Panama: The Pros And Cons Of Hiring Through An Employer Of Record (EOR) In Panama

Legal Framework Governing Employers of Records (EORs) in Panama

Panama has a well-developed legal framework governing EORs. Under Panamanian law, an EOR is known as a "contratista de personal," which translates to "personnel contractor." Personnel contractors are regulated by the Panamanian Labor Code and must be registered with the Ministry of Labor and Social Security.

One of the key advantages of using an EOR in Panama is that it allows companies to quickly and easily establish a presence in the country without the need to set up a separate legal entity. However, it is important to note that while EORs can help streamline the process of expanding into Panama, they are not a substitute for compliance with all applicable laws and regulations.

Employers must ensure that they are working with a reputable EOR that is in compliance with all relevant laws and regulations in Panama. This can help mitigate the risks associated with using an EOR, such as the risk of reputational damage or legal liability.

Advantages of Hiring through an EOR in Panama

1. No Requirement to Incorporate a Local Entity: Hiring through an EOR eliminates the need to establish a local entity in Panama. This can save companies time and money, as the process of incorporating a local entity can be lengthy and complex.
2. Flexibility: An EOR can provide companies with the flexibility to adjust their workforce in Panama as business needs evolve. This can be particularly useful for companies that have seasonal or project-based employment needs.
3. Ability to Hire in Multiple Jurisdictions: Companies that use an EOR can easily hire employees in multiple jurisdictions in Panama, without the need to establish a separate legal entity in each location.
4. Compliance: Hiring through an EOR can help ensure compliance with local labor laws, regulations, and requirements in Panama. This can help mitigate the risk of fines, penalties, and legal disputes.

Disadvantages of Hiring through an EOR in Panama

1. Permanent Establishment Risk: While the EOR structure can help businesses quickly and easily hire employees in a new location, it may also create a risk of inadvertently establishing a permanent establishment. This can occur if the business is found to have a significant level of control over the activities of the employees in the new location or significant presence in the foreign countries. In these situations, the business may be subject to local taxes and regulations, and may be required to register as a local entity. To mitigate this risk, it is important for businesses to carefully evaluate their EOR arrangement and ensure that it is structured in a way that is compliant with local laws and regulations.
2. Unattractive to employees: The EOR structure is often viewed as less attractive to employees because it can create a sense of instability. This is because the EOR arrangement typically involves a third-party company becoming the legal employer of the worker, while the worker continues to perform their job duties for another company. While this can provide benefits such as access to benefits and compliance with local labor laws, it can also lead to uncertainty for employees about their job security and future career opportunities. Additionally, the EOR structure may involve changes to employment status or benefits, which can further contribute to a sense of instability. As such, employees may be hesitant to pursue opportunities within an EOR arrangement, preferring instead the stability and security of traditional employment models by a local entity.
3. Increased Cost: When hiring a large number of employees, the costs associated with the EOR structure can quickly add up. For example, the third-party company providing EOR services may charge a premium for their services, and there may be additional costs associated with managing and administering benefits for a large workforce. In these situations, establishing a local entity may be a better option. By setting up a local entity, businesses can gain greater control over their workforce and potentially reduce costs associated with the EOR structure. This can also provide greater flexibility and scalability for the business as they grow and expand in the new location. While the decision to use the EOR structure or establish a local entity ultimately depends on a range of factors, including the size and scope of the business and the regulatory environment in the new location, it is important for businesses to carefully consider their options and make an informed decision that aligns with their strategic goals and priorities.
4. Difficulty Building a Company Culture: Companies that use EORs may find it more difficult to build a cohesive company culture. Because employees are working remotely and are managed by a third-party entity, it can be challenging to create a sense of connection and shared purpose among the workforce.
5. Lack of Ownership and Control of Employees: Companies that use EORs may have less ownership and control over their employees. Because the EOR is the legal employer, the company may not have as much say in hiring decisions or other employment-related matters.
6. Language and Cultural Barriers: Companies that are not familiar with the language and culture of Panama may find it challenging to communicate with employees and navigate local labor laws and regulations. This can increase the risk of miscommunications, misunderstandings, and compliance issues.
7. Reputation Risk: If the EOR in Panama is not reputable or does not have a strong track record of compliance and reliability, this can reflect poorly on the company that uses its services. This can damage the company's reputation in the eyes of its customers, partners, and investors.

Important Consideration: An alternative to hiring through an EOR in Panama is to establish a local subsidiary company and hire employees through that company, this will mitigate and/or remove the risks outlined above.

The Benefits of Working with a Local EOR in Panama:

Working with a local EOR in Panama can provide several benefits to businesses expanding into the country. These benefits include:

• Local knowledge
• Cultural sensitivity
• Expertise in local markets

Each point is developed below.

Local knowledge: Local EORs may have a deeper understanding of local labor laws, regulations, and customs, which can help businesses navigate the complexities of doing business in Panama. They may also have established relationships with local authorities and suppliers, which can help expedite the process of setting up operations.

Cultural sensitivity: A local EOR may be better equipped to understand and navigate cultural differences, which can be especially important when working with employees and customers in Panama. This can help minimize the risk of miscommunication or cultural misunderstandings that could negatively impact business operations.

Expertise in local markets: Local EORs may have specialized knowledge of local markets, industries, and talent pools. This can be especially valuable for businesses looking to expand into specific sectors or regions in Panama.

Overall, working with a local EOR in Panama can help businesses navigate the complexities of doing business in the country and provide valuable expertise and support. When selecting an EOR, businesses should carefully evaluate potential providers to ensure that they are a good fit for their needs and have a strong track record of compliance and reliability.

Wages vary based on the region your company is operating within, making it difficult to navigate and remain compliant with payroll and wage laws. Hiring an Employer of Record in Panama (EOR) can help to mitigate potential issues.

The Future of EORs in Panama

As the business landscape in Panama continues to evolve, EORs are likely to play an increasingly important role in helping companies expand their presence in the region. With its strategic location, strong economy, and business-friendly environment, Panama has become an attractive destination for companies looking to establish a foothold in Latin America.

As the demand for EOR services in Panama grows, we can expect to see a number of trends emerging in this space. One key trend is the increasing use of technology to streamline EOR services and improve efficiency. This includes the use of cloud-based platforms for payroll and HR management, as well as AI-powered tools for compliance monitoring and risk management.

Another trend we can expect to see is the continued expansion of EOR services beyond traditional staffing and payroll functions. As companies seek more comprehensive solutions for managing their workforce, EORs in Panama are likely to offer a wider range of services, such as talent acquisition, training and development, and performance management.

Finally, we can expect to see more competition in the EOR market in Panama, as new players enter the market and existing providers expand their offerings. This will create more choices for companies looking to work with an EOR, but will also require careful consideration of factors such as reputation, experience, and cost.

Conclusion

Employers of Record (EORs) offer a valuable solution for companies looking to expand their presence in Panama without the need to establish a local entity. While there are risks associated with using an EOR, these can be mitigated through careful selection of a reputable provider and a clear understanding of the advantages and disadvantages of this approach.

As the business landscape in Panama continues to evolve, EORs are likely to play an increasingly important role in helping companies navigate the complexities of local labor laws and regulations, while also providing valuable support for talent acquisition, training and development, and performance management.

Originally published 25 April, 2023 | Updated on: 21 June, 2023

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.