In Panama, written employment contracts are a legal requirement for all employees. These contracts must be drafted in Spanish and registered with the Ministry of Labor. There are three main types of employment agreements recognized under Panamanian labor law.

Indefinite-Term Contracts (Contratos por Tiempo Indefinido)

This is the most common type of employment contract in Panama. It offers no specific end date for employment and is presumed to be the default type unless otherwise specified. Indefinite-term contracts grant employees full benefits as outlined by Panamanian labor laws.

Fixed-Term Contracts (Contratos a Término Fijo)

Fixed-term contracts are suitable for temporary positions or projects with a predetermined timeframe. The maximum duration for a fixed-term contract is one year, with an exception of up to three years for specialized technical skills positions. Extensions beyond the initial term are allowed, but if the employment continues past the extended period, the contract automatically converts into an indefinite-term contract.

Probationary Contracts (Contratos de Prueba)

Probationary periods are common in Panama and are typically included within a fixed-term or indefinite-term contract. The probationary period cannot exceed 90 days. During this time, either the employer or the employee can terminate the contract without needing a just cause.

In Panama, while there's no mandated format for employment contracts, certain clauses ensure clarity and protect both the employer and employee.

Parties to the Agreement

The employer and employee should be clearly identified, including their full names and identification details.

Job Description and Responsibilities

The employee's job title, duties, and responsibilities should be clearly defined.

Remuneration and Benefits

The employee's salary or wages should be detailed, including the payment method and frequency. Any bonuses, commissions, or fringe benefits offered should be specified.

Work Schedule and Overtime

The regular working hours, including breaks and rest periods, should be outlined. Procedures and compensation for overtime work, if applicable, should be established.

Leave Policies

Entitlements to paid leave, such as vacation time, sick leave, and maternity/paternity leave, as mandated by Panamanian labor law, should be specified.

Termination Clauses

The grounds for termination by either party, following the guidelines set out in the Panamanian Labor Code, should be outlined. Notice periods required for termination should be specified. Severance pay calculations, if applicable, should be addressed.

Dispute Resolution

The process for resolving any disagreements arising from the employment contract should be established.

This is not an exhaustive list, and additional clauses can be included depending on the specific needs of the employment relationship.

In Panama, the Labor Code recognizes probationary periods as a method for employers to evaluate an employee's suitability for a role before committing to a long-term contract. However, the use of probationary periods is subject to specific regulations.

Eligibility for Probationary Periods

Probationary periods can only be applied to employment contracts that require specific skills or abilities. There is no legal provision for probationary periods for entry-level positions or those not demanding specialized skills.

Maximum Duration

The maximum allowable probationary period in Panama is three months (90 days). Agreements that exceed this duration are considered null and void.

Probationary Period Clauses

While not mandatory, it is advisable to include a probationary period clause within the main employment contract. This clause should clearly state:

• The purpose of the probationary period (e.g., to assess skills and suitability for the role).
• The duration of the probationary period (not exceeding three months).
• The evaluation criteria used to assess the employee's performance during the probation period.

Termination During Probation

Both the employer and the employee have the right to terminate the employment contract during the probationary period without needing a just cause. However, written notification is recommended to avoid any misunderstandings.

Probation Period and Confirmation of Employment

Upon successful completion of the probationary period, the employee is typically considered confirmed in the position, and the indefinite-term or fixed-term contract terms come into full effect.

Employers should ensure fair and objective assessments during the probationary period. Employees who feel they were unfairly terminated during probation may have recourse through the Panamanian labor court system.

Confidentiality and non-competition are two key areas that Panamanian employment agreements can address to protect an employer's sensitive information and business interests. However, the legal enforceability of these clauses differs.

Confidentiality Clauses

Employees in Panama are implicitly obligated by law to maintain the confidentiality of their employer's trade secrets and confidential information acquired during their employment. Article 126 of the Panamanian Labor Code prohibits employees from disclosing "technical, commercial or manufacturing secrets or those related to the organization or administration of the enterprise" to third parties.

To further strengthen this protection, employers can include a well-drafted confidentiality clause within the employment agreement. This clause should clearly define the types of information considered confidential, the employee's obligations regarding maintaining confidentiality during and after employment, and potential consequences of a breach of confidentiality, such as disciplinary action or legal recourse.

Non-Compete Clauses

In contrast to confidentiality clauses, Panamanian law generally restricts the enforceability of non-compete clauses in employment contracts. The Panamanian Constitution upholds the right to work, making it difficult to impose limitations on an employee's ability to seek employment with a competitor after leaving a position.

Court rulings have established that non-compete clauses may be considered invalid unless they meet specific criteria, such as reasonable geographic and time limitations, protection of legitimate business interests, and potentially offering some form of compensation to the employee in exchange for agreeing to a non-compete clause.

Due to the challenges in enforcing non-compete clauses, employers in Panama may consider alternative strategies to protect their interests. These could include non-solicitation clauses, which restrict employees from soliciting the employer's clients or employees for a certain period after termination, or confidentiality agreements with stricter terms concerning trade secrets or highly sensitive information.