences.

Severance pay is calculated based on the employee’s salary and tenure, including indemnity for length of service, accrued vacation pay, and proportional 13th-month bonus. For example, an employee with 3 years of service earning $500 weekly would be entitled to approximately $24,000 in severance. Employers must provide written notice, conduct investigations when applicable, and settle all dues on the termination date to ensure compliance.

Employees are protected against wrongful dismissal; claims can lead to reinstatement or compensation. Employers should meticulously document performance issues, follow procedural steps, and seek legal advice to mitigate risks.

Panama offers a favorable environment for freelancing and independent contracting, allowing businesses to access specialized skills without the overhead of traditional employment. Key to successful engagements is understanding the legal, contractual, and tax frameworks. Correct classification of workers is crucial, as misclassification can lead to penalties. Employees are governed by labor law, while contractors fall under civil or commercial law. The distinction is based on factors like control, integration, and financial risk.

Contracts in Panama should clearly define the relationship, scope of work, compensation, and include clauses on confidentiality and intellectual property (IP). IP rights typically remain with the creator unless assigned by contract. Tax obligations for contractors include income tax and potentially ITBMS, with progressive rates applied to income. Contractors must also manage their own insurance needs.

Independent contractors are prevalent in sectors like technology, creative services, consulting, and professional services, offering businesses flexibility and access to niche expertise. Proper contract structures and adherence to local regulations are essential for mitigating risks and ensuring compliance.

Panama provides various visa options for foreign workers, each with specific eligibility criteria and application procedures. Employers play a key role in sponsoring foreign employees, ensuring compliance with immigration laws. Common visa types include short-term (up to 90 days, extendable), professional, investor, pensioner/retiree, and special economic zone visas, tailored to different employment scenarios.

The work permit process requires submitting a formal labor contract, company registration proof, employee credentials, police background check, medical certificate, and valid passport. The employer initiates the application with the Ministry of Labor (MITRADEL), which reviews and approves the permit, typically taking several weeks to months. Fees vary based on permit type.

Foreign nationals working in Panama may qualify for permanent residency after several years of legal residence, with requirements including continuous stay, clean criminal record, and financial proof. The process involves submitting an application to the National Immigration Service.