Countries › Panama › Guide › 16. What is normal abroad but not here › No dismissal at will after two years of service

No dismissal at will after two years of service

Last verified: 2026-10-29 · Status: Stable

Abroad, many employers can end an open ended contract with notice or a modest payment. In Panama an employer cannot end an indefinite contract without a just cause listed in the Labor Code, except mainly for workers with less than two years of continuous service and certain small businesses, and even then indemnity plus 30 days' notice is owed. Every indefinite contract also earns a seniority premium of one week per year whatever the cause of termination, funded quarterly through a cesantía fund, and economic dismissals need prior proof before the labor authorities.

Panama's currency, the balboa (B/.), is at par with the US dollar, which circulates freely; the Superintendencia de Bancos states that the balboa's value is on a par with the US dollar and that the dollar circulates without restrictions in commercial and financial transactions (checked 29 October 2026). USD figures therefore equal the balboa figures.

Key facts

Dismissal at will of indefinite contracts	Not allowed after two years of continuous service, save listed small business and other exceptions; indemnity and 30 days notice still owed below two years textCódigo de Trabajo arts. 211 and 212, as of 2026-10-29 · in force
Unjustified dismissal indemnity, first ten years	3.4 weeks per yearCódigo de Trabajo art. 225 C (Ley 44 de 1995), as of 2026-10-29 · in force
Seniority premium on any termination	1 weeks per yearCódigo de Trabajo art. 224 (Ley 44 de 1995), as of 2026-10-29 · in force
Deemed authorisation for economic dismissal if no decision	60 daysCódigo de Trabajo art. 215, as of 2026-10-29 · in force

The rule

1. The employer may not end an indefinite employment relationship without a just cause provided by law and following its formalities.
Cost to do it: Unjustified dismissal triggers the art. 225 indemnity or reinstatement with back pay.
Example: A manager with six years of service cannot be let go simply because the new regional head wants a different profile. / Applies to a US dollar salary in the same way, since the balboa is at par.Código de Trabajo (Decreto de Gabinete 252 de 1971), art. 211, 1971-12-30 official text · verified 2026-10-29

2. The just cause rule does not apply to: workers with less than two years of continuous service; domestic workers; permanent staff of small farms (10 or fewer workers), agro industries (20 or fewer) and manufacturers (15 or fewer); crew of ships in international service; apprentices; and retail establishments and businesses with five or fewer workers (except financial, insurance and real estate businesses). In these cases the employer must still pay the art. 225 indemnity and give 30 days' notice or pay in lieu, counted from the next pay period.
Cost to do it: Art. 225 indemnity plus 30 days' notice or its value.
Example: A worker on B/.1,500 a month dismissed without cause after 18 months: indemnity 5.1 weeks (3.4 weeks a year) is B/.1,765.38, plus B/.1,500 in lieu of notice, plus the seniority premium of 1.5 weeks, B/.519.23, assuming a weekly salary of B/.346.15 (B/.1,500 x 12 / 52). / Total about US$3,784.61.Código de Trabajo art. 212 as replaced by Ley 44 de 1995 art. 31, art. 212, 1995-08-14 official text · verified 2026-10-29

3. Just causes are disciplinary, non imputable (such as the worker's original unfitness or manifest inefficiency, invocable only within six months of starting, or a final prison sentence) or economic. Economic causes are the employer's insolvency or bankruptcy, closure or definitive reduction of work because the operation is clearly unprofitable or the extracted resource is exhausted, and the definitive suspension or proven reduction of activities due to serious economic crisis, partial unprofitability, technological change, loss of a concession, cancelled orders or falling sales. In economic dismissals the employer starts with the least senior workers in each category and then prefers to retain Panamanians, union members and the most efficient workers.
Cost to do it: No fee; economic causes still carry the art. 225 indemnity.
Example: A company closing a loss making plant must apply the seniority order and then retain Panamanian staff over foreign staff. / Headcount reductions planned in a global restructuring must follow this order in Panama.Código de Trabajo art. 213 as amended by Ley 44 de 1995 art. 32, art. 213, sections A to C, 1995-08-14 official text · verified 2026-10-29

4. The employer must notify the worker in advance and in writing of the date and the specific cause or causes of dismissal and cannot later rely on different causes. Economic dismissals must first be proven before the administrative labor authorities; otherwise they are unjustified by law. If the authority has not decided within 60 calendar days, the employer may dismiss, the dismissal is fully justified, and the art. 225 indemnity is payable.
Cost to do it: Indemnity under art. 225 even when the economic cause is accepted.
Example: A dismissal letter that cites poor performance cannot later be defended in court as an economic dismissal. / Allow at least 60 days for the administrative route in any reduction plan.Código de Trabajo art. 214; art. 215 as added by Ley 8 de 30 de abril de 1981 art. 2, arts. 214 and 215, 1981-04-30 official text · verified 2026-10-29

5. On termination of every indefinite contract, whatever the cause, the worker receives a seniority premium of one week of salary for each year worked from the start of the relationship, with a proportional part for incomplete years.
Cost to do it: One week of salary per year of service.
Example: Ten years on B/.1,500 a month: 10 weeks, B/.3,461.54 at a weekly salary of B/.346.15. / About US$3,461.54, owed even on resignation or justified dismissal.Código de Trabajo art. 224 as replaced by Ley 44 de 1995 art. 35, art. 224, 1995-08-14 official text · verified 2026-10-29

6. For unjustified dismissal, or dismissal without the required prior authorisation, of a worker on an indefinite contract who opts for indemnity, relationships that began after Ley 44 de 1995 took effect are indemnified at 3.4 weeks of salary per year for the first ten years and one week per year after that, proportionally for incomplete years; the same indemnity applies to dismissals for economic causes. Payment in kind of the premium and indemnity is prohibited.
Cost to do it: 3.4 weeks a year for the first ten years, then one week a year.
Example: Five years on B/.1,500 a month: 17 weeks, B/.5,884.62, plus a seniority premium of 5 weeks, B/.1,730.77, total B/.7,615.38 (weekly salary B/.346.15). / Total about US$7,615.38.Código de Trabajo art. 225 as replaced by Ley 44 de 1995 art. 36, art. 225, section C, 1995-08-14 official text · verified 2026-10-29

7. A dismissed worker may ask the Juntas de Conciliación y Decisión, or the labor courts where there are none, for reinstatement or the art. 225 indemnity. If the employer does not prove the just cause or the prior authorisation, the worker also receives back pay of up to three months from dismissal for workers hired after Ley 44 de 1995. Where reinstatement is ordered, the employer may instead pay the indemnity plus a 25 percent surcharge for those workers if it is not up to date with the cesantía fund, plus back pay.
Cost to do it: Up to three months of back pay; 25 percent surcharge on the indemnity if the cesantía fund is in arrears.
Example: An employer that loses a case on a B/.5,884.62 indemnity and is behind on the fund pays B/.1,471.15 extra plus up to B/.4,500 back pay. / About US$5,971.15 on top of the indemnity.Código de Trabajo arts. 218 and 219 as replaced by Ley 44 de 1995 arts. 33 and 34, arts. 218 and 219, 1995-08-14 official text · verified 2026-10-29

8. Employers must build a cesantía fund for indefinite contracts to pay the seniority premium and the indemnity for unjustified dismissal or justified resignation. Each quarter the employer contributes the seniority premium share and 5 percent of the monthly share of the potential indemnity, deposited in trusts with authorised private fund managers that are not subsidiaries or affiliates of the employer.
Cost to do it: Quarterly contributions plus trust administration costs.
Example: On B/.1,500 a month, the seniority share is about B/.28.85 a month (one week a year). / About US$86.54 a quarter for the premium share alone, plus 5 percent of the monthly indemnity share.Código de Trabajo arts. 229-A to 229-C as added by Ley 44 de 1995 art. 37, arts. 229-A, 229-B and 229-C, 1995-08-14 official text · verified 2026-10-29

Scenario	Seniority premium	Indemnity	Notice	Total
Resignation after 5 years	B/.1,730.77	None	Worker gives 15 days	B/.1,730.77
Justified disciplinary dismissal after 5 years	B/.1,730.77	None	Not applicable	B/.1,730.77
Unjustified dismissal after 5 years	B/.1,730.77	B/.5,884.62	Not applicable	B/.7,615.38
Dismissal without cause at 18 months (art. 212)	B/.519.23	B/.1,765.38	B/.1,500.00	B/.3,784.61

Cost of ending an indefinite contract, worker hired after 1995 on B/.1,500 a month (weekly salary B/.346.15 = 1,500 x 12 / 52); B/. equals US$.

Worked example

A US company's Panamanian subsidiary wants to replace a sales manager hired in 2020 on B/.1,500 a month. Without a just cause, the manager can claim reinstatement or the indemnity: after six years, 20.4 weeks (B/.7,061.54) plus a six week seniority premium (B/.2,076.92), and up to three months of back pay if the employer loses.
If the same manager had 20 months of service, the employer could end the contract without cause under art. 212 by paying the indemnity and the seniority premium pro rata and giving 30 days' notice.

Step by step

Diary each worker's two year anniversary; decisions on fit should be made before it.
Write every dismissal letter with the date and all specific causes; they cannot be added later.
For economic reductions, file with the labor authorities first and allow 60 calendar days.
Keep the cesantía fund contributions current to avoid the 25 percent surcharge.
Use the probation clause in the written contract (up to three months where special skill is needed) for early exits.

Common traps

The two year exception still costs the indemnity plus notice; it is not free dismissal.
Seniority premium is owed on resignation too, so it is a liability on every indefinite contract.
The salary base for indemnities is the more favourable average of the last six months or the last thirty days, including overtime (art. 149).

Sources

← At least 90 percent of ordinary staff must be PanamanianA mandatory thirteenth month paid in three installments →

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