Panama is a small but very well-known country in Central America. It borders Costa Rica and Colombia, but more importantly, it is home to the Panama Canal, the critical shipping conduit between the Caribbean Sea and the Pacific Ocean. As such, this country is significant in terms of logistics and transportation for half the world. Panama produces important export items, including copper ore, bananas, coffee, shrimp, cement, and aircraft parts. However, its economy is even more focused on services.

Around 15% of the country’s labor force of 2.205 million workers are employed in the agricultural sector, while 17% are employed in the industrial sector. The other 68% are employed in services that include logistics, transportation, maritime, tourism, healthcare, insurance, and more. Panama’s economy is growing steadily, and its GDP has reached $91.68 billion in 2025. With a population of just 4.57 million, this means a relatively high per capita GDP of over $20,000 per year.

If you’re interested in hiring workers in this dynamic country, working with a Panama EOR might be the right choice for your business. This guide will explore how this relationship works and the benefits it can produce for your organization and employees.

How to Hire Employees in Panama

Panama has over two million workers thanks to an increase in the country’s labor participation rate, which has increased to 65% after a pandemic-period decline. Women’s participation is very high in the country, which helps bolster this number. Unemployment in Panama is still high at 8%, but is still declining as people return to work after the pandemic. Salaries in Panama are still relatively low, with a median salary of around $750 per month and an average of roughly $1200 per month. Under these conditions, employers can attract top talent simply by providing compensation that is slightly higher than the market average.

This doesn’t mean, however, that it’s easy to connect, hire, and manage local workers. For foreign investors with little experience in the country, the language, culture, and labor market can all be very different and hard to adapt to. Many use professional recruiters to help them find the talent they require, then choose one of the following options to hire local employees:

Entity Incorporation

Setting up a business entity in Panama can be a good idea, and even a necessity, if you’ll be working directly in the local market for a significant length of time. However, it’s not the best option if you only want to work with Panamanians temporarily. 

Foreign investors normally choose to open limited liability companies (LLCs) or public limited companies (PLCs). They may also open branch offices of companies registered in other jurisdictions. All of these types of entities can be 100% foreign-owned in Panama. According to the World Bank, Panama is one of the easiest countries to set up a business in. It ranks 51st out of over 180 countries for ease of setting up a business, with a score of 92%. It can take just five days and require six procedures to incorporate an LLC. 

Once this is done, however, you’ll still need to hire workers and manage their needs. To do this, you’ll need to learn how to manage HR in the country or hire an experienced HR team. You’ll also need the help of tax and legal experts to help you keep in compliance with all local laws.

Working with an EOR

Working with a Panama Employer or Record, or EOR, is a viable alternative to setting up an entity or hiring contractors. With an EOR partner, you don’t need an entity to legally hire workers in Panama. Instead, the EOR hires them for you and also manages their HR needs long-term. This leaves you responsible for their schedules and daily work, while the EOR handles the rest. If you want to have direct control over your employees’ work and enter the Panama market as quickly as possible, partnering with an EOR might be your best option. 

Hiring Independent Contractors

If you’re not ready to make the major commitment of time, money, and resources needed to set up a business in Panama, you can try working with contractors instead. You can hire them remotely through a business you manage elsewhere as long as you can arrange work submissions and bill payments internationally. Working with contractors can allow you to access rare skills and leverage expertise across a wide range of areas. Instead of hiring permanent employees, you can hire contractors for only short periods or specific projects. You also won’t need to manage their tax and social security payments, as independent contractors manage these things themselves.

At the same time, there are negative aspects to hiring contractors or freelancers to consider as well. They work for multiple employers, often at the same time, and may give priority to the client who offers the biggest project or the most pay. Their work may also not be consistent, or they may not be consistently available when you need their services. They make their own hours and work under their own terms, meaning you have little control. If you try to assert control over how and when they work, you can also risk being penalized for worker misclassification.

For the rest of this guide, we’ll look in detail at how EORs operate, what they take responsibility for, and the advantages you can gain from partnering with one.

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Using an Employer of Record in Panama

Working with an EOR is usually your best option if you don’t own an entity in Panama and don’t intend to incorporate one any time soon. This partnership allows you to focus solely on your role as the worksite employer, managing schedules and tasks for your employees. At the same time, the EOR manages your employees’ HR concerns, including:

  • Onboarding: Whether you’ve found workers on your own or hired an agency to help you recruit them, your EOR partner will play an important role in bringing them on board. You’ll still need to perform internal onboarding activities, including giving them orientations, job training, and access to the tools and systems they’ll use in their jobs. The EOR will handle the administrative side of things. This typically involves collecting their personal information and documents, creating profiles for them on its digital platform, and registering them with the relevant authorities.
  • Payroll: New employees will need to be added to your payroll, and this is an important task your EOR will manage. It will set up each employee with a specific, automatic calculation based on their salary, deductions, and tax rates. You’ll need to provide the EOR with time and attendance data for each employee for each pay period. The EOR will use this data to calculate how much to deduct from each employee’s pay for benefits and taxes. It will then pay their salaries on your behalf. 
  • Taxes: Workers in Panama need to pay personal income taxes on their earnings, and it’s the employer’s responsibility to calculate and withhold these taxes. The EOR will do this for you as a key part of payroll processing. It will also remit the withheld funds to Panama’s tax authority, the Dirección General de Ingresos (DGI), on your behalf.      
  • Benefits administration: Panamanian employees are entitled to many mandatory benefits that include social security programs, annual leave, maternity leave, and more. Your EOR partner will administer these benefits for you, keeping track of employee entitlements and also deducting mandatory contributions from their salaries as necessary. Most PEOs can also help you provide additional benefits like private health insurance and retirement savings plans for your workers.
  • Contracts: Making sure your contracts are compliant with Panamanian law is one of the main strengths of EORs. They use their legal expertise to create these contracts once you’ve negotiated terms, and enter into them directly with your employees on your behalf. They will normally manage signatures and commitments, as well as file contracts to be used for later reference.
  • Terminations: If you want to dismiss employees, you’ll need to let your EOR partner know, since it acts as their legal employer and must formally terminate their contracts. The EOR will judge your reasons for the dismissals and provide notice and severance pay to the employees if required. 
  • Compliance: The EOR, as your workers’ legal employer in Panama, will need to manage compliance with all local tax and employment laws. In this way, it shields you from risk while ensuring that your employees correctly receive the working conditions and benefits they’re entitled to.
  • Recruitment: Some EORs also offer recruitment services, actively searching for local or even international talent to fill your vacancies in Panama. Other EORs simply provide you with tools in their platforms that can help you recruit more effectively on your own. These tools can include applicant tracking systems (ATSs) and connections to leading job sites in Panama.

Employment and Labor Laws in Panama

The legal system in Panama is heavily influenced by Spanish civil law, but also carries influences from the American legal system. The main legal instruments that regulate employment in the country include the Constitution, the Labor Code (Cabinet Decree No. 252 of 1971), and the Organic Law of the Panama Canal Authority. While your EOR partner will handle compliance for you, it’s still critical to know your obligations to your employees.

Employment Contract Requirements

Employment contracts in Panama must be written in Spanish or in a foreign language accompanied by a Spanish translation. Unlike in some other countries, oral contracts are not permitted. All employment agreements must be in writing and include the following details:

  • Identification of the parties
  • Employee’s dependents, if any
  • Location of the workplace
  • Work description
  • Start date
  • Duration (if fixed-term)
  • Hours of work
  • Wages and payment terms

Fixed-term contracts are permitted in Panama, but only for non-durable work. These contracts generally have a maximum duration of one year, although they may be extended up to three years for roles requiring specialized technical skills.

Standard Working Hours

Employees in Panama normally work six days a week and eight hours a day, for a regular workweek of 48 hours. Minors aged 17 can only work 42 hours a week, and those aged 16 can only work 36 hours. Workers must be given at least a 30-minute break each day, and at least 24 hours of rest once a week.

Overtime

Overtime is allowed in Panama, but is optional for workers, except in emergencies. Employees can work up to three hours of overtime a day and a maximum of nine hours a week. They must be paid 125% of their normal wages for daytime overtime hours, and 150% if they work overtime between 6:00 pm and 6:00 am. 

Probation Periods

Probation periods are common in Panama and can last up to three months. Employees cannot be required to undergo probation again when re-hired by the same employer. During probation, either party may terminate their employment agreement at any time without having to provide notice or compensation to the other party. 

Payroll and Employment Taxes in Panama

Fiscal Year

The fiscal year in Panama is the same as the calendar year, beginning 1 January and ending 31 December. 

Payroll Cycles

Employers can choose to pay their workers weekly, bi-weekly, or monthly. Workers must be paid at least once a month and must be paid on the last business day of the month, so payrolls are normally processed several days in advance. 

Minimum Wage

The minimum wage in Panama varies depending on the industry the employee works in, the region, and the size of the company. Last updated in January 2024, the minimum wage ranges from $1.64/hour for agricultural workers to $3.71/hour for workers in free zones and special economic zones. 

Employer Tax Contributions

Employers in Panama must pay contributions to social schemes and insurance programs that total between 15.08% and 21.00% of each employee’s salary.

  • Social security tax: 13.25% of the employee’s compensation
  • Education insurance tax: 1.5% of the employee’s salary
  • Professional risk tax: Between 0.33% and 6.25% of the employee’s salary, depending on the industry.

Employee Payroll Tax Contributions

Employees also make mandatory contributions of 11% that are deducted from their salaries.

  • Social security tax: 9.75% of the employee’s compensation
  • Education insurance tax: 1.25% of the employee’s salary

Individual Income Tax Contributions

Employers in Panama are required to calculate and withhold personal income taxes from their employees’ salaries. Panama follows a progressive system with the following taxation levels: 

Income (USD)

Tax Rate

0 to 11,000

0%

11,000 to 50,000

15%

More than 50,000 

25%

Bonus Payments

As in most Latin American countries, a 13th-month salary is mandatory in Panama. This extra month’s pay is generally provided in three installments during the year, in April, August, and December. This bonus is not legally considered a salary payment. 

Time Off and Leave in Panama

Mandatory Leave Entitlement

After they work continuously for their employers for 11 months, Panamanian workers become entitled to 30 calendar days of annual paid leave. They must be paid for this leave at least three days before they take it, and it must be taken in one or two periods. 

Public Holidays

Panama celebrates at least 11 public holidays of national and religious significance each year. These are considered paid days off for employees. If they must work on these days, workers have to be paid 200% of their normal wages. The normal holidays provided include:

  • New Year’s Day (January 1) 
  • Martyrs’ Day (January 9) 
  • Carnival (date varies)
  • Good Friday (date varies)
  • Labor Day (May 1) 
  • Independence from Colombia (November 3) 
  • Flag Day (November 4) 
  • First Call for Independence (November 10) 
  • Independence from Spain (November 28) 
  • Mother’s Day (December 8) 
  • Christmas Day (December 25) 

Sick Leave

Workers in Panama are entitled to take sick leave when ill or incapacitated. They accrue sick leave at the rate of 12 hours of leave for every 26 days they work. This provides them with around 18 eight-hour days of sick leave annually. The employer pays their wages for their first three days, while the rest are paid through social security. 

Parental Leave

Pregnant women in Panama can take six weeks off work before their expected delivery dates and eight weeks after, for a total maternity leave of 14 weeks. This leave is fully paid through social security benefits as long as the mother has made significant contributions. If not, the employer must pay the difference.

New fathers are entitled to three days of paid paternity leave on the birth of their children. Their jobs are protected during these periods, and fathers’ jobs can also be protected for up to a year if the mother dies in childbirth or is unemployed for a year after giving birth. 

Bereavement Leave

Employees are entitled to three days’ paid leave upon the death of a close family member, and one day should a more distant relative pass away.  

Termination and Severance in Panama

Termination

During a worker’s probation period, they can resign or be dismissed without reason or notice. After probation, employers are required to prove just cause. If the employee is guilty of gross misconduct, they can be summarily terminated. If they haven’t worked for two years, employees can still be dismissed without the need for the employer to provide just cause.

Notice Periods

For most employees, the employer must give 30 days’ notice of termination. They can also pay 30 days’ wages in lieu of providing notice. Employees are generally required to provide their employers with 15 days’ notice if they wish to resign.

Severance Pay

Severance pay is not normally required for regular dismissals. However, employees terminated due to redundancy are entitled to severance pay based on their length of service, calculated according to the following schedule:

Period of ServiceSeverance Pay (equivalent to monthly salary)
0 to 6 months½ month
6 to 9 months¾ month
9 months to 1 year1 month
1 to 2 years3 months
2 to 4 years4.5 months
4 to 5 years5.2 months
5 to 10 years9.75 months
Over 10 years14.8 months

Why Hire in Panama with an Employer of Record?

There are lots of reasons why so many employers in Panama choose to hire workers through EORs, including:

  • Language skills: Spanish is the national language of Panama and the native language for most inhabitants, making it essential for doing business in the region. Many Panamanians in urban areas and the Canal Zone also speak English, which helps facilitate communication with international employers and clients.
  • Low costs: Panamanian workers are generally more affordable than equally skilled workers in many other countries, helping businesses reduce labor costs. It can also be more cost-effective to engage an EOR to manage HR and compliance instead of hiring in-house HR and legal specialists.
  • Reduced risk: An EOR acts as the legal employer of your local workforce in Panama, taking responsibility for employment compliance and helping protect your business from fines and other penalties.
  • Extensive opportunities: Panama is a growing market with strong opportunities for foreign investors. Sectors such as construction, logistics, tourism, and financial services continue to expand rapidly.

How to Choose an Employer of Record in Panama

Because of the country’s growing economy, there are more and more EORs operating in Panama each year. To help you choose the best service provider for your needs, consider these factors:

Price

Set your hiring and HR budget and explore the fees that different providers offer. You can quickly eliminate any EORs that can’t offer you the services you need within this budget.

Services

While core services like payroll, benefits administration, and leave management are provided by all EORs, you may want more. Look for providers that can offer additional services like recruitment and supplementary benefits administration to suit your needs.

Reputation

Look at the online ratings and reviews for the EORs you’re considering. Excellent reviews show an ability to provide high-quality services to employees and clients, and to maintain legal compliance effectively in Panama.

Expand into Panama Easily with Remote People’s Employer of Record in Panama

Remote People’s Employer of Record (EOR) services in Panama keep your business compliant and your employees treated to top-quality HR services. To meet an effective employee management partner in Panama, contact Remote People today.