Contents of this guide
What the settlement includes, by cause
The Labor Code does not define the “liquidación” as a single payment. It is the sum of several items that the law regulates in different articles, and which depend on the cause of termination and the type of contract. The table lists each item with its article. The Code is in Spanish and the provisions below are paraphrased.
| Item | Article | When it applies |
|---|---|---|
| Pending salary and overtime | 148 | Always. Salary must be paid in full, covering ordinary and extraordinary hours. |
| Proportional vacation | 54, item 6 | When the relationship ends before the full rest period is completed: one day for every eleven worked. |
| Seniority premium | 224 and 226 | Open-ended contract, whatever the cause of termination. |
| Indemnity | 225 | Unjustified dismissal, dismissal without the necessary prior authorization, or an economic cause (section C of article 213). |
| Indemnity for justified resignation | 223 | When the worker ends the relationship for one of the just causes the article lists. |
| 30 days’ notice or its payment | 212 | Dismissal without cause of the excepted workers (for example, under two years of continuous service). |
| Back pay (salarios caídos) | 218 | Only if there is a lawsuit and the employer fails to prove a justified cause. |
Text consulted: a compilation of the Labor Code headed by the Ministry of Labor and Labor Development and hosted by the Judicial Branch, which includes reforms up to Law 44 of August 12, 1995. Later reforms should be confirmed in the Gaceta Oficial before applying a specific case.
The proportional 13th month usually appears in the settlement as well. Panama Outsourcing’s guide to how the settlement is calculated includes it in the three scenarios it describes: resignation, justified dismissal and unjustified dismissal. That payment has its own regulation outside the Labor Code and is not covered in this guide.
Seniority premium: one week of pay per year
Article 224 provides that when any open-ended contract ends, whatever the cause, the worker is entitled to a seniority premium of one week of salary for each year worked since the start of the relationship. If a year is not completed, the proportional part is owed.
The cause does not condition the premium. According to the text, it is paid the same in a resignation, a justified dismissal and an unjustified one. The reference salary is set by article 226: the average of the total remuneration received during the last five years worked.
One rule on resignations: article 222 requires a worker who quits without cause to give written notice fifteen days ahead, or two months for a technical worker. A worker who fails to do so owes the employer one week of salary, which may be deducted from the seniority premium.
Indemnity for unjustified dismissal: the scale in article 225
The indemnity is added to the premium when the contract is open-ended and the dismissal is unjustified, was made without the necessary prior authorization, or responds to an economic cause. For employment relationships begun since Law 44 of 1995 took effect, section C of article 225 sets 3.4 weeks of salary for each year worked in the first ten years and one week for each later year. If a year is not completed, the proportion is paid.
The same article contains two other scales for service before and after April 2, 1972, which matter only for very old relationships. It also states that these indemnities cannot be combined with any other scale and that paying the premium and the indemnity in kind is prohibited.
| Years of service | Weeks of indemnity (section C) |
|---|---|
| 1 | 3.4 |
| 3 | 10.2 |
| 5 | 17 |
| 10 | 34 |
| 15 | 39 (34 for the first ten years and 5 for the next five) |
The salary base for the indemnity is not the one used for the premium. Article 149 requires indemnities to be calculated on the average earned in ordinary and extraordinary hours over the previous six months or thirty days before the right becomes enforceable, whichever is more favorable to the worker.
Worked example, step by step
Illustrative case, unrelated to any real worker: open-ended contract, five years of service begun after Law 44, constant monthly salary of 1,000 balboas, unjustified dismissal and 110 days worked since the last vacation. Articles 224 and 225 do not say how to convert a monthly salary into a weekly one. The example uses the equivalence of four and a third weeks per month that article 54 applies when paying vacation.
| Item | Calculation | Result in balboas |
|---|---|---|
| Reference weekly salary | 1,000 divided by 4.3333 | 230.77 |
| Seniority premium | 5 weeks × 230.77 | 1,153.85 |
| Indemnity | 17 weeks × 230.77 | 3,923.08 |
| Proportional vacation | 110 divided by 11 = 10 days × 33.33 (one day = 1,000 divided by 30) | 333.33 |
| Notice | Not applicable: more than two years of service and outside the article 212 categories | 0.00 |
| Total, plus pending salary | 5,410.26 |
Figures rounded to two decimals. In a real case, the average salary under articles 149 and 226, the exact dates and any collective agreement apply.
Panama Outsourcing, S.A. states on its website that its payroll calculation service, biweekly or monthly, covers overtime, holidays, commissions, vacation, sick leave and final settlements, with filing to the Social Security Fund’s SIPE system. The service page details what it includes.
Severance fund and claim deadlines
Articles 229 A to 229 N, added by Law 44 of 1995, require employers with open-ended contracts to set up a severance fund in trust, with quarterly contributions for the seniority premium and five percent of the monthly share of the indemnity. When the relationship ends, the worker receives what was contributed for the seniority premium, whatever the cause. The amounts contributed for the indemnity are received in three situations: unjustified dismissal declared by the authority, justified resignation declared by the authority, and a mutual agreement signed by both parties (article 229 L). Article 229 M exempts cooperatives and the companies in items 3 and 6 of article 212 from the obligation, unless they choose to join.
On deadlines, articles 210 to 229 N set no number of days for delivering the settlement. What article 221 does set are limitation periods: sixty working days from separation to ask for reinstatement or the indemnity with back pay, and one year to claim only the indemnity and the other benefits arising from the termination.
Checklist before paying
- Confirm the contract type. The seniority premium and the article 225 indemnity are provided for open-ended contracts. For fixed-term contracts, article 227 requires an employer who ends the contract without just cause to pay the salaries for the remaining time.
- Document the cause in writing. Article 214 requires written notice of the date and the specific causes, and does not allow different causes to be alleged later.
- Fix the start and end dates. They determine the complete years and fractions for the premium and the indemnity.
- Calculate the two reference salaries. Five-year average for the premium (article 226) and six-month or thirty-day average for the indemnity (article 149).
- Add vacation and pending salary. One day for every eleven worked since the last rest period.
- Check the status of the severance fund. If what was contributed and its returns already cover the liability, the employer need not contribute more (article 229 F).
- Keep proof of payment. A signed release, preferably reviewed by a labor lawyer, prevents later disputes.
Companies that prefer not to run this calculation by hand can rely on a payroll service. Panama Outsourcing’s website also presents a labor-legal advisory service covering contracts, internal regulations, payroll and disciplinary documentation. For the other payroll costs, Radar’s guide to Social Security Fund contributions details what the employee and the employer pay, and the one on taxes a company pays places payroll among tax obligations.
This content is informational and does not replace the advice of a labor lawyer or the Ministry of Labor and Labor Development.
Frequently asked questions
What is a final settlement (liquidación laboral) in Panama?
It is the last payment a worker receives when the employment relationship ends. It combines items such as pending salary, proportional vacation, seniority premium and, depending on the cause, the indemnity or the notice pay, each with its own article in the Labor Code.
How is the seniority premium calculated?
At one week of salary for each year worked, plus the proportional part of incomplete years, under article 224. The reference salary is the average remuneration of the last five years worked (article 226).
Is the seniority premium paid if the worker resigns?
Yes, in open-ended contracts. Article 224 recognizes it whatever the cause of termination. If the worker resigns without the required notice, article 222 allows one week of salary to be deducted from the premium.
How much is the indemnity for unjustified dismissal?
For relationships begun since Law 44 of 1995, 3.4 weeks of salary for each year in the first ten years and one week for each later year, with the proportion for incomplete years (article 225, section C).
How long is there to claim the settlement?
Article 221 sets sixty working days from separation to ask for reinstatement or the indemnity with back pay, and one year to claim only the indemnity and the other benefits of the termination.
Related articles
- Social security contributions in Panama: what the employee pays, what the employer pays and what changed
- Taxes a company pays in Panama: income tax, ITBMS, dividends, Notice of Operation and payroll
- Minimum wage in Panama: how it is set, regions, sectors and how it is calculated
Sources
- Labor Code, Cabinet Decree 252 of 1971, text with reforms up to Law 44 of 1995: articles 224 and 225 (page 48), 226 (49), 212 and 213 (44), 214 (46), 218 and 221 to 223 (46 and 47) and 229 L (50).
- Labor Code, article 54, vacation and article 149, salary for indemnities.
- Law 44 of August 12, 1995, Legislative Assembly, article 37 (copy hosted by the Superintendency of Banks): severance fund, articles 229 A to 229 D.
- Panama Outsourcing, payroll calculation, labor-legal advisory and how the settlement is calculated in Panama.
- Radar Panamá, social security contributions and taxes a company pays.
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