The repercussions of the District Court’s decision voiding Act 41 known as “Reforma Laboral”

Mar 2023
José Martínez-Rivera

By José Martínez-Rivera and Alejandra M. Arnaldy Figueroa

Act 4-2017 (“Act 4”), known as “Ley de Transformación y Flexibilidad Laboral”, came into effect on January 26, 2017. Years later, on June 20, 2022, Act 41 was approved. Act 41 reverted some of the changes made through Act 4 to our labor laws and, in part, reinstated the labor regime for private-sector employees as it was before the approval of Act 4 (Act 41 restored the number of days for accrual of sick and vacation leave; reinstated a diminished probation period; reestablished Christmas bonus eligibility; reinstated the presumption that any dismissal of an employee is not justified; and extended the statute of limitation for employees to commence an action against an employer).

Nonetheless, Act 4 was approved without the consent of the Financial Oversight and Management Board of Puerto Rico, which on September 1, 2022, initiated an adversary proceeding seeking an order to nullify Act 41 for being inconsistent with Puerto Rico’s certified fiscal plan. On March 3, 2023, the United States District Court for the District of Puerto Rico issued its much-anticipated decision. Basically, the Court granted the Oversight Board’s Count II request and nullified ab initio Act 41.[1] The Court concluded:

The only way to prevent the enforcement and application of the law, which regulates the private sector and provides for private civil enforcement remedies, is to nullify it ab initio. Accordingly, the Court hereby declares that Act 41, and any actions that have been taken to implement it, are null and void ab initio. The Court further permanently prohibits and enjoins the Governor or other persons who are in active concert or participation with the Governor from taking any acts to help private parties implement or enforce Act 41. Financial Oversight v. Puerto Rico, Adv. Proc. No. 22-00063-LTS, pag. 37.

This judgment carries various effects. However, what employers for private-sector employees in Puerto Rico need to know about this decision?

  1. Since Act 41 was nullified ab initio, it should be seen as having no legal effect whatsoever. In other words, Act 41 never had any legal consequences, and the governing regime of employment law is the one approved on January 26, 2017, via Act 4’s considerable amendments to previous labor laws. Any action taken from that day forward is undertaken under Act 4’s legal authority.
  2. The presumption that every dismissal of an employee is not justified is eliminated for dismissals carried out from January 26, 2017 onwards.
  3. The shortened statute of limitations (one year) for employees to commence an action against an employer is maintained under Act 4’s amendments to preceding labor laws.
  4. The accrual of sick and vacation leave for employees hired after January 26, 2017 –if there is no written agreement to the contrary– is the one legislated under Act 4. This is the same premise for Christmas bonus eligibility.
  5. The probation period for non-exempt employees is 9 months and for exempt employees is 12 months, as it was under Act 4.
  6. The statutory severance formula reverts to the cap of 9 months and the severance formula is reinstated to 3 months plus 2 years per year of service for all employees hired on or after January 26, 2017, regardless of years of service.
  7. If an employee’s benefits were under Act 4 and the employer, expressly acting in accordance with Act 41, changed the benefits to comply with Act 41, then, an employer may revert the employee’s minimal benefits to its original form, in accordance with Act 4. This, only if: (1) the employee was hired after January 26, 2017 and before March 3, 2023; (2) employee’s benefits were under Act 4; (3) employer expressly increased the employee’s benefits in order to comply with Act 41; and (4) employer promptly notified the employee about the change of benefits to their original form. Note: this suggested approach may vary and is particularly risky. Its final interpretation and way of implementation may lie in the Supreme Court of Puerto Rico. Before that, a case-to-case approach is advised. Additional note: the Court’s decision is not final and could be reverted in appeal.

On the other hand, on March 10, 2023, the Secretary of Labor issued an Opinion pertaining the District Court’s decision. The Opinion noted that the effect of the Court’s null decree is not so easy to grasp and that controversies should be reviewed on a case-by-case basis. The Secretary’s suggested approach is the following: “we recommend that employers continue recognizing, to the extent that its financial and operational situation allows, benefits greater than those in force after the decision of the Federal Court, as part of the employer’s authority to grant benefits greater than the minimum established by labor laws.” The Opinion advices this approach but points out that the employer can restate the benefits as they were under Act 4, as long as employees are guided and the change takes effect prospectively. Regarding this last point, the Secretary’s Opinion recommends that prior to any change that will affect the benefits of a newly hired employee, employers take into consideration the language used in the recruitment contracts. In cases were employers modified employment contracts, manuals, and policies to establish the benefits provided by Act 41, the Opinion recommends a prospective restatement of benefits as they were under Act 4. However, to avoid any claim regarding said contracts, it is recommended that prior to any change, employers amend said employment contracts, manuals, and policies.

Regarding probatory period, the Opinion outlines two scenarios: (1) the one in which the employer expressly established a probatory period of three months and (2) the one in which the employer established a probatory period as provided by law. For the first scenario, the Secretary’s Opinion indicates that the employer may be obliged to maintain the regular status of employees that exceed the probatory period of three months. For the second, the Opinion states that employers may use the probatory period of nine or twelve months to assess permanent status. The Secretary’s Opinion cautions against this last scenario on the grounds that the District Court’s decision is not final.

Concerning benefits provided under Act 41 to non-exempt employees, the Opinion indicates that no employer can deduct those from salary or recover them through other means: “an employer may not withhold the salary of its non-exempt employees to recover what was paid in excess by taking into consideration the nullity ab initio of the Act 41, either for vacation days, the annual bonus or any other benefit.” Furthermore, exempt employees “can voluntarily agree with your employer any type of salary deduction, as long as when the agreement does not transgress another law, morality, or public order.”

Respecting bonification, the Opinion points out that Act 148 allows an employer to credit the annual bonus with any other bonification paid to the employee during the year if the employee is notified on time and in writing of the intent to credit said other bonus to the payment of the bonus required by law. Nonetheless, the Opinion advices against this approach.

Finally, the opinion notes that the Court’s Order nullifying Act 41 is not yet final, since the Puerto Rico government can still appeal to the U.S. Court of Appeals for the First Circuit to request the reinstatement of Act 41.

[1] Through Count I, the Oversight Board requested an order pursuant to sections 104 (k) and 108 (a) (2) of PROMESA determining that Act 41 is nullified because the Oversight Board has determined that it impairs and/or defeats the purposes of PROMESA. On the other hand, via Count II (this is the one that the Court granted) the Oversight Bard requested an order pursuant to section 204(a) of PROMESA determining that Act 41 is nullified because the Governor (i) has not submitted a formal estimate and certification as required by section 204 (a) (2) of PROMESA and (ii) has failed to comply with direction given by the Oversight Board under section 204 (a)(4)(B) of PROMESA. It is important to consider that the Court’s decision rests solely on Count II.