You've found the right people in Panama. The roles make sense. The timing is right. But then the questions start piling up: Do you need a local entity? What's the deal with the 13th-month salary? Can you even hire foreign workers without hitting a legal wall?
These aren't small questions. Panama's labor laws have real teeth, and foreign companies that skip the details often find themselves dealing with compliance issues that could have been avoided entirely.
If you're thinking about starting a business in Panama as a foreigner or simply want to bring people on board without setting up a full local structure first, this guide covers what you actually need to know in 2026.
Before anything else, you need to pick your entry point. There are two main options:
Option 1: Set up a local legal entity This means incorporating in Panama, getting your company registered, and managing all payroll, taxes, and compliance yourself. It gives you full control but takes time (often weeks to months) and carries significant fixed overhead.
Option 2: Use an Employer of Record (EOR) An Employer of Record (EOR) acts as the formal employer in Panama for administrative and compliance purposes, managing payroll, social security registration, employment contracts, and other labor-related obligations. This structure allows foreign companies to engage personnel in Panama without establishing a local legal entity. Depending on how the working relationship is structured and the level of control exercised by the foreign company, certain responsibilities under Panamanian labor law may still arise. In practice, an EOR arrangement can allow companies to onboard employees in as little as 1 to 5 business days.
For companies testing the Panamanian market or scaling quickly, the EOR route has become the default starting point. As Hireborderless noted in their January 2026 update: "An Employer of Record handles these obligations, contract registration with MITRADEL, and foreign workforce restrictions."
This is where things tend to go sideways. Here are the most common mistakes we see when foreign companies try to hire in Panama without proper guidance.
There is no at-will employment in Panama. Once a probationary period ends (up to 3 months), terminating an employee requires just cause. That cause must be one of the specific reasons outlined in the Labor Code.
If you dismiss someone without just cause:
This surprises a lot of U.S.-based companies. Every termination should go through legal review before any action is taken.
Panama's Labor Code (Article 17) limits how many foreign workers a local company can employ:
These limits apply to both headcount and total payroll. So even if your headcount stays under 10%, if foreign salaries represent more than 10% of your payroll, you may still be out of compliance.
There are exceptions. Multinational companies, businesses in free zones, and City of Knowledge tenants often qualify for different rules. Spouses or dependents of Panamanians or long-term residents (10+ years) can sometimes count as local employees.
An EOR manages this internally within their own employment structure, which is one reason why it's the preferred route for mixed teams.
The 13th-month salary is not a bonus. It is a legal requirement. Every employee is entitled to one full extra month's salary, paid in three equal installments:
It's calculated on average earnings and prorated for partial years. Many foreign companies either forget this entirely or budget it incorrectly. Miss it and you're looking at administrative sanctions.
As of February 2026, employer contributions to the Caja de Seguro Social (CSS) sit at 13.25% of gross salary. Under Law 462 passed in March 2025, this will increase:
Employee contributions remain at 9.75%. When you factor in the 13th-month pro-rata, annual leave, and other mandatory benefits, your total employment cost is meaningfully higher than the base salary number alone.
Panama has roughly 200 professions reserved exclusively for Panamanian or naturalized citizens. This list includes law, accounting, most engineering disciplines, medicine, psychology, and customs brokerage, among others.
If you need to fill one of these roles with a foreign national, it's not a straightforward process. This is an area where getting professional advice upfront saves a lot of time and frustration later.
Effective January 16, 2026, new minimum wage rates came into force under Executive Decree No. 13 (December 31, 2025), covering the 2026 to 2027 period.
Key points to understand:
Verified Minimum Wage Adjustments (Sourced from law firm summaries of the decree, including Morgan & Morgan and Fabrega Molino)
In retail trade, workers in both regions received an increase of B/.9.50/month, as did wholesale trade workers in Region 1.
Domestic workers saw region-specific adjustments: those in Region 1 now earn B/.350/month, reflecting a B/.10 increase, while those in Region 2 earn B/.320/month, an increase of B/.5.
Security guards across both regions received an adjustment of B/.12/month, and waste collection workers in Region 1 saw the highest increase on this list at B/.15/month.
The overall average adjustment comes out to approximately 1.34%, according to law firm analyses of the decree. The changes affect more than 400,000 workers in Panama.
For the exact minimum rate applicable to a specific role in your sector, the right move is to reference the Official Gazette directly or consult MITRADEL or a licensed professional. No single universal rate exists.
Beyond salary, every employee in Panama is entitled to the following by law:
Leave and time off:
Working hours:
If more than 3 hours of a mixed shift fall within nighttime hours, the entire shift is legally classified as a night shift (7h/day, 42h/week)
Contracts must include:
For foreign national hires, the employment contract must be registered with MITRADEL as part of the work permit application process.
When it comes time to hire, a local entity setup can take weeks to months, while an EOR gets you to your first hire in as little as 1 to 5 business days.
On the question of a legal employer, your company holds that role under a local entity, whereas with an EOR, the provider manages all compliance on your behalf. Similarly, foreign worker quotas must be strictly self-managed under a local entity, while the EOR handles this within their own structure.
Overhead costs differ significantly — a local entity comes with high fixed costs covering office space, accounting, and legal fees, while an EOR operates on a simple per-employee fee with no fixed overhead. Payroll and compliance obligations (MITRADEL, CSS, payroll) are self-managed under a local entity but fully outsourced through an EOR.
For companies exploring new markets, market testing is slow and expensive via entity setup, but fast and flexible through an EOR. If circumstances change, exit flexibility is another key differentiator — winding down a local entity is complex and costly, while exiting an EOR arrangement is straightforward. Finally, employer liability remains with your company under a local entity, whereas the EOR assumes it.
As Global Expansion noted in their 2026 hiring guide, setting up a company in Panama can be expensive and complex. For companies wanting to move fast or test a team before committing to full incorporation, EOR is typically the lower-risk entry point. JJ Associates can help you understand which structure fits your specific goals.
Most foreign nationals need a work permit before they can legally work in Panama. Here's how the process generally works:
Work permits are tied to specific employers. If your employee changes roles, a new permit may be required.
Understanding the context helps when planning a team.
Panama has a total labor force of approximately 2.17 million people, with around 1.9 million employed, according to INEC 2024 data cited in recent 2025 to 2026 reports. The services sector drives about 68% of employment, with logistics, finance, and trade leading growth. The City of Knowledge (Ciudad del Saber) has become a significant hub for technology and innovation-focused companies.
On the investment side, Panama attracted US$2.833 billion in foreign direct investment in 2024, with 4.5% GDP growth projected for 2025 according to IMF data. That context matters. Panama is not a secondary market. For companies with a regional Latin American strategy, it's often the anchor.
If you're evaluating the region more broadly, our team at JJ Associates supports business setup and compliance across Panama, Mexico, Colombia, Brazil, and beyond.
Getting the hiring structure right from day one makes everything else easier. Whether that means using an EOR to move quickly or planning a full entity setup for the long term, the decisions you make early will shape your compliance obligations for years.
At JJ Associates, we work with companies entering Panama and the broader Latin American market. We can connect you with the legal and operational support you need to hire correctly, stay compliant, and scale confidently.
Get in touch with JJ Associates today to talk through your hiring setup in Panama.
Can a U.S. or foreign company hire Panamanian employees without having a local office? Yes. Using an Employer of Record (EOR) allows foreign companies to legally employ staff in Panama without setting up a local entity. The EOR becomes the legal employer and handles all payroll, CSS, MITRADEL registration, and contract compliance on your behalf.
What is the 13th-month salary in Panama and is it mandatory? Yes, it is mandatory. Every employee is entitled to one full extra month's salary per year, paid in three equal installments on April 15, August 15, and December 15. It is calculated on average earnings and prorated for partial years of service.
How does Panama's foreign worker quota work? Local companies can have a maximum of 10% foreign regular staff and up to 15% for specialists or technicians. These limits apply to both headcount and total payroll. Certain exceptions exist for multinational companies, free zone businesses, and other specific categories. EOR solutions often help navigate this for mixed-nationality teams.
What are the employer Social Security contribution rates in Panama for 2026? As of February 2026, employer CSS contributions are 13.25% of gross salary. Under Law 462 passed in March 2025, this will increase to 14.25% from March 2027 and 15.25% from March 2029. Employee contributions remain at 9.75%.
What happens if you dismiss an employee in Panama without just cause? Panama does not allow at-will termination after the probationary period. If an employee is dismissed without just cause, they can file a claim within 60 days. They may be entitled to reinstatement or severance, which is typically calculated at around 3.4 weeks of average pay per year for the first 10 years, plus pro-rated 13th-month salary and vacation pay.
Did minimum wages change in Panama in 2026? Yes. Executive Decree No. 13 (December 31, 2025) introduced new minimum wage rates effective January 16, 2026. Rates vary by geographic region, economic activity, and company size. The overall average adjustment was approximately 1.34%. For precise rates applicable to your role and sector, consult MITRADEL or a licensed Panamanian labor professional.
How long does it take to get a work permit for a foreign employee in Panama? Work permit processing generally takes 1 to 3 months, depending on the type and documentation. A registered employment contract with MITRADEL and a current company public registry certificate are typically required. Some processing can be done through the Panama Digital platform.
Are there professions in Panama that foreign nationals cannot work in? Yes. Around 200 professions are reserved exclusively for Panamanian or naturalized citizens. These include law, accounting, most engineering fields, medicine, psychology, and customs brokerage. If you need to fill one of these roles, speak with a licensed Panamanian labor attorney about your options.
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