Doing Business in Puerto Rico Blog: Business Coaching, News & Developments

VERBAL CONTRACT COSTS $800,000 TO EMPLOYER

In Jose Muñiz v Steifel Laboratories, No. 06-1944, The U.S. Court of Appeals for the First Circuit Court affirmed a judgment of $600,000 against Stiefel Laboratories, Inc. in breach of a 2001 binding verbal contract that guaranteed the plaintiff  “continued employment if Stiefel were to decide in the future to close its Puerto Rico subsidiary, which plaintiff headed. Stiefel terminated plaintiff’s employment, along with that of all of its other Puerto Rico employees, when it shut down its Puerto Rico operations on January 31, 2003.” Stiefel did not offer plaintiff another position. Besides the $600,000 back pay, front pay, and benefits, the jury awarded $100,000 each to plaintiff for pain and suffering.  The case was brought under diversity jurisdiction.

In Puerto Rico, a verbal contract is enforceable as long as it includes the essential conditions required for its validity - the consent of the contracting parties, a definite object which may be the subject of the contract, and the cause for the obligation. 

Still pending is the $200,000 award for pain and suffering since under Puerto Rico law, they are not ordinarily recoverable per se for a breach of contract claim (particularly to a non-party) except in some case where for example “the defendant in breach of contract has on the same facts also committed a tort and [foresaw] and necessarily caused pain and suffering damages. “ The Circuit court affirmed the case except for the $200,000 for pain and suffering currently pending certification to the Puerto Rico Supreme Court.

WHEN BUYING A BUSINESS IN PUERTO RICO PAY ATTENTION TO SENIORITY ISSUES

From a labor/employment standpoint, anyone considering acquiring a business in Puerto Rico needs to take into account the "Transfer of Going business" clause under Wrongful Discharge Act No. 80 of May 30, 1976.

When a business changes ownership, the employees that remain with the new owners will be credited with the seniority they accrued under the previous owner (plus the seniority they accrue under you). This is important because under Act 80, a business must indemnify an employee who is discharged without cause and; the actual indemnity will vary depending on the years of employment. 

Under the Act every employee contracted without a fixed term, who is discharged without good cause shall be entitled to receive:

(a) The salary corresponding to two (2) months, as indemnity, if he/she is discharged within the first five (5) years of service; the salary corresponding to three (3) months if he/she is discharged after five (5) years and up to fifteen (15) years of service; the salary corresponding to six (6) months if he/she is discharged after fifteen (15) years of service.

(b) An additional progressive compensation equal to one (1) week for each year of service if he/she is discharged within the first five (5) years of employment; two(2) weeks  for each year of service between five (5) and fifteen (15) years of service and; three (3) weeks for each year of service after completing fifteen (15) years of service.

The purchaser is not obligated to keep the employees. Under the law, if the acquirer decides not to commence operations with the services of all or any of the employees and hence does not become their employer, the former employer shall be liable for the compensation provided under the Act;  “and the purchaser shall retain the corresponding amount from the selling price stipulated with respect to the business.” In case the purchaser opts to continue with the workers and later discharges them without good cause it  shall be liable for severance payment under the  Act.

While the final decision on the fate of the employees is often a point of negotiation between the parties, knowing the actual liability will help the purchaser decides the best course of action.

FOLLOW A THREE STEP AUDIT BEFORE FIRING AN EMPLOYEE

Firing an employee in Puerto Rico for misconduct has legal consequences.  It may be deemed wrongful, discriminatory, retaliatory or in violation of some other law. You need to contend with both local and federal labor & employment issues. Fines can be steep and in some cases may require job reinstatement. Before you discharge an individual, consider and resolve the following issues.  This self-audit may avoid  future wrongful discharge claims.

Why are you are terminating the worker? If its for disciplinary reasons or violation of some policy you must follow a three step process: (1) You need to prove that the act was committed by the worker; (2) the discipline imposed must be proportionate; (3) regardless of (1) and (2), make sure  the worker is not protected by a specific law such as age, sex, disability, workers compensation, pregnancy, color, political views, religion, retaliation and if he/she is,  make sure (that you can prove) that the condition protected plays no role in the decision to terminate.

Here are some key questions you need to ask yourself:

• Is the applicable policy or rule written?
• Have  you provided  the worker with a copy of the rules or  policy?
• Do you have evidence of having provided a copy (such as  a signed acknowledgment form)?
• Is the violation contained within the rule or policy? What is the penality if any?
• Do you have a specific disciplinary process? Will you follow it?
• How serious is the  breach of conduct? Is it a first offense? A discharge for a first offense is unjustified unless it's of a grave nature and puts the business at risk.
• Have you calculated the amount of the indemnity under Puerto Rico's Wrongful Discharge Act No. 80 ? It is a wise idea to know what is your legal exposure under the law in case you are not able to prevail in a wrongful discharge claim.

Is the Worker protected by a specific law? In Puerto Rico, employers can discharge workers at will but must pay an indemnity if the discharge is without cause. However the employer must be careful not to breach other  employment laws that prohibit employment discharges for a specified reason. Example of these laws include firing a person for his/her age, color, gender, national origin, religious beliefs,  disability, retaliation and enjoying protected leaves.  While a  discharge for cause may be an adequate defense in many cases, a initial analysis of the applicability  of these laws is a wise precautionary measure. Typical questions you might ask include:

• Is the worker of a foreign nationality, black, impaired, professes a particular religion?
• Is the worker currently under a particular leave?
• Is the worker older than most? Older than 40?
• Is the worker the only woman? Has she been harassed?
• Is the worker disabled or perceived to be disabled?
• Is the worker a victim or perceived to be a victim of domestic violence?
• Is the worker currently under a protected leave such as pregnancy, Family-Medical, jury, military or workers compensation?
• Is there any protected condition that the worker may invoke to sidetrack the case from a simple discharge to a major discrimination claim?

Summary Procedure Trips Employers

Even though, the legal process was enacted more than forty years ago, employers regularly get hammered with its provisions. I'm refering to the  summary process of labor claims, Act No. 2 of October 17, 1961. This law sidesteps ordinary civil procedure for a streamline process which contains what I call a "sudden death" provision. If an employer fails to answer a complaint filed under Act No. 2 within 10 days of being summoned, the court must enter judgment in favor of the employee.

A recent case illustrates my point.  In Teresita Cabrera v. Zen Spa, 2006 TSPR 150, a plaintiff sued its former employer  for wrongful discharge, accrued sick leave and vacation, Christmas bonus, Cobra and other violations. When the employer failed to answer the complaint within the allowed 10 days, plaintiff moved for summary judgment. The court then entered judgment against the spa.

It did not matter whether the claims were valid; or that the answer to the complaint  was filed just four days after the prescribed period; or that there were a series of complex claims joined in one process that required considerable time to respond; or that there was some confusion as to the wording of the process (giving reason to think it was an ordinary case).  The only thing that mattered was that the employer answered the complaint after the tenth day. Period.

I personally think that this provision does more harm than good and lends itself to abuse.  The ten-day limit was enacted as a counter measure to ruthless delay tactics by employers. Unfortunately, once employers pass the initial time hurdle, the case is not much  different from the regular civil process.

Of course, there are exceptions and not all employment claims can be included in the process but the law exists and employers need to be aware of it.  Rather than explaining all the ins and outs, I just want the reader to realize the severity of the processs and talk -immediately- to an employment lawyer upon receiving a summons and/or complaint of a former employee.

The Nuts & Bolts of Discharging a Worker For Cause

A company employs a worker whom we will call Bill.  Upon investigation, management suspects that Bill misappropriated twenty dollars.  They lack direct evidence.  Rather, they rely on circumstantial  data that point at Bill.  With over twenty  years of tenure, can  Bill be fired for cause? Most likely not unless there is clear  evidence that proves Bill's wrongful act.

Firing a worker for cause is a relative issue and involves a case by case analysis. One thing is clear, in Puerto Rico, the law discourages firing workers for a first offense. Act No. 80 is the law that regulates dismissals in private workplaces and fines those who wrongfully discharge workers.

To handle a disciplinary discharge from a legal standpoint, an employer must follow a  two step process.  First, it must show in no ambiguous terms that the worker did what the employer contend he/she did. Then, it must  demonstrate that the discharge was the appropriate response.  If the discipline is too severe, then it will be deemed to be without cause and the employer will be liable under the law. As with most labor laws in Puerto Rico, the employer bears the burden of proof.

Without proper documents, prior memoranda and witnesses, an employer will fail in the initial step- show that the conduct that motivated the discharge actually happened. This means that before taking any disciplinary action, an employer should examine the employee’s file. The more documented the file is (particularly with repeated violations) the easier it will be to take action.

As a general rule a discharge will be for cause when:

-There is a pattern of improper or disorderly conduct;

-The employee exhibits an attitude of not doing his/her work  efficiently and diligently;

-There are repeated violations of reasonable rules and regulations (provided that the employer furnished the employee with a written copy);

-The discharge is not made by mere whim or fancy; it must be related to the normal operation of the business;

-Serious offenses,  when they endanger the operation of the enterprise and security of coworkers.  Example-theft, physical aggression, dealing drugs,  acts involving illegal firearms.

Here are additional guidelines:

- Loss of employee's confidence or making a fraudulent statement in company forms  does not necessarily justify a discharge when it's a first offense;

- An otherwise discharge for cause may be overturned if the employer fails to abide by its own rules. For example if under the employee's manual, an exit interview is required before a discharge is final, the disciplinary action may be deemed wrongful if the interview was not conducted.

-For it to be effective, discipline must be consistent, progressive and uniformly applied;

-Just cause will largely depend on the effect the worker's conduct has on the operation of the employer's business.

 

 

OMA: The Department of Labor's New Tool to Short Circuit Protracted Wrongful Discharge Claims

The Department of Labor has turned into an adjudicative body under the new legislation that gives them the authority to investigate and bring to an administrative trial, all wrongful discharge claims. Previously, only a court of law could adjudicate wrongful discharge claims.  The Department could only send  claim letters demanding payment on behalf of the discharged worker.  If that failed, the had to file a wrongful discharge claim in court  and go through a complete  civil process.   That is no longer the case.  A worker that files a claim with the Department will be able to speed up the  procedure considerably.  After the initial investigation,  the Department will attempt to  engage in mediation with the employer and if that fails, it will follow with  a short administrative hearing that will determine whether the employer is liable under the wrongful discharger act.  With the increase in penalties and a speedy claims process, employers have less room to maneuver when confronted with a claim for wrongful discharge.

Increased Liability under PR's Wrongful Discharge Law

Employers in Puerto Rico are now subject to stiffer  penalties when discharging workers without cause.  Act No. 128 of October 7, 2005, raised the statutory indemnity assessed to an  an employer when it  is deemed to have wrongfully discharge a worker.

Wrongfully discharge workers will be entitled to receive from their former employer two months pay if the discharge occurs within the first five years of employment; three months if it occurs between the fifth and fifteenth year and; six months after fifteen years of service.

In addition,the worker will  receive an additional week of pay for every year of employment -if the discharge occurs within the first five years of employment; two week's pay for every year of employment after the fifth and before the fifteenth year and; three weeks pay per year after fifteen years of service.

The salary used to calculate the indemnity will be the highest salary during the last three years of employment

Wrongful Discharge Act: What is Just Cause?

Puerto Rico's Act No. 80  provides that  employers who terminate workers for 'just cause' need not pay any severance. So, what does 'just cause' mean?

Just Cause is a relative concept which depends on the particular circumstances of a case.  In general terms, however a discharge must relate to the proper and normal operation of the business; conduct akin to: (a) a pattern of improper or disorderly conduct; (b) an attitude of not performing work adequately; (c)  repeated violations of company policies or rules  of conduct.

Single offenses will not generally suffice unless  the isolated act which gives rise to the discharge is  of a grave  nature.  The act must reveal an undesirable trait or attitude of such a  magnitude that  immediate termination is the proper and logical response.  Thus the laws does not favor discharge for a first violation, unless the conduct is of such nature that it endangers the operation of the business and the security of other people.  Examples of acts that may fall under this category are: theft, gross negligence, sabotage, assault and other acts of violence.

Wrongful Discharge Act: Primer

In Puerto Rico, workers not hired for a fixed period are protected by Act No. 80; a hybrid version of the doctrine of employment at will prevailing in the U.S.

As long as an employer does not incur in a specific violation of an employment law- such as discrimination - it can terminate a worker's employment and will only have to pay the statutory severance and accrued benefits. The amount of severance is  based on the employee's  years of service.  To calculate the indemity see my post titled -Increase Liability under Wrongful Discharge Act

Employers face a drastically more serious liability if discharge is done for discriminatory reasons.  While Act No. 80,  merely penalizes a wrongful discharge, Puerto Rico discriminatory statutes (and their federal counterparts) prohibit the practice and provides for the imposition of double damages against the employer. Assessment of damages may include reinstatement, double back and front pay and pain and anguish (double).

§ 185b. Indemnity for discharge without just cause—Good cause for the discharge of an employee from an establishment shall be understood to be:

a) That the worker indulges in a pattern of improper or disorderly conduct. b)The attitude of the employee of not performing his work in an efficient manner, or of doing it belatedly and negligently or in violation of the standards of quality of the product produced or handled by the establishment.

(c) The employee’s repeated violations of the reasonable rules and regulations established for the operation of the establishment, provided a written copy thereof has been opportunely furnished to the employee.

(d) Full, temporary or partial closing, of the operations of the establish­ment.

(e) Technological or reorganization changes as well as changes of style design or the nature of the product made or handled by the establishment and changes in the services rendered to the public.

(f) Reductions in employment made necessary by a reduction in the anticipated or prevailing volume of production, sales or profits at the time of the discharge.

A discharge made by the mere whim of the employer or without cause relative to the proper and normal operation of the establishment shall not be considered as a discharge for good cause. Neither shall it be considered just cause for discharging an employee, his/her collaboration or expres­sions made by him/her pertaining to his/her employer’s business before any administrative, judicial or legislative forum in Puerto Rico when said expressions are not of a defamatory character nor constitute disclosure of privileged information according to law In this last case, in addition to any other corresponding adjudication, the employee thus discharged shall have the right to have an order issued for immediate restitution in his/her employment and to be compensated for an amount equal to the salaries and benefits not received from the (late of discharge until a court orders reinstatement in his/hers employment.