Remote work for an out-of-state employer

It is Act 27-2024, the "Act to Facilitate the Implementation of Remote Work in the Private Sector and to Incentivize the Establishment of Airline Bases in Puerto Rico", explained by Opinion of the Secretary of Labor 2024-02. It defines which employment law governs the relationship between an out-of-state employer with no business nexus to Puerto Rico and a person working remotely from here.

The Act speaks of covered employers: those not engaged in taxable trade or business in Puerto Rico nor in selling taxable items here, under the 2011 Internal Revenue Code and Treasury’s official interpretation. The opinion lists the conditions under which an employer with remote employees in Puerto Rico is not deemed engaged in trade or business: having no office or fixed place of business on the Island at any time in the taxable year, no economic nexus, not being a merchant under Act 1-2011, the remote employee not being an officer, director or majority shareholder, the services being for clients or businesses with no nexus to Puerto Rico, and the income being reported on a federal W-2 or a 499R/W-2PR.

• That the employer be a covered employer: out-of-state and with no taxable business nexus to Puerto Rico, under the conditions the opinion lists.Verified against the official source
• For the domiciled-employee rule: being an exempt employee under the FLSA — executive, administrator or professional — domiciled in Puerto Rico and performing the work remotely.Verified against the official source
• Being domiciled means being physically present in Puerto Rico with the intention of remaining indefinitely, per Article 87 of the 2020 Civil Code to which the Act refers.Verified against the official source

• The employment agreement: when the Act applies, it is the document governing the relationship. Absent an agreement, the law of the employer’s headquarters or of the employee’s domicile applies, depending on the case.
• Evidence of the insurance coverage the employer provides, if it is to replace the Fund’s and SINOT’s: it must be equal to or greater than what local laws require.

1. 1

   Step 1: First: is your employer "covered"?

   The Act only comes into play if the employer is out-of-state and not engaged in taxable trade or business in Puerto Rico. The opinion details conditions that must all hold: no office or fixed place of business here during the taxable year, no economic nexus, not being a merchant under Act 1-2011, you not being an officer, director or majority shareholder, your services being for clients or businesses with no nexus to Puerto Rico, and the employer reporting your income on a federal W-2 or a 499R/W-2PR. If your employer has operations here, this Act is not your case.

2. 2

   Step 2: Second: are you domiciled in Puerto Rico?

   Being here is not the same as being domiciled. The Act takes the definition from the 2020 Civil Code: you are domiciled when you are physically present and intend to remain indefinitely. Someone who came for three months to deal with a family matter and plans to go back is not domiciled; someone who moved to stay is.

3. 3

   Step 3: Third: are you an FLSA exempt employee?

   This is the axis most people miss. The domiciled-employee rule applies only to exempt employees under the FLSA — executives, administrators or professionals, per that federal statute and DTRH regulation. If you are domiciled in Puerto Rico and NOT exempt, Act 27-2024 does not apply to you and all Puerto Rico employment laws cover you. The opinion says so in as many words and devotes two of its five examples to it.

4. 4

   Step 4: If you are exempt and domiciled: the contract governs

   When the four conditions hold — exempt employee, domiciled in Puerto Rico, covered employer and remote work — the relationship is governed exclusively by the employment agreement between the parties, or, absent one, by the laws of the state where the employer is headquartered. The relationship is excluded from Puerto Rico employment law unless expressly provided otherwise. In practice that means what you negotiated in writing is what you have.

5. 5

   Step 5: If you are not domiciled here

   When a person decides to relocate to Puerto Rico without becoming domiciled, to work remotely for a covered employer, the employer is exempt from complying with all local employment laws, including those on benefits, obligations and insurance. The relationship is governed solely by the contract or, absent one, by the law where the person is domiciled. And one important difference from the previous case: here the Act applies to exempt and non-exempt employees alike.

6. 6

   Step 6: The Fund, SINOT and unemployment

   A covered employer need not provide State Insurance Fund coverage, SINOT coverage or, where applicable, chauffeur’s coverage, provided it supplies coverage equal to or greater than those local laws require. With unemployment the rule differs: the covered employer must comply with Puerto Rico’s Employment Security Act, unless the domiciled employee can claim benefits in another jurisdiction. If they cannot, the opinion says the employer may delegate to the employee the task of obtaining unemployment insurance with DTRH, including filing the quarterly returns, and clarifies that the Act does not expressly authorise that delegation but does not prohibit it either.

7. 7

   Step 7: The warning the opinion itself makes

   Worth reading twice if your employer will provide coverage by another route. The opinion says that if a covered employer decides to provide workers’ compensation by other means, Act 45-1935 generally will not apply, and that it is unclear whether the employer immunity that Act grants to policyholders would be extended, or whether the reinstatement provisions of Acts 45 and 139 would apply. The reason it gives is simple: Act 27-2024 is silent on the point.

8. 8

   Step 8: Airlines with bases in Puerto Rico

   The Act’s other half. Since 17 January 2024, employees of airlines that establish air bases or crew bases in Puerto Rico and are covered by collective bargaining agreements are excluded from Puerto Rico employment law protections, and their terms and conditions of employment are governed solely by the agreement. The opinion clarifies the other thing to know: NON-unionised employees of those same airlines do keep Puerto Rico employment law protections, because no exemption applies to them.

There is nowhere to apply: this is not a procedure but the rule deciding which law governs your employment. Application questions go to the Department of Labor and Human Resources, which issued the opinion; tax questions go to Treasury, because the fiscal side runs through the 2011 Internal Revenue Code as amended by Act 52-2022.

• Believing remote work alone is enough: the Act also requires the employer to be out-of-state with no taxable business nexus here.
• Forgetting the FLSA exempt-employee requirement in the domiciled-employee case.
• Thinking a non-exempt person who becomes domiciled in Puerto Rico stays under contract law: the opinion says all local employment laws apply to them.
• Confusing being in Puerto Rico with being domiciled, which requires the intention to remain indefinitely.
• Accepting substitute coverage without checking it is equal to or greater than the Fund’s and SINOT’s.
• Assuming every employee of an airline with a base here is excluded: the exclusion covers only those under a collective bargaining agreement.

These are the government pages this guide is based on.

• Departamento del Trabajo y Recursos Humanos (DTRH)

  Departamento del Trabajo

  www.trabajo.pr.gov

• Department of Labor and Human Resources — portal and labour library

  dtrh

  www.trabajo.pr.gov