Employee Benefits

by cstlaw

Puerto Rico’s Sick Leave Law Faces Major Changes With The Enactment Of Act No. 28-2018 & Act No. 60-2018

On January 27, 2018, Governor Ricardo Rosselló Nevares signed into law Act No. 60-2018, to amend Article 6 of Act No. 180-1998, better known as the “Puerto Rico Minimum Wage, Vacation, and Sick Leave Act.” This recent amendment to Act 180 seeks to prohibit employers in the private-sector from considering employees’ justified sick leave absences as criteria in performance reviews, compensation, promotion and/or disciplinary related decisions. The Legislature sought to remedy an apparent contradiction in granting employees the right to be absent from work for justified medical reasons, while allowing employers to penalize them for exercising that right.

Specifically, the amendment provides in its relevant part that insofar as employees have the right to make use of their sick leave in warranted or justified situations, employers may not establish and implement internal policies or norms that consider these justified absences for medical reasons as unjustified absences and subject the employees to disciplinary measures, or as criteria for assessing efficiency when evaluating performance and considering employees for raises or promotions.

While the preamble indicates that employers have mechanisms to verify whether employees are using sick leave adequately (e.g., investigating the veracity of medical certificates or seeking second opinions), the fact remains that Act 180 does not allow employers to request or require medical certificates for daily sick leave or medical-related absences that do not exceed two (2) days.

This being the case, we strongly encourage all clients to carefully examine the amendment as soon as possible and consider any potential changes to their internal policies and protocols, performance evaluation forms, and absenteeism policies to eliminate justified medical-related absences and avoid using them as a criterion for purposes of discipline and/or in considering employees for promotions or salary increases. Please note that this amendment went into effect immediately upon the Governor’s signature.

The Governor also signed into law Act No. 28-2018, which will become effective on February 20, 2018. Essentially, the bill provides all eligible employees, including temporary employees, an additional special paid leave of up to 6 days per year to care for their own “catastrophic illness.” Act No. 28 defines “catastrophic illnesses” as those listed in the Health Insurance Administration of Puerto Rico Special Coverage (HIAPRSC), which currently includes: (1) Acquired Immunodeficiency Syndrome (AIDS); (2) Tuberculosis; (3) Leprosy; (4) Lupus; (5) Cystic Fibrosis; (6) Cancer; (7) Hemophilia; (8) Aplastic Anemia; (9) Rheumatoid Arthritis; (10) Autism; (11) Post Organ Transplant; (12) Scleroderma; (13) Multiple Sclerosis; (14) Amyotrophic Lateral Sclerosis (ALS); and (15) Chronic Kidney Disease in stages 3, 4 or 5. Note the list is not exhaustive as it is dependent on the updates provided from time to time in the HIAPRSC.

Employees will be entitled to said leave after working for a period of at least 12 months and averaging 130 hours per month during that 12-month period. Current employees that already meet those requirements prior to the enactment of Act No. 28 (i.e. prior to January 21, 2018) may already use the 6-day special leave.

In addition to those requirements, Article 3 of Act No. 28 lists the following requirements, among others:

• Congruent with Act No. 60, employers may not use this special paid leave as a criterion for purposes of discipline and/or in considering employees for promotions or salary increases, reducing their hours, reclassifying their position, changing their shifts or taking any adverse employment action.
• The employee must have exhausted his/her regular sick leave, and the employer may not force the employee to use the special leave prior to exhausting the regular sick leave.
• The 6-day special paid leave may be used in each calendar (natural) year and may not be accrued or carried over to the next calendar year.
• There is no obligation to liquidate any unused special paid leave upon termination of employment.
• The use of this special paid leave will be considered “time worked” for purposes of accrual of all employee benefits.
• At the request of the employee, the employer must allow the use of the special paid leave either through split, flexible or intermittent schedules.

The employer may request a medical certificate from a healthcare professional that offers medical treatment for the “catastrophic illness”, certifying that the employee is indeed diagnosed with one of the catastrophic illnesses –as listed in the HIAPRSC– and continues to receive medical treatment. The request for medical information must comply with the Health Insurance Portability and Accountability Act’s (HIPAA) privacy and confidentiality protections.

Lastly, please be advised that the Secretary of the Department of Labor and Human Resources of Puerto Rico is authorized to investigate, receive and file complaints, and impose fines of up to $2,000 for violations of Act 28.

If you have any questions or comments or if you’d like our assistance to review or modify your practices, employment agreements and policies accordingly, please contact any of the following attorneys from our Labor & Employment Practice Group at your convenience:

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The content of this Newsletter has been prepared for information purposes only. It is not intended as, does not constitute and should not be construed as either legal advice or solicitation of any prospective client. An attorney-client relationship with Casillas, Santiago & Torres LLC (CST) cannot be formed by reading or responding to this Newsletter. Such a relationship may be formed only by express engagement with CST.

by cstlaw

Secretary Of The Puerto Rico Department Of Labor Issues Opinion Letter No. 2017-001 Regarding Payment Of Wages To Employees (Exempt And Non-exempt) In The Private Sector In The Days / Weeks Following A Hurricane [Maria]

Puerto Rico is still trying to recover from the brutal passage of Hurricane Maria one (1) month ago. As a result of the devastation and lack of power and running water, private employers have temporarily ceased operations and others have by now resumed operations albeit on limited schedules and/or with a partial staff. In any event, nearly every employer on the Island saw their operations impacted by Hurricane Maria and a question often asked by employers during these times concerns the payment of wages to their employees.

Earlier this week (October 17, 2017) the Secretary of the Puerto Rico Department of Labor and Human Resources issued an Opinion Letter – No. 2017-001 – addressing the obligations of employers in the private sector regarding the payment of wages to exempt and non-exempt employees. The purpose of this Newsletter is to provide a summary of the Secretary’s Opinion Letter and a reminder of the general rules concerning the payment of wages to exempt and non-exempt employees.

Non-Exempt (hourly) Employees

The Opinion Letter first addresses an employer’s legal obligation with respect to non-exempt employees. Non-exempt employees are those who, among other things, are compensated for hours worked and are entitled to over-time. The Fair Labor Standards Act (FLSA), as well as local PR Wage and Hour statutes, generally applies to hours actually worked. Hence, pursuant to the FLSA, and as recognized by the Secretary, employers that are unable to provide work to non-exempt employees due to a natural disaster are not required to pay for the hours these non-exempt employees would have otherwise worked had it not been for the natural disaster. As such, the Opinion Letter concludes that, absent any specific provision in the Collective Bargaining Agreement or in the Employee Manual, employers are not obligated to pay the hours that their non-exempt employees did not work as a result of the passage of a hurricane.

However, the Opinion Letter outlines that time which an employer is obligated to pay their non-exempt employees:

• Those hours during which the employer requires the employee to conduct work;
• Those hours during which the employee is allowed or permitted to conduct work that benefits the employer, even when not required by the employer;
• Those hours worked remotely by the employee outside of the workplace; and
• The time during which an employee is waiting for work at the employer’s premises.

Waiting time is that time during which a non-exempt employee is required to remain at a certain location pursuant to his/her employer’s request, either waiting for work or waiting to resume work after a power outage, etc., and which cannot be used by the employee for personal matters or for his/her benefit. Thus, absent any specific provision in the Collective Bargaining Agreement or in the Employee Manual, the non-exempt employee should only be paid for the time he/she arrived at work until he/she was sent home.

Thus, while the general rule is that an employer does not have an obligation to compensate non-exempt employees for hours not worked even if the lack of work is the result of a hurricane, and the Secretary recognizes as much, the Secretary in his Opinion Letter calls on employers to compensate their non-exempt employees for the time and hours not worked, in light of the unprecedented emergency on the Island. Alternatives outlined in the Opinion Letter are awarding additional compensation on a discretionary basis to help employees during this emergency, compensating employees without regard to accrued licenses, charging that time to accrued vacation leave or even allowing employees (if they so request) to credit that time towards paid licenses to which they are entitled.

Exempt Employees

The general norm is that employees classified as executives, administrators and professionals –among other exemptions – under the FLSA and local applicable regulations, are paid on a salary basis a predetermined amount which is not subject to reductions due to variations in the quality or quantity of the work performed. These exempt employees are generally excluded by labor & employment legislation from benefits such as minimum wage, overtime, accrual of vacation and sick leave, and meal period and their benefits are generally governed by their employment contracts or agreements with their employers.

As recognized in the Secretary’s Opinion Letter, exempt employees must be paid their entire salaries for each workweek in which they conduct some work, without regard to the hours actually worked. In other words, if the employer closed operations because of the hurricane or inclement weather and the closing or shutdown lasted less than an entire week, no deductions can be made from the exempt employee’s salary to account for the days not worked during the closing, even when work was conducted on only one (1) partial day of the week; that is, exempt employees must be paid the full predetermined salary. The Opinion Letter recognizes that the employer can pay the entire salary for the partially-worked workweek and, in its discretion, charge those days during which the exempt employee did not conduct work, to an employee’s accrued vacation leave.

However, the Opinion Letter also recognizes that pursuant to the FLSA regulations, an employer does not have an obligation to pay exempt employees for any workweek in which they perform no work.³ As such, those employers that were forced to close operations for an entire week (or more) during which no work was performed, do not have to pay their employees for that workweek.

The Opinion Letter provides guidance as to how to treat days not worked by exempt employees during this period, for personal reasons (other than sickness or disability). Generally, if the employee was summoned to work and is absent during one or more entire days, the employer is allowed to deduct this time from their salary. The Opinion Letter mentions not showing up to work due to bad weather, blocked roads or problems with access to gasoline or transportation, as being absent for personal reasons. Notwithstanding, if the exempt employee’s absence for personal reasons is partial and does not cover the entire day, no deduction from his/her salary may be made, but the employer may charge the partial absence to accrued leave. If the employee does not have accrued vacation leave, for instance, he/she must be paid or compensated for the entire day. The Opinion Letter reminds employers that pursuant to the FLSA, deductions cannot be made to exempt employee’s salaries for partial absences, such as arriving late to work or leaving work early.

As with non-exempt employees, the Secretary also appealed to the employers’ goodwill inviting them to pay their exempt employees their entire salary for time or weeks not worked as a result of Hurricane Maria, without charging said time to accrued vacation leave. Other alternatives outlined in the Opinion Letter are awarding additional compensation on a discretionary basis to help employees during this emergency, compensating exempt employees without regard to accrued licenses, charging that time to accrued vacation leave or even allowing employees to credit that time towards paid licenses to which they are entitled.

PUERTO RICO DISASTER RELATED TAX RELIEF – QUALIFIED DISASTER RELIEF PAYMENTS ARE NOT TAXABLE INCOME

On October 4, 2017, the Puerto Rico Department of Treasury (“PRDT”) issued Administrative Determination No. 17-21, providing a similar temporary tax relief established under Section 139 of the Internal Revenue Code, 26 U.S.C. 139, for special “qualified disaster assistance payments” made by employers to aid their employees repair or compensate for the damages or loss caused by Hurricane Maria. Essentially, such “qualified disaster relief payments” will not be considered as part of the employee’s gross income, and the employer may deduct any such payments.

Essentially, a “qualified disaster relief payment” is defined as “any amount paid to or for the benefit of an individual” to:

(1) to supply or pay reasonable and necessary expenses to the employee or his/her family, such as food, medicine, medical expenses, gasoline, living expenses, caregiving expenses for the employee’s children and dependent relatives, purchase of power generators, funeral expenses incurred as a result of Hurricane Maria, and as long as such payments are made directly to the seller and/or service provider;
(2) to pay reasonable and necessary expenses incurred for the repair or rehabilitation of a principal residence or the repair or replacement of its contents to the extent that the need for such repair, rehabilitation, or replacement is attributable to Hurricane Maria, and as long as such payments are made directly to the seller and/or service provider;
(3) payments made directly to an individual as monetary assistance to compensate for the damages or loss caused by Hurricane Maria;
(4) payments made by a Federal, State, or local government, or agency or instrumentality thereof, regarding Hurricane Maria in order to promote the general welfare, but only to the extent any expense compensated by such payment is not otherwise compensated for by insurance or otherwise.

Additionally, all employers that grant loans to their employees not exceeding $20,000 at 0% interest rate, during September 21, 2017–June 30, 2018, do not need to report the employee’s payments as income. Such loans may be granted in addition to the “qualified disaster relief payment.”

In order for the “qualified disaster relief payment” to be exempt, additional requirements must be met, such as, for example: the payment must be provided to the employee during September 21 until December 31, 2017; the employer must file on or before January 31, 2018 a sworn statement; among other requisites. Please contact any of our attorneys from our Corporate and Tax Practice Group to discuss the additional requirements that must be met for the payments to qualify for the exemption:

Feel free to reach out to any of the attorneys listed below from our Labor & Employment Practice Group for further guidance or with any questions concerning the content of this Newsletter.

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The content of this Newsletter has been prepared for information purposes only. It is not intended as, does not constitute and should not be construed as either legal advice or solicitation of any prospective client. An attorney-client relationship with Casillas, Santiago & Torres LLC (CST) cannot be formed by reading or responding to this Newsletter. Such a relationship may be formed only by express engagement with CST.

by cstlaw

Puerto Rico and Cofina filed for bankruptcy

On May 3, 2017, the FINANCIAL OVERSIGHT AND MANAGEMENT BOARD FOR PUERTO RICO (the “Oversight Board”) filed a petition requesting the protection of Title III of the Puerto Rico Oversight, Management and Economic Stability Act (“PROMESA”) for the GOVERNMENT OF PUERTO RICO (the “Petition”). More so, on May 5, 2017, the Oversight Board filed a petition requesting the protection of Title III of PROMESA for the PUERTO RICO SALES TAX FINANCING CORPORATION (“COFINA”). Puerto Rico’s Bankruptcy is considered the biggest bankruptcy case in United States History. The purpose of this Client Newsletter is to provide you with an overview of the current situation.

A. BACKGROUND INFORMATION

On 2016, the U.S. Congress passed PROMESA, which, among other things, created the Oversight
Board and imposed an automatic stay on creditor lawsuits against the government, which stay was
extended to May 1, 2017, but has now expired.

According to PROMESA, “[t]he purpose of the Oversight Board is to provide a method for a
covered territory to achieve fiscal responsibility and access to the capital markets.” PROMESA
provides the Oversight Board with the critical tools necessary to satisfy its mandate, including the
ability to certify a fiscal plan for the Commonwealth and “covered entities,” as well as two different
processes (Title III and Title VI) that can be used to restructure the Commonwealth’s debts.

On June 30, 2016, the Oversight Board was established under PROMESA section 101(b). On
August 31, 2016, President Obama appointed the Oversight Board’s seven voting members.

From December 2016 through March 2017, the Oversight Board and the Commonwealth held
more than thirty meetings with creditor representatives to better understand their perspectives and
work towards achieving a consensual financial restructuring. On March 13, 2017, after almost six
months and numerous internal and external meetings between the Oversight Board and its advisors,
the Oversight Board certified an amended version of the current Governor’s fiscal plan. Not happy
with the result and the projected level of debt service, creditors requested the decertification of the
current fiscal plan and the certification of a new fiscal plan that would have exceeded the certified fiscal plan’s debt sustainability analysis. The Oversight Board and the Commonwealth convened
mediation on April 13, 2017, to find common ground and a consensual resolution.

As previously mentioned, on May 3, 2017, the FINANCIAL OVERSIGHT AND MANAGEMENT BOARD
FOR PUERTO RICO (the “Oversight Board”) filed the Petition. More so, on May 5, 2017, the
Oversight Board filed a petition requesting the protection of Title III of PROMESA for the PUERTO
RICO SALES TAX FINANCING CORPORATION (“COFINA”) (“COFINA’s Petition”). Puerto Rico’s
Bankruptcy is considered the biggest bankruptcy case in United States History.

Presently, only the Puerto Rico General Fund and COFINA are under the protection of Title III of
PROMESA. However, other government instrumentalities may request to join the Title III
proceedings as affiliates of the Government. Whether a particular agency is considered to be part
of the Puerto Rico General Fund, and as such included in the Title III Case, is a determination that
must be made pursuant to the agency’s organic act.

According to Exhibit II of the Petition, the Government of Puerto Rico is defined to include: “all
departments, offices, programs, etc. and all funds related to the Governmental and Business
Activities of the [Commonwealth of Puerto Rico (Primary Government)] such as the General Fund
Operating Budget and Non-Budgetary Funds”. Please be aware that the fact that an agency was
listed as a “Covered Entity” by the Oversight Board on its September 30, 2016 meeting, does not
mean that such entity is subject to Title III Case filed.

B. TITLE III OF PROMESA

Title III of PROMESA extends to Puerto Rico and its instrumentalities various of the benefits of
a bankruptcy proceeding. See Section 301 of PROMESA. To this effect, the mentioned title
incorporates by reference various sections of the United States Bankruptcy Code. In general terms,
the cited provision makes a proceeding under the mentioned title one similar to a bankruptcy
reorganization or Chapter 11 proceeding. However, due to the nature of the entity requesting the
relief, it also incorporates dispositions applicable to a governmental entities bankruptcy proceeding
(Chapter 9).

Therefore, Title III of PROMESA creates a sui generis procedure to manage the reorganization of
Puerto Rico’s debt obligations. Nevertheless, as it can be seen, this procedure is extremely similar
to that of a reorganization bankruptcy. Please note that the rules that govern the Title III Case are
those applicable to bankruptcy proceedings. See Section 310 of PROMESA.

As of the date of this Newsletter, the presiding judge of the case issued an order transferring the
case docket to the Puerto Rico Bankruptcy Court Docket. This is the only procedural order and/or instruction regarding the Title III Case management issued by the mentioned judge. Still, it is
expected that she will issue various procedural orders prior to the commencement of the case.
Please be aware that PROMESA does not set a time table for the completion of the proceeding.

Pursuant to the nature of the proceedings, the Oversight Board, on behalf of Puerto Rico, should
present a plan for the adjustment of its debts. If the plan is confirmed, it will be binding upon all
Puerto Rico’s Creditors and the Commonwealth will be able to discharge its debts, prohibiting any
collection efforts, beyond the amounts owed pursuant to the Plan. Notice concerning any such plan
will be provided pursuant to the form and manner of notice ordered by the Court.

As of the filing of the petition, there is a stay on any action to collect against the Government of
Puerto Rico. Ordinarily, the effect of the automatic stay is that collection efforts against a debtor
are precluded. This stay had a direct impact on over 22 cases that were filed against the
Government or its instrumentalities. Please be aware that the Commonwealth’s Constitution
provides that general obligation debts must be paid before paying any other creditor of Puerto
Rico. See Art. VI Sec. 8 P.R. Const. The priority in which all other creditors are to be paid is
established by 23 L.P.R.A. § 124a.

According to Section 301 of PROMESA, the bankruptcy petition cannot be dismissed until 120
days from the date of the filling of the petition have elapsed.

C. GOVERNMENT OPERATIONS AFTER THE FILLING OF THE PETITION

The immediate effect of the filing of the petition is yet unknown, especially for government
contracts. Notwithstanding, based on the available information and the contents of various motions
filed by attorneys of Oversight Board, it appears that the immediate effect of the filling of the
Petition in regard to the government operations is to stay the collection proceedings by government
general obligation debt holders, but at this stage, the impact is limited in regard to government
operations. As an example, counsel for Oversight Board requested the Court to issue an order
confirming that banks can cash government issued checks. In said motion, the Oversight Board
states, in accordance with Section 305 (2) and 305(3) of PROMESA, that Puerto Rico is in control
of its property and, as such, may use the same in any manner it sees fit.

Based on the foregoing, unless otherwise instructed, pursuant to 11 U.S.C. § 501, all Government
Creditors must timely file a Proof of Claim (“PoC”) in the case. Ordinarily, the PoC sets out the
amount that is owed to the creditor as of the date of the bankruptcy filing and, if relevant, any
priority status. Failure to file a PoC can expose the creditor from being excluded from its rights to
receive a distribution (pay out) from the bankruptcy estate. The classification (secured or
unsecured) and the priority that a PoC will receive in the proceeding is determined pursuant to the
Bankruptcy Code and PROMESA.

With regards to current contracts, the Oversight Board has the authority to assume or reject
executory contracts. Upon assumption of an executory contract, the Government must provide
some assurances as to the cure of any defaults, compensation for pecuniary losses occurred as a
consequence of the default, and future performance of the contract. If an executory contract is
rejected, a claim may be filed for damages or losses suffered as result of such action.

Whether a creditor can discontinue providing goods or services to the Government of Puerto Rico
is a determination that must be made on a case by case basis. This determination involves various
that must be carefully evaluated.

Please be aware that the filling of the Title III Case does not preclude Puerto Rico from engaging
in efforts to implement consensual debt restructurings if possible and practicable.

D. PRESIDING JUDGE AND VENUE

Pursuant to Section 308 of PROMESA, on May 4, 2017, the Chief Justice of the United States
Supreme Court appointed United States District Judge, Hon. Laura Taylor Swain, form the
Southern District of New York as the presiding judge for the Puerto Rico Title III Case. The
mentioned judge is Harvard Law graduate. Prior to being appointed District Judge she served as a
Bankruptcy Court in the Eastern District of New York. Before this, she worked on the private
practice.

The venue of the Title III Case is the United States District Court for the District of Puerto Rico.
However, the Oversight Board can request a change of venue to the United States District Court
for the Southern District of New York. See Section 307 of PROMESA.

We will keep you posted with the developments of this important and historic situation.

*****

For further information on these matters, you may contact any of the attorneys listed below:

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The content of this Newsletter has been prepared for information purposes only. It is not intended as, does not constitute and should not be construed as either legal advice or solicitation of any prospective client. An attorney-client relationship with Casillas, Santiago & Torres LLC (CST) cannot be formed by reading or responding to this Newsletter. Such a relationship may be formed only by express engagement with CST.

by cstlaw

P.R. Department of Labor Releases Regulations on Employer’s Duty to Provide Religious Accommodations

The Puerto Rico Department of Labor and Human Resources (“Labor Department”) released regulations pertaining to an employer’s obligations and duties upon being notified by an employee or candidate for employment of a request to reasonably accommodate religious practices under the Workplace Flexibility Transformation Act, Act No. 4 of January 26, 2017 (“WFTA”)¹. Relevant to these regulations, the WFTA imposed on employers an obligation to reasonably accommodate religious practices if an employee so requests in writing, provided that such accommodations are not unduly burdensome or entail an excessive difficulty to the employer.

The regulations issued by the Labor Department establish a series of definitions and detail the procedure that must be followed when an employee requests accommodation of his/her religious practices. The employee seeking to obtain a religious accommodation must first make the request to the employer in writing². The written request must, at the very least, provide a description of the religious activity, the accommodation requested, and its frequency.

Pursuant to the regulations, the employer shall consider and provide a definitive written response to the request within seven working days, unless the religious practice and/or attendance at the religious service is to take place before then. The request shall be presumed denied if no response is provided within the 7-day term. The regulations further provide that the employer may schedule a meeting with the employee to discuss alternatives to the accommodations sought. The regulations require that both parties employ good-faith efforts to agree to the accommodation of the employee’s religious practice and/or attendance at the religious service.

An employer’s denial of a request for religious accommodation must be issued in writing and must set forth the reasons supporting such denial. Furthermore, the employer is obligated to state why providing the requested accommodation, or an alternate one, constitutes an excessive hardship or difficulty. Unsupported denials as well denials based on the premise that other employees could request the same accommodation, shall not be considered valid. Employers may not deny requests for religious accommodation in retaliation and/or as a means of discipline.

The regulations define “excessive difficulty” as the employer’s clear and detailed demonstration that accommodating the religious practices and/or an employee’s (or candidate) attendance to a religious service, will entail major costs or create dangerous working conditions. The fact that the employee or candidate cannot perform his/her duties shall constitute excessive difficulty. Pursuant to the definition provided in the regulations, the employer shall prove that any accommodation would be unreasonable in light of the circumstances.

Pursuant to the regulations, an employee may file an administrative charge before the Bureau of Labor Standards of the Department of Labor (DOL) in connection with the denial of a request for reasonable accommodation, the failure to reach an agreement with the employer and/or an adverse employment action taken against the employee as a result of having made a request for accommodation. Upon being notified of the administrative charge, the employer must file a response within ten (10) days. Thereafter, the charge will be referred to the Office of Mediation and Adjudication (OMA) of the DOL. Employers found to have failed to accommodate an employee’s religious beliefs face monetary fines ranging from $1,000 to $5,000 and may be ordered to provide the requested religious accommodation. Note that this administrative grievance process is not a pre-requisite or condition to filing a judicial complaint.

If you have any questions or concerns, or simply wish additional information regarding the aforementioned regulations, please contact any of the attorneys from our Labor & Employment Practice Group at your convenience.

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¹The Regulations have not yet been filed with the Department of State. As per Article XI, the regulations will be valid 30 days after having been filed before the Department of State.

²It should be noted that under federal law an employee may request religious accommodations verbally.

The content of this Newsletter has been prepared for information purposes only. It is not intended as, does not constitute and should not be construed as either legal advice or solicitation of any prospective client. An attorney-client relationship with Casillas, Santiago & Torres LLC (CST) cannot be formed by reading or responding to this Newsletter. Such a relationship may be formed only by express engagement with CST.

by cstlaw

Highlights Of The Government Of Puerto Rico Proposed Fiscal Plan Presented To The Financial Oversight And Management Board Or Puerto Rico

On February 28, 2017, the Government of Puerto Rico presented to the Financial Oversight and Management Board or Puerto Rico (“Oversight Board”) a proposed Fiscal Plan for Puerto Rico (the “Proposed Plan”). The Proposed Plan indicates that it seeks to achieve fiscal solvency and long term economic growth.

To achieve its objectives, the Proposed Plan recommends fiscal reform measures, strategic reform initiatives and financial control reforms. These recommendations include:

i. Fiscal Reform Measures that reduce the 10-year financing gap by $33.3 billion, by:

• Revenue enhancements through tax reform and compliance enhancement strategies
• Government right-sizing and subsidy reductions
• Efficient delivery of healthcare services
• Pension reform

ii. Structural Reform Initiatives that provide the tools to significantly increase Puerto
Rico’s capacity to grow its economy, including:

• Improving ease of business activity
• Capital efficiency
• Energy Reform

iii. Financial Control Reforms through improvement of transparency, controls and
accountability of budgeting, procurement and disbursement processes.

Included herein are some highlights of certain initiatives that the Government of Puerto Rico is
recommending under the Proposed Plan.

A. Transformation of Hacienda

As part of the mentioned plan the Puerto Rico Department of the Treasury (“Hacienda”) will embark in a multi-year transformation process to reduce leakage of funds and improve revenue collections. Some of the specific initiatives that the Proposed Plan mentions are:

• Deploy internet Sales and Use Tax (“SUT”) collections through economic and affiliate
  nexus instead of consumer self-reporting;
• Implement point of sale (POS) SUT collections; and
• Substitute the excise tax under Act 154 (which was recently extended for 10 years)
  consistent with the requirements of Section 901 of the US Internal Revenue Code (“US
  Code”) and in harmony with the proposed US changes under the US Code for US
  multinationals operating in PR like:
  • Modified version of effectively connected income source rule;
  • Increase income tax rate on exempted income;
  • Income tax withholding on imputed royalty or cost allocation payments; and/or
  • Withholding income tax on profits distributions.

B. Changes to Service Charges

Also, the Proposed Plan suggest to revise fees and charges for services to keep up with market trends.
To accomplish this, the plan specifically endorses the:

• Increase motor vehicle license fees by 10%;
• Increase motor vehicle insurance fees by 5% (AACA);
• Increase traffic fines fees by 10%; and
• Increase other miscellaneous permits, charges and royalties by 10%

C. Subsidy Reduction

More so, the mentioned plan seeks to reduce subsidies to the University of Puerto Rico, municipalities
and others. According to the Proposes Plan, engaging in this initiative will result in savings of $6.5B
in 10 years. Specifically, the plan advises to:

• Reduce $350MM of municipalities’ General Fund appropriation while providing
  municipalities with a modernized property tax regime in order to close their budget
  gap by raising the effective tax rate to .65% and the nominal rate to 2%. Real Property
  taxes will be assessed based on market values that will be updated regularly and
  with every sale.
• Reduce $100MM in other subsidy programs by consolidating all incentives that
  provide special tax rates, deductions, credits, grants and other forms of economic
  incentives into a simple code.
• Reduce $300MM of University of PR’ General Fund appropriation.

D. Structural Reform

The Proposed Plan also procures to implement a variety of structural reforms that will provide a
cumulative 2.0% increase in GNP growth. These reforms include the improvement of ease of business
activities and energy reform.

– Improve Ease of Business Activity

1. Private Sector Labor Reform (Act 4-2017)
2. Permitting Process reform
3. Tax Reform
   • Lower marginal tax rates and broaden the tax base; simplify and optimize
     the existing tax code to achieve gains in efficiency, ease of doing business
     and reducing tax evasion

– Energy Reform

• Leverage and facilitate expedited private sector investments in modern, costefficient,
  and environmentally compliant energy infrastructure; reform PREPA
  operations and services to clients; and allow for greater competition in energy
  generation.

E. Economic Development Initiatives

Finally, the Proposed Plan seeks to implement a complete package of economic development
initiatives that will drive the marketing and attraction of new investments and the creation of new jobs
in Puerto Rico. Specifically, the plan seeks to target:

• Innovative Startups, by Provide a tax credit for innovative startups that receive
  Federal research and development grants (NIH, NSF, etc.) and perform that
  research in Puerto Rico; and
• Electronic Export Information, through working with the US Department of
  Commerce to eliminate the requirement to file an Electronic Export Information
  (EEI) for interstate commerce between Puerto Rico and the mainland US.

F. Pending Approval

The Proposed Plan needs the approval of the Oversight Board. The Oversight Board can make
comments or suggest modifications on it or could discard it and approved their own Fiscal Plan.

*****

If you have any questions or comments regarding the aforementioned, please do not hesitate to contact any of the following attorneys from our Corporate & Tax Practice Group at your convenience:

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The content of this Newsletter has been prepared for information purposes only. It is not intended as, does not constitute and should not be construed as either legal advice or solicitation of any prospective client. An attorney-client relationship with Casillas, Santiago & Torres LLC (CST) cannot be formed by reading or responding to this Newsletter. Such a relationship may be formed only by express engagement with CST.

by cstlaw

New Withholding Limit For Social Security Fax

The Social Security Administration (SSA) announced that the maximum amount of wages in 2017 subject to the 6.2% Social Security tax (old age, survivor, and disability insurance) will rise from $118,500 to $127,200, an increase of more than 7%.

Thus, the maximum OASDI (Social Security) tax payable by an employer in 2017 would be $7,886.40. This is a $539.40 increase from 2016.

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If you have any questions or comments regarding the aforementioned, please do not hesitate to contact any of the following attorneys from our Corporate & Tax Practice Group at your convenience:

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The content of this Newsletter has been prepared for information purposes only. It is not intended as, does not constitute and should not be construed as either legal advice or solicitation of any prospective client. An attorney-client relationship with Casillas, Santiago & Torres LLC (CST) cannot be formed by reading or responding to this Newsletter. Such a relationship may be formed only by express engagement with CST.

by cstlaw

Puerto Rico’s Labor & Employment Legislation Landscape Faces Major Overhaul with Approval and Enactment of Workplace Flexibility Transformation ACT (“WFTA”)

CLIENTS & FRIENDS TAX ALERT

RETAIL & SERVICES MERCHANTS

Earlier today, Governor Ricardo Rosselló Nevares signed into law Bill 453, known as the Workplace Flexibility Transformation Act (“WFTA”). WFTA, which was approved by the Puerto Legislature on January 23^rd, is the first key labor legislation of the incoming Administration and represents a major overhaul to Puerto Rico’s labor and employment landscape. WFTA reflects Puerto Rico’s new and current socioeconomic reality and the incoming Administration’s interest in making Puerto Rico more attractive and competitive by creating an environment conductive to competitive business and job creation. WFTA is effective immediately.

Key aspects and provisions of WFTA are outlined below. Please bear in mind that some of the provisions impact non-exempt employees while others impact all employees working in Puerto Rico. Also note that while WFTA is effective immediately and some provisions only apply to employees hired after its effective date, some provisions also apply to existing employees.

Employment contracts / agreements – WFTA seeks to provide some certainty to the employment relationship in an attempt to promote job creation through the establishment of local and foreign businesses on the Island. With this in mind, WFTA contains several provisions dealing with employment contracts or agreements.

• Figure of independent contractor is presumed as long as certain conditions outlined in WFTA are met.
• Incorporates various elements used by the courts in determining whether a person is an employee or an independent contractor and limits the application of the economic reality test.
• Flexibility afforded for younger employees (over 18) to enter into the workforce and execute contracts, whether as employees or employers
• Amendment makes it more difficult to invalidate employment agreements based on the argument that they are contrary to law, moral or public order, and to file claims for breach of oral contracts or agreements (those exceeding 3-month compensation will not be recognized).
• Establishes rights and obligations of employees.
• In an attempt to provide uniformity and certainty, WFTA also provides that actions derived from an employment agreement or seeking benefits emanating therefrom will have a 1-year statute of limitations (does not apply to actionable claims prior to WFTA’s enactment or to claims that have a different statute of limitations as per special law).

Religious Accommodation – Employers have an obligation to reasonably accommodate religious practices once employee makes request in writing, as long as it does not entail an excessive difficulty to the employer

Overtime – Act 379 suffered major amendments, including:

• Daily overtime will be determined on a calendar day basis (rather than a rolling 24-hour period), unless the employer designates a different 24-hour cycle in writing at least 5 days in advance and the employee gets at least 8 hours of rest between consecutive workdays.
• Work performed by new non-exempt employees on 7^th consecutive day (day of rest) will be paid at time and a half (1 ½), while current non-exempt employees will continue to be paid at double rate.
• Special pay for Sunday work is eliminated.
• Double rate overtime is eliminated for new employees; these will be paid at time and a half (1 ½) the regular rate of pay.
• Current employees who enjoy superior benefits (overtime at double rate) will retain such benefits.

The employer may authorize employees to compensate for time not worked during a workweek for personal reasons, and those hours will not constitute overtime as long as: (i) the work is performed during the same workweek; (ii) the employee does not exceed 12 hours in a day; nor (iii) more than 40 hours  per week.

Meal Period –Amendments provide flexibility to meal periods and reduce penalty for new employees

• Penalty reduced from double to time and a half (1 ½) the regular rate of pay for new employees; current employees must be paid at double rate.
• Meal period may be waived if the employee works no more than a total of 6 hours in the day.
• Meal period may commence as early as after the second consecutive hour of work.
• Aside from croupiers, nurses and security guards, the Secretary of the Department of Labor may authorize other classifications to be entitled to a reduction of meal period to 20 minutes, provided written agreement is executed.

Flexible Schedule –Amendment paves way for reduced and flexible / alternate work schedules

• Flexible workweek is established, providing that conventional 5-day workweek may be reduced to a 4-day workweek without paying overtime as long as: (i) written agreement is executed; (ii) employee does not work more than 10 hours per day; nor (iii) more than 40 hours per week.
• Employees that regularly work 30 or more hours and have worked at least 1 year for the employer, may make a written request for a change in work schedule, specifying the desired change, either in work days, amount of work time and/or workplace, providing the reasons for the request, the effective date and duration of the change; the employer will be obligated to respond within 20 calendar days and denials must be justified. A written response will be required for employers with 15 or more employees; petitions from parents (“heads of families”) with sole parental rights or custody of their minor children, must be processed with priority.
• A civil cause of action is provided against employers that retaliate or take any adverse employment action against an employee that refuses to accept an alternate (reduced) workweek schedule or for requesting a change or modification in the work-schedule; aside from redress for damages, the employee may be reinstated and additional punitive damages may be imposed.

Closing Law – Repealed. However, commercial retail establishments previously covered by the Closing Law must remain closed to the public on Good Friday and Easter Sunday.

Vacation / Sick Leave –Accrual rates and thresholds suffered substantial amendments.

• Applicable to new employees; current employees who enjoyed substantial accrual rates will continue to enjoy these as long as they continue to work for same employer
• Illegal for an employer to terminate, layoff or suspend indefinitely an employee in order to rehire him/her and circumvent the grandfathering clause; violation deemed misdemeanor with imposition of administrative fines ($500 to $5,000) and/or jail time (no less than 120 days to no more than 1 year), in addition to civil fines equal to double damages
• Minimum hour threshold increased to 130 hours / month
• Monthly accumulation for vacation leave: (i) half (1/2) day during the first year of service; (ii) three fourths (3/4) day after first year of service until five years of service; (iii) one (1) day after five years of service until fifteen years of service; (iv) one and one fourth (1 ¼) day after achieving fifteen years of service
• Local employers with 12 or less employees can establish a monthly vacation accrual of a half (1/2) day per month
• For employees that earn tips, payment of vacation / sick leave will be based upon the legal minimum wage ($7.25) and/or the stipulated hourly rate, whichever is higher
• Monthly accumulation of sick leave remains at one (1) day per month
• 1-year statute of limitations for employee to present wage claim since employee’s termination and/or resignation (except for extrajudicial wage claims notified prior to WFTA’s enactment); statute of limitations may be tolled

Christmas Bonus – Amendments apply to employees hired after enactment of WFTA

• If employer has more than 20 employees during more than 26 weeks in a period of 12 months [from October 1st through September 30th], during which time an employee worked 1,350 hours or more, employer is obligated to grant a Christmas bonus equivalent to 2% of employee’s total salary. Christmas bonus capped at $600.00.
• If employer has less than 20 employees during more than 26 weeks in a period of 12 months [from October 1st through September 30th], during which time an employee worked 1,350 hours or more, employer is obligated to grant a Christmas bonus equivalent to 2% of employee’s total salary. Christmas bonus capped at $300.00.
• During their first year of employment, employees hired after the enactment of WFTA are only entitled to 50% of the Christmas bonus
• Christmas bonus must be paid between November 15^th and December 15^th

Other bonuses paid to employees during covered period may be credited towards Christmas bonus, provided employer makes written notification of such intent.

Cafeteria Plans –WFTA amends Internal Revenue Code and expands the type of benefits employers can provide to their employees under “cafeteria plans,” mirroring federal income tax provisions

Breastfeeding Leave – Amendment extends breastfeeding rights to part-time employees who work at least 4 hours during the work day; also,

• Amendment establishes that employers must guarantee privacy to employees extracting breast milk, as well as a secure and hygienic space that has electricity and ventilation; if employee is working part-time and her working day surpasses 4 hours, period to extract breast milk will be equal to 30 minutes for each consecutive 4 hour period of time
• Noncompliant employers face penalty fees as damages equal to: (1) three times the employee’s salary for each day the employer denied employee her breastfeeding rights or (2) an amount not less than $3,000.00, whichever is greater; when employee has a salary under the federal minimum wage, as defined in the Fair Labor Standards Act (FLSA), tips will be included in salary calculation for the penalty fee or, absent that, the federal minimum wage will be used to calculate the penalty fee, whichever is most beneficial to the breastfeeding mother

Unemployment – Minimum and maximum weekly benefits are increased

Act 80 – Puerto Rico’s Wrongful Termination Act is substantially amended to adopt a new severance formula, applicable to employees hired after the enactment of WFTA and terminated without just cause (“justa causa”). Other changes include:

• Employees hired after the enactment of WFTA and terminated without just cause will be entitled to three (3) months’ salary plus two (2) weeks’ salary for each full year of employment (note that under current formula, employees terminated without cause within the first 5 years of employment, would be entitled to two (2) months’ salary, plus one (1) week for every year of service)
• For purposes of calculating Act 80’s severance, 1 month will be comprised of 4 weeks
• Severance benefit capped at nine (9) months
• New formula does not apply to employees hired priorto the enactment of WFTA
• Severance payments under Act 80 will be tax-exempt (up to the amount of the statutory severance)
• Amendment to Article 11 of Act 80 eliminates employer’s burden of proof to establish that termination was justified (no presumption that termination was without just cause) and employer bond
• Article 2 amended to define “just cause” as the termination of an employee that is not based on illegal reasons and is not due to the employer’s whims and to include reasons related to the normal and proper functioning of the employer’s operations
• Constructive discharge case law and doctrine incorporated into Act 80
• 9-month probationary period is established (unless otherwise stipulated among the parties or in cases where the employee is represented by a union) for non-exempt employees
• 12-month probationary period is established for executives, administrators and professionals under the Fair Labor Standards Act (FLSA)
• 1-year statute of limitations is adopted for claims stemming from terminations that occur after the enactment of WFTA
• Several definitions incorporated into Act 80; of significance is that fixed-term employment agreements that do not exceed a 3-year term (either in the original term or by way of extensions) shall be presumed bona fide and valid

Definition of salary “overturns” case law from Court of Appeals that adopted a broad and all-encompassing definition of salary for purposes of calculating severance pay.

Reinstatement – Worker’s compensation and non-occupational disability (SINOT) reinstatement provisions are amended – prospectively – to provide that reinstatement must be requested within 12 months of the date of the work-related accident and/or non-occupational disability, or within 6 months for employers with 15 or less employees at the date of the accident and/or non-occupational disability

Discrimination / Retaliation claims – caps adopted for damages (mental anguish and other compensatory and punitive damages).

• Less than 101 employees:        $50,000
• 101 to 200 employees:             $100,000
• 201 to 500 employees:             $200,000
• 501 or more employees:           $300,000
• Federal legislation and case law adopted for purposes of interpreting discrimination / retaliation laws
• Amendment to Article 3 of Act 100 (Anti-Discrimination Act) eliminates presumption that employer incurred in any of the discriminatory acts included in Act 100 when such acts are conducted without just cause

We strongly encourage all clients to carefully examine WFTA and consider any potential changes to their internal policies and protocols. If you have any questions or comments regarding WFTA or if you’d like assistance to revise or modify your practices, employment agreementsand policies accordingly, please contact any of the attorneys from our Labor & Employment Practice Group at your convenience.

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The content of this Newsletter has been prepared for information purposes only. It is not intended as, does not constitute and should not be construed as either legal advice or solicitation of any prospective client. An attorney-client relationship with Casillas, Santiago & Torres LLC (CST) cannot be formed by reading or responding to this Newsletter. Such a relationship may be formed only by express engagement with CST.

by cstlaw

Preliminary Highlights of the Tax Changes by Act 72-2015

CLIENTS & FRIENDS TAX ALERT

I. Income Tax Provisions

Articles 2 & 14 – Big Taxpayers

A new definition of big taxpayers has been added to the Code to include: commercial banks or trust companies; private banks; brokerage houses; insurance companies; telecommunication entities; and entities with a volume of business of $50 MM. Big taxpayers are required to file their income tax returns at the office established by the Secretary of the Treasury or electronically.

Article 3 – Tax rates of Individual Taxpayers

The maximum individual tax rate is set to 33% on the excess over $61,500 plus $8,430, plus a gradual adjustment of 5% of the net income subject to tax in excess of $500,000, but limited to $8,895 plus 33% of the personal and dependent exemption.

Article 4 – Special income tax to individuals engaged in a trade or business is eliminated

The special tax of 2% imposed on all gross income generated by an individual engaged in the performance of services or engaged in a trade or business, when the gross income generated is in excess of $200,000, is eliminated for taxable years beginning after December 31, 2014.

Article 5 – Alternative Minimum Tax (“AMT”) Applicable to Corporations

1. With respect to the determination of one of the elements of the computation of AMT, a taxpayer may be able to exclude certain expenses incurred or paid to a related person or home office from the 20% AMT on related party expenses. The approval of the Secretary of the Treasury would be necessary and the exclusion is limited to 60% of the total expenses subject to the 20% AMT; and
2. Other of the elements in the determination of the AMT, the 2% tax applicable to the purchases of personal property between related persons is increased for taxable years beginning after December 31, 2014, based on the volume of business (“VOB”) of the purchaser from trade or business within Puerto Rico, as follows:
   • if VOB is more than or equal to $10 MM, but less than $500 MM, then 2.5%;
   • if VOB is more than or equal to $500 MM, but less than $1,500 MM, then 3%;
   • if VOB is more than or equal to $1,500 MM, but less than $2,000 MM, then 3.5%;
   • if VOB is more than or equal to $2,000 MM, but less than $2,750 MM, then 4.5%; and
   • if VOB is more than or equal to $2,750 MM, then 6.5%.

   Also, for purposes of this AMT element, for taxable years beginning after December 31, 2014, the discretion of the Secretary of the Treasury to take into consideration certain facts in order to reduce the tax percentage applicable to the purchases of personal property between related persons is eliminated.

Article 6 – Adjustments in the Computation of Alternative Minimum Net Income

Net Operating Loss Deduction for Alternative Minimum Tax Determination. – The deduction for net operating loss for alternative minimum net income was reduced from 80% of alternative minimum net income to 70% of alternative minimum net income for taxable years ended after December 31, 2014.

Article 7 – Expenses not related with the principal trade or business

For taxable years beginning after December 31, 2014, the amount of the deduction that a shareholder or partner may take for its proportional share of the losses of corporation of individuals, partnerships and special partnerships is limited to 80% of its participation on the aggregate net income of the corporation of individuals, partnerships and special partnerships.

Article 8 – Net Operating Loss Deduction

For taxable years beginning after December 31, 2014, the amount of the carry-over of the deduction for net operating loss was reduced from 90% to 80% of net income for taxable years beginning after December 31, 2014.

Further, in the determination of the net operating loss deduction, except in the case of entities with certain tax incentives grants, the following shall not be allowed:

1. Expenses incurred or paid to a related person not engaged in a trade or business within Puerto Rico, if said payments are attributable to the conduct of a trade or business within Puerto Rico and are not subject to income tax withholding at source under the Code for the taxable year in which incurred or paid; or
2. Expenses incurred or paid to a home office located outside of Puerto Rico, by a foreign corporation engaged in the conduct of a trade within Puerto Rico through a branch.
3. Expenses incurred or paid to a related person or home office that were excluded by the Secretary of the Treasury from the 51% expense disallowance related to expenses incurred or paid to a related person or home office.

Article 10 – Items Not Deductible

1. For taxable years beginning after December 31, 2014, and for purposes of the application of the authority granted to the Secretary of the Treasury to exclude certain expenses incurred or paid to a related person or home office from the 51% expense disallowance related to expenses incurred or paid to a related person or home office, the discretion of the Secretary of the Treasury to exclude said expenses is limited to 60%.
2. Expenses incurred or paid for the performance of services by a non-resident person if the taxpayer paying for the services has not paid the corresponding applicable sales and use taxes (“SUT”) or value added taxes (“VAT”), respectively, on said services.
3. The cost or depreciation of any good or taxable item, for SUT or VAT, respectively, even when said good or taxable item is considered an ordinary and necessary business expenses, if the taxpayer has not paid the SUT of VAT applicable to said good or taxable item.

Article 11 – Capital Gains and Losses and carry-over of capital losses

1. Corporations – for taxable years beginning after December 31, 2014, capital losses from the sale or exchange of capital assets are allowed only up to 80% of the gains derived from said sales.Expenses incurred or paid to a home office located outside of Puerto Rico, by a foreign corporation engaged in the conduct of a trade within Puerto Rico through a branch.
2. Other taxpayers – capital losses from the sale or exchange of capital assets during a taxable year are allowed against the gains generated from said sales during said taxable year, and any excess may be deducted against the lesser of the net income of the taxpayer or $1,000.
3. Carry-over of capital losses – for taxable years beginning after December 31, 2014, capital losses from the sale or exchange of capital assets may be carry-over up to 80% of the net capital gain generated for the taxable to which said capital losses are being carried-over.

II. Sales and Use Tax Provisions

Before discussing the amendments made by HB 2482 to the SUT provisions, it should be noted that current SUT provisions provide that the tax shall be separately stated on any receipt, invoice, ticket, or other evidence of sale, and said provisions were not amended. Similarly, under current SUT provisions commercial rent is not subject to SUT.

As it will be detailed in the VAT section of this memo, a new Section 4150.07 was enacted by Act 72-2015 allowing non-residents to request a refund with respect to the sale of articles that are going to be exported (tourist that will leave the island), provided they comply with certain requirements. Although there is no such specific provision for the SUT under Act 72-2011, Section 4030.03 of the Code provides an exemption from the payment of SUT for taxable articles purchased for exportation which may be applicable. It should be noted though that section 4030.03 was not necessarily designed with this in mind.

Pursuant to Section 4030.03 of the Code, taxable items that are sold for use and consumption outside Puerto Rico, even when the sale takes place in Puerto Rico shall be exempt from the payment of the SUT. In order for such taxable items to be exempt from the payment of the SUT, they must be exported within sixty (60) days from the date of sale of such article. Treasury’s SUT Regulation further provides that a taxable item shall be considered sold for use or consumption outside of Puerto Rico when the purchaser of such taxable item takes possession of it outside of Puerto Rico. Thus, if the purchaser takes possession of such taxable items in Puerto Rico the sale of such taxable item shall be presumed to be for use or consumption in Puerto Rico, and the seller shall have the obligation to collect the SUT in such sale. (Refer to Example 2 of the Regulation). However, said rule establishes a presumption that may be rebutted by coordinating a procedure with the Treasury Department (by way of a ruling) under which the seller can verify that the purchaser will use and/or consume the taxable item outside of PR. For example, the seller may request a copy of the license of the seller and a copy of the airline ticket departing Puerto Rico within sixty (60) days from the date of sale of such article.

Article 19 – SUT Amendments to definitions

1. Designated professional services – in addition to the previously determined activities, for period beginning after September 30, 2015, the definition includes services provided by a “returns, declarations or refund claims specialist”.
2. As a general rule services are considered taxable, thus, subject to SUT unless an exemption or exclusion applies. The exclusion from SUT for certain services after the amendments will be as follows:

1. For taxable events occurring before September 30, 2015, the following services will be excluded from SUT:
   1. Business to business (“B2B”) services, except for the following B2B services which will be subject to a SUT of 7% (6% state and 1% municipal) before July 1, 2015; and 11.5% (10.5% state and 1% municipal) from July 1, 2015 to March 31, 2016:
      1. Bank charges;
      2. Collection services;
      3. Security and private investigation services, except when provided to building or residence associations;
      4. Cleaning services, except when provided to building or residence associations;
      5. Laundry services;
      6. Maintenance and repair services, except when provided to building or residence associations;
      7. Telecommunications services;
      8. Waste disposal services, except when provided to building or residence associations; and
      9. Daily car rental services.
   2. Designated professional services. Designated professional services means:
      1. Agronomists;
      2. Architects;
      3. CPA’s;
      4. Brokers, sellers and real estate companies;
      5. Professional draftspersons;
      6. Professional real estate appraisers;
      7. Geologists;
      8. Legal services;
      9. Engineers and surveyors; and
      10. Returns, declarations or refund claims specialist services.
   3. Government provided services, including sewer services;
   4. Education services;
   5. Interest, other charges for the use of money and service charges by financial institutions;
   6. Insurance commissions and services;
   7. Insurance commissions and services;
   8. Health and hospitalization services; and
   9. Services provided by persons with a volume of business equal or less than $50,000.
2. For taxable events occurring before September 30, 2015, the following services will be excluded from SUT:
   1. B2B services and designated professional services, which will be subject to a special 4% tax;
   2. Government provided services, including sewer services;
   3. Education services;
   4. Interest, other charges for the use of money and service charges by financial institutions;
   5. Insurance commissions and services;
   6. Health and hospitalization services;
   7. Services provided by persons with a volume of business equal or less than $50,000; and
   8. Services between related persons or controlled group.
1. A new B2B definition is added – For taxable events occurring after September 30, 2015 up to March 31, 2016, B2B services will be subject to a special 4% tax, except:
   1. B2B services that are subject to a SUT of 11.5% (10.5% state and 1% municipal) until March 31, 2016;
   2. Government provided services, including sewer services;
   3. Education services;
   4. Interest, other charges for the use of money and service charges by financial institutions;
   5. Insurance commissions and services;
   6. Health and hospitalization services;
   7. Services provided by persons with a volume of business equal or less than $50,000; and
   8. Services between related persons or controlled group.

Articles 20, 21, 31 & 32 – SUT

1. Effective July 1, 2015 until March 31, 2016, the SUT state rate of 6% is increased to 10.5% on the sale of taxable items including tangible personal property and taxable services. The municipal SUT of 1% is maintained. Thus, effective July 1, 2015 until March 31, 2016, an 11.5% SUT rate shall apply on the sale of taxable items including tangible personal property and taxable services.
2. For taxable events occurring after September 30, 2015 and up to March 31, 2016, B2B services, except for the ones above mentioned, and professional designated services (legal, CPA, engineers, architects, etc.) will be subject to a new 4%. The B2B services and professional designated services that are subject to the new 4% tax will not be subject to the 1% municipal SUT.
3. The Secretary of the Treasury has been given the authority to extend the deadline of March 31, 2016 for the phase out of the state SUT into the value added tax (“VAT”) up to 60 days.

Article 22 – Person responsible for SUT payment

With respect to taxable services, B2B and professional designated services performed by a non-resident person to a merchant in Puerto Rico, the person responsible for the payment of the SUT to the Treasury Department will be the merchant in Puerto Rico receiving the services.

Article 23 – Accounting method

For taxable events occurring after September 30, 2015, merchants engaged in the performance of professional designated services may use the cash basis method for purposes of the obligations of collecting and remitting the SUT.

Article 24 – Time to remit the SUT

A new provision is added for merchants with a VOB for the immediately before taxable year equal or less than $1,000,000, the time to remit the SUT to the Treasury Department for the month of July 2015, would be as follows:

• 55% of the SUT collected shall be paid not later than August 20, 2015; and
• 45% of the SUT collected shall be paid in three equal installments on September 20, 2015, October 20, 2015 and November 20, 2015, respectively.

Article 25 – SUT Credit in sales for resale

SUT credit provisions are amended to allow merchants who hold a reseller certificate to take a credit for the SUT paid on purchases and importations. For periods commencing before Jun 30, 2015, the credit is limited to 75% of the merchant’s responsibility reflected in the SUT return, except that in the case of merchants dedicated principally to the sale of food and food ingredients, the credit may be up to 100% of the merchant’s responsibility reflected in the SUT return. For periods commencing after Jun 30, 2015, the credit is up to 100% of the merchant’s responsibility reflected in the SUT return.

It should be noted, that the SUT credit that could be taken is limited to the state SUT portion (6% before July 1, 2015, and 10.5% after July 1, 2015), and although not clear, but it seems that no credit could be taken under the SUT systems for the 4% tax being paid on B2B services and professional designated services.

Article 26 – Transition for pre-existing SUT transactions

For pre-existing SUT transactions as of July 1, 2015, the sale of taxable items under contracts or bids executed or granted before July 1, 2015 will be subject to the SUT rate applicable to the taxable item as of June 30, 2014. The same shall apply to contracts related to taxable services if said services were paid before July 1, 2015.

Article 31 – Municipal SUT

It is not clear what happens to the 1% municipal SUT after March 31, 2016, as approved under Act 72-2015 the 1% municipal SUT continues to exist when the VAT starts.

III. Value Added Tax Provisions

Article 27 – VAT

The following is a brief highlight of the most relevant VAT provisions, definitions and procedures.

Starting on April 1, 2016, unless postpone by the Secretary of the Treasury, as a general rule a VAT of 10.5% will apply on the importation and sale of goods and services, including services rendered by a non-resident person to a person in PR. In the case of services rendered by a non-resident person to a merchant in Puerto Rico, said merchant will be obligated to compute, pay, and disclose the applicable VAT on services in the VAT Monthly Return. Please note that as approved, the 1% municipal SUT continues to apply on the sale of taxable items.

Similar to the SUT provisions, under the VAT the commercial rent is not subject to tax, and under both systems the price of the items and the amount of the tax should be shown separately. Also, the concept of the importer bond is maintained. Bonded merchants do not have to pay upon introduction into Puerto Rico, they pay with their monthly declaration of imports on or before the 10^th day of the following month.

The following taxable transactions are subject to a zero (0) tax rate: sale of goods for exportation; sale of services for exportation; and the sale of raw material, articles for manufacturing and equipment used in manufacturing to a manufacturing plant with an exemption certificate.

As previously mentioned, with respect to the sale of article to non-residents for exportation (tourist that will leave the island), a new Section 4150.07 was enacted by Act 72-2015. Under Section 4150.07, a non-resident individual who acquires property in Puerto Rico over which they have paid VAT may request a refund of the VAT paid if he/she comply with the following requirements: (1) the individual leaves Puerto Rico within a period not exceeding 30 days from the date the goods are purchased, and (2) the total amount paid by one or more goods as reflected in a single receipt exceeds $500. Section 4150.07 provides that the Secretary of the Treasury, the Tourism Company and the Ports Authority shall set forth the procedure for the person to request the refund at his/her exit from Puerto Rico.

For purposes of the application of VAT, the following are not considered “goods”:

1. money, stocks, bonds, notes, and other securities or obligations;
2. intangibles (except computer programs);
3. blood, products derived from blood, and human tissue and organs;
4. electricity generated by the PR Power Authority or any other entity;
5. water supplied by the PR Aqueduct and Sewer Authority; and
6. any property of the Commonwealth of PR or of the U.S. Government.

Goods considered for exportation (zero tax rate) are:

1. Goods acquired in PR to be sent to an address outside PR, if exported within 60 days of the sale;
2. Tobacco or cigarettes sold to foreign or US flag ships for consumption outside PR;
3. Goods sold at air or maritime terminals to persons departing from PR, when the person selling the good has the appropriate license (duty free shops or terminals); and
4. Goods sold to cruise ships.

The following transactions will not be subject to VAT:

1. Financial and insurance services, except bank charges;
2. Sale of prescription drugs;
3. Sale of articles to make up for physical or physiological deficiencies;
4. Sale of goods and services acquired with funds from Medicare, Medicaid and the Government Health Plan;
5. Sale of goods and services to the Government, or importation of goods by the Government;
6. The sale or importation of gasoline products and products derived from crude oil;
7. The rent or lease of real property subject to the room tax imposed by the Tourism Company;
8. Sale of food or food ingredients;
9. Sale of goods acquired with funds from the Federal Nutrition Assistance Program and WIC;
10. Sale of real property;
11. Rent or lease of principal residence, students and senior citizens lodging;
12. Rent or lease of commercial real property;
13. Sale of goods by non-for profit organizations, only if the goods being sold were acquired by donation;
14. Sale of machinery and equipment used for the performance of healthcare services on humans;
15. Sale of articles used by bona-fide farmers;
16. Occasional sales by churches or religious organizations;
17. Education and child care services;
18. Sale of goods to a merchant engaged in a tourism business when the tourism business has an exempt purchase certificate, and only with respect to goods that are used in the tourism activity and are not inventory;
19. Sale of articles for manufacturing to a manufacturing plant;
20. Sale of printed books;
21. Sale of vehicles, boats and heavy equipment that are subject to excise taxes;
22. Performance of health and hospitalization related services to humans or animals; and
23. Legal services provided on contingency with respect to cases involving family law, domestic food support, tort medical malpractice, and tort physical and mental anguishes damages.

One of the important elements of VAT systems is the availability of the credit to be taken by the merchant importer or purchaser of goods and services on the subsequent resale. The credit is composed of VAT paid on the import of goods, the purchase of goods and services in Puerto Rico and the VAT paid by a merchant for services rendered by a non-resident person. Except in the case of merchants principally engaged in the sale of foods or certain provisions, and merchants principally engaged in the sale of prescriptions drugs, merchants engaged in the sale of taxable and exempt goods and services might not be able to take full credit for VAT paid, because they are required to make an apportionment of part of the credit between taxable and exempt transactions. To evidence and keep track of the credits and to account for adjustments, a system of fiscal voucher and credit/debit notes has been put in place, as follows

1. Fiscal Voucher: merchants that purchase goods or services may request that the seller provide a Fiscal Voucher evidencing the tax withheld;
2. Debit Note: if there has been an increase in the amount of the value of the sale transaction, compared to what was reported in the Fiscal Voucher (including any corrections to the invoice); or
3. Credit Note: if there has been a decrease in the amount of the value of the sale, compared to what was reported in the Fiscal Voucher (including any corrections to the invoice, returns, bad debts, additional discounts, or when the sale is canceled).

If a merchant has credits or adjustments in excess of the VAT it is required to remit to the Treasury Department during a month, a VAT overpayment results. VAT overpayments that do not exceed $10,000 must be applied in the following month and the months thereafter, until exhausted. However, if the overpayment exceeds $10,000, the merchant may request a reimbursement if it holds an Eligible Merchant Certificate (a merchant with an annual volume of sales exceeding $500,000 for the three immediately preceding years, or less applicable period if in operations for less than three years, and 80% of its total sales are subject to a zero VAT tax rate), or if is in an overpayment situation for three consecutive months.

This is a preliminary discussion of the most relevant provisions of Act 72-2015. We will keep you posted with further updates to reflect any technical amendments, issued guidance and further clarifications.

by cstlaw

U.S. Supreme Court rules against retailer Abercrombie & Fitch in widely publicized headscarf case and allows EEOC’s employment discrimination suit to go forward

LABOR & EMPLOYMENT CLIENT ALERT

On Monday, June 1^st, 2015, the U.S. Supreme Court ruled that under the disparate-treatment (intentional discrimination) provision of Title VII of the Civil Rights Act of 1964, an applicant (plaintiff) need only show that his or her need for religious accommodation was a motivating factor in the employer’s decision and need not show that the prospective employer had “actual knowledge” of the need for an accommodation.² The Opinion underscores the need for employers to accommodate, within reason, the religious practices and beliefs of applicants and employees alike, unless such accommodation would impose an “undue hardship” on the business.

The case involved Samantha Elauf, a practicing Muslim, who was denied a job at Abercrombie & Fitch because her hijab (headscarf) would conflict with Abercrombie’s “Look Policy.” Although Elauf received a satisfactory rating as part of her interview process, she ultimately was denied employment because Elauf’s headscarf violated Abercrombie’s Look Policy, specifically a provision in the Policy prohibiting caps.³ We must underscore that the manager who interviewed Elauf and gave her a satisfactory rating, believed or suspected Elauf wore the headscarf because of her faith.

The Equal Employment Opportunity Commission (EEOC) filed suit on Elauf’s behalf alleging that Title VII of the Civil Rights Act of 1964 prohibited Abercrombie from refusing to hire Elauf because of Elauf’s religious beliefs. The case made its way to the Supreme Court and in an 8-1 decision, religion got the upper hand. The Supreme Court reversed the decision from the Tenth Circuit Court of Appeals which had granted summary judgment to Abercrombie upon concluding that an employer cannot be liable under Title VII for failing to accommodate an applicant or employee’s religious belief or practice until the applicant or employee provides the employer with actual knowledge of the need for an accommodation.

In the majority opinion’s view, the disparate treatment provision of Title VII, which forbids employers from, among others, failing to hire an applicant because of such individual’s religion, relaxes the “but-for” causation standard to prohibit even making a protected characteristic a “motivating factor” in an employment decision. More importantly, the Court ruled that the disparate treatment provision of Title VII does not impose a knowledge requirement, contrary to, for instance, the Americans with Disabilities Act of 1990’s reasonable accommodation provision.

Thus, in disparate-treatment claims based on a failure to accommodate a religious practice, the rule promulgated by the Supreme Court is the following: employers may not make an applicant’s religious practice or beliefs, confirmed or otherwise, a factor in employment decisions. Put simply, an employer’s decision motivated in part by a desire to avoid prospective religious accommodation, is violative of Title VII. Although it declined to so rule or hold, the majority opinion hints or suggests that at least a suspicion on the part of the employer that the practice in question is a religious practice, is required for the motive requirement to be met.⁴ Bear in mind, however, that in the context of this case Abercrombie knew or at least suspected that Elauf’s hijab was worn for religious reasons.

Lastly, the Supreme Court rejected Abercrombie’s argument that a neutral policy cannot constitute intentional discrimination. The majority opinion holds that Title VII does not demand mere neutrality with regards to religious practices, but rather gives religious practices “favored treatment.” Thus, particularly as it pertains to religious beliefs and practices, employers must think twice before making employment decisions based upon the perception that no harm is done in applying a neutral policy across the board.

If you have any questions or comments regarding the aforementioned, or if you’d like assistance to ensure that your practices and policies are aligned with the Supreme Court’s ruling, please contact any of the following attorneys from our Labor & Employment Practice Group at your convenience:

Juan J. Casillas Ayala
jcasillas@cstlawpr.com   |  787-523-3439

Luis F. Llach Zúñiga
lllach@cstlawpr.com  |  787-523-3496

Angel X. Viera Vargas
aviera@cstlawpr.com  |  787-523-3466

Israel Fernández Rodríguez
ifernandez@cstlawpr.com  |      787-523-3437

by cstlaw

Recent amendments to Puerto Rico’s Anti-retaliation statue and Puerto Rico’s Minimum Wage, Vacation and Sick Leave Act

LABOR & EMPLOYMENT CLIENT ALERT

A. Significant amendments to Puerto Rico’s anti-retaliation statute (“Act 115”)

On September 19, 2014, Governor Alejandro García Padilla signed House Bill 1467 into law, creating Act No. 169 of September 29, 2014 (“Act 169”), which amends Puerto Rico’s anti-retaliation statute, Act No. 115 of December 20, 1991 (“Act 115”). The new changes introduced by Act 169 amend and clarify the definition of “employer” under Law 115, and substantially expand the protection against retaliation afforded to employees under the statute to testimony shared, offered or presented before the employer’s internal proceedings. These new amendments align Act 115 with the anti-retaliation provisions set forth in Title VII of the Civil Rights Act of 1964.

1. “Employer” – The amendment provides for a broader, almost all-encompassing definition of employer, which applies equally to all employers (its agents and supervisors), whether public or private in nature, public corporations, or any other type of present or future corporation or organization, whether for-profit or nonprofit, all persons and individuals, including the Commonwealth of Puerto Rico and its three branches of government, its public instrumentalities, municipal governments and all municipal corporations and instrumentalities, that have one or more employees and that provide any type of compensation to such employees, whether monetary or not.The definition includes labor organizations (or unions) and other organizations, groups and/or private associations in which employees participate and engage in collective bargaining with employers with respect to the terms and conditions of employment, and employment agencies.
2. Prohibition against retaliation – Employer’s internal proceedings includedPrior to this recent amendment, Act 115 prohibited and made it unlawful for an employer to retaliate or take adverse employment action against an employee who engaged or attempted to engage in protected activity under the statute, which included testifying, participating, assisting or offering information –verbal or written- before any legislative, administrative or judicial forum in Puerto Rico. The amendment substantially expanded or broadened the concept of “protected activity” and now protects employees from retaliation for offering testimony, providing or attempting to provide information, or otherwise participating in an internal investigation in the workplace and/or before a company-level forum, or offering this information to any company employee or representative in a position of authority, provided the information or expression is not defamatory or privileged. Act 169 became effective immediately.

B. Amendments to the Puerto Rico Minimum Wage, Vacations and Sick Leave Act (“Law 180”)

Also on September 19, 2014, Governor Alejandro García Padilla signed House Bill 1521 into law, creating Act No. 160 of September 19, 2014 (“Act 160”), introducing significant amendments to Puerto Rico’s Minimum Wage, Vacation and Sick Leave Act, Act No. 180 of July 27, 1998 (“Act 180”). Notably, Act 160 introduces a new civil penalty for any violation to Act 180’s provisions, in addition to the existing criminal penalties. As amended, Act 180 now provides that any individual or person that, acting as an employer or administrator, representative, agent, employee or manager (or supervisor) of an organization, corporation, society, or the like, violates or refuses to comply with the Statute’s provisions, shall incur in civil liability for a sum equal to double the amount of damages that the action has caused the employee. In addition, the amendment establishes that in those cases where the court (or any other trier of the issue or controversy) is unable to determine the amount of pecuniary damages to be awarded to the employee, the court may –at its discretion- impose a penalty for a sum of not less than five hundred dollars ($500.00), but not more than three thousand dollars ($3,000). An employer’s agents and administrators are exposed to this new civil penalty in their individual capacities.

Act 160 also amended Act No. 15 of April 14, 1931, known as the Organic Act of the Department of Labor and Human Resources of Puerto Rico, to enable the Department’s Office of Mediation and Adjudication (“OMA”) to impose the new civil penalty set forth in Act 160.

If you have any questions or concerns, or simply wish additional information regarding the aforementioned amendments, please contact any of the following attorneys from our Practice Group at your convenience:

Juan J. Casillas Ayala
jcasillas@cstlawpr.com   |  787-523-3439

Luis F. Llach Zúñiga
lllach@cstlawpr.com  |  787-523-3496

Angel X. Viera Vargas
aviera@cstlawpr.com  |  787-523-3466

Israel Fernández Rodríguez
ifernandez@cstlawpr.com  |      787-523-3437