Severance for dismissal in Puerto Rico: how it is calculated

The first 48 hours

Before signing anything, save evidence. Ask for the dismissal letter in writing and note the effective date, the clock to claim runs from that date. Gather your last pay stubs, your contract or appointment letter if there is one, the employee handbook and any performance evaluations you have.

Do not sign a release the same day. A well-drafted release waives claims that may be worth more than what is on the table, and payment of what you already earned (wages worked and accrued vacation) does not depend on you signing anything.

File for unemployment right away, without waiting to resolve severance. They are two separate things and one does not block the other.

The severance formula

Severance is set by Act 80 of 1976, the Unjustified Dismissals Act. It goes to any employee hired for an indefinite term who is dismissed without just cause. The Article 1 formula has two parts that add up:

• **An amount equal to 3 months' salary**, provided you have completed the applicable probationary period (or the one the parties stipulated).
• **Plus 2 weeks' salary for each completed year of service.**
• Cap: in no case will the indemnity exceed the salary corresponding to **9 months**.
• The 9-month cap **does not apply** to employees hired before the 2017 Labor Reform: their indemnity is calculated under the prior law.
• For these purposes, the law defines that **one month is four weeks**.

Which salary is it calculated on?

Here is a rule that works in your favor and that many people do not know. Article 4 provides that the indemnity is paid using as its base **the highest salary rate you earned within the three years immediately preceding the dismissal**. It is not last month's pay: if your salary was cut, or you earned more in an earlier position within those three years, that higher number governs.

Years of service are also counted broadly: they are determined on the basis of all accumulated prior work periods you worked for the same employer, provided the employment relationship was not interrupted for more than two years and the services were rendered in Puerto Rico. If you left and came back within that window, those years count.

What is excluded are years already compensated by reason of a dismissal, separation, termination or transfer of a going business, whether voluntarily, by judgment or by settlement. You do not collect twice for the same period. And any payment the employer already made you by reason of the termination is credited against the indemnity.

Severance is not taxed

This is the fact that moves the most money and gets overlooked most. The law provides that payment of the Act 80 indemnity (and also any equivalent voluntary payment the employer makes by reason of the dismissal) is **free of income tax**. It does not matter whether it is paid at the moment of dismissal or later, by settlement or under a judicial judgment or administrative order.

The limit is clear: any amount paid **in excess** of the indemnity the law provides is subject to tax. That is why, when negotiating an exit, how the amount is broken down matters.

Additionally, Article 10 expressly prohibits any deduction or withholding on the indemnity, except those required by laws passed by the United States Congress. If you receive a severance check with ordinary payroll deductions, there is something to review there.

What counts as dismissal (and what is just cause)

«Dismissal» is more than being let go. Article 5 also includes indefinite suspension or one exceeding three months (except in seasonal industries and businesses) and something people do not know has a name: **resignation motivated by employer actions aimed at inducing or forcing you to quit**, such as imposing more onerous working conditions, cutting your salary, demoting you, or subjecting you to abuse or humiliation. If you resigned because they made your life impossible, that can be a dismissal in the eyes of the law.

On the other side, just cause is one not motivated by legally prohibited reasons and that is **not the product of the employer's mere caprice**. The law lists, among others: a pattern of improper or disorderly conduct; a pattern of deficient performance; repeated violation of reasonable rules provided a written copy was given to you in time; total, temporary or partial closing of operations; technological or reorganization changes; and workforce reductions due to a drop in production, sales or profits.

Note the words «pattern» and «repeated». An isolated incident is not the same as a pattern, and a rule you were never given in writing hardly sustains a dismissal for repeated violation.

Act 80 does not apply to someone who at the time of dismissal is providing services under a temporary or fixed-term employment agreement. Careful with that: the law presumes valid and bona fide a fixed-term contract not exceeding three years in its initial term or across all its renewals, but if the practice and frequency of renewals create an expectation of indefinite continuity, the employment is understood to be for an indefinite term.

You have one year, and it is not negotiable

Article 12 is blunt: the rights Act 80 grants **prescribe after one year from the effective date of the dismissal**. Past that year, the claim is dead even if you were entirely right. Claims for dismissals prior to the Labor Reform are governed by the prescription term in force then.

If you go to court, the law speeds things up: in any suit founded exclusively on Act 80, the court holds a conference no later than sixty days after the answer is filed, and the parties are required to appear, or send someone authorized to make decisions, including settling the claim. That conference is where many cases resolve.

A severance claim can be filed through the summary procedure of Act 2 of 1961, the same one that covers unpaid wages. That procedure is built so a worker can win fast and with no money up front: the employer has ten days to answer or final judgment is entered against it, and if you win with private counsel, the employer pays the fees.

Unemployment and the next step

Unemployment is administered by the Department of Labor and is independent of severance. File as soon as you are out of work: the benefit is not retroactive to the dismissal date but to your application date, so every week you wait is money you do not recover. Having an open Act 80 claim does not disqualify you.

While it is being resolved, keep applying. If the dismissal was due to a closing or a workforce reduction, there is nothing personal to explain in your next interview: it is a reason the law itself recognizes as just cause, and recruiters understand it.