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7 March 20236 minute read

Court declares Puerto Rico’s 2022 labor reform null

On March 3, 2023, the Federal District Court of Puerto Rico ruled that Puerto Rico Act No. 41 of June 20, 2022 (Act No. 41) was approved in violation of the Puerto Rico Oversight, Management, and Economic Stability Act (PROMESA), and that the changes to local employment statutes instituted by the act are null and void ab initio. Both the Puerto Rico legislature and the government’s executive branch announced that they will appeal the decision.

As discussed in earlier client alerts on June 28, August 24 and October 18, 2022, Act No. 41 introduced several important changes to Puerto Rican employment law, in many cases reversing changes which were introduced by the 2017 Labor Reform. Act 41 states that the reform took effect on July 20, 2022 for large businesses and on September 18, 2022 for micro, small and medium businesses (SMEs).

However, the law’s implementation remained unclear until March 3, 2023, as Puerto Rico’s Fiscal Oversight and Management Board (FOMB) maintained that the government of Puerto Rico had not properly certified that Act No. 41 was consistent with the Puerto Rican Fiscal Plan, as required by law.

The government’s failure to comply with the FOMB’s instructions

Following the approval of Act No. 41, the government submitted the law to the FOMB along with documentation to show that Act No. 41 was in accordance with the Fiscal Plan.

The FOMB responded that the government’s evidence was insufficient to demonstrate compliance with the Fiscal Plan and, consequently, instructed the government to suspend implementation of the law. The government responded by refusing to act in tandem, explaining that PROMESA does not authorize the FOMB to suspend approved laws unilaterally.

This interpretation of PROMESA seems to stem from certain language included in Pierluisi v FOMB, 21-1071 (1st Cir. 2022), where the First Circuit stated:

The Commonwealth also sought declarations that the Oversight Board cannot "unilaterally" invalidate a law and must seek judicial relief under § 2124(k) to enjoin a law's implementation. In other words, the Commonwealth sought declarations that the mere invocation by the Board of noncompliance with PROMESA did not have any legal effect in and of itself. The district court eventually dismissed these counts given the court's disposition of the Board's summary judgment motions. The Commonwealth does not address these dismissals on appeal. However, we note the district court's statement that "[a] proper declaration of a negative section 108(a)(2) determination by the Board [i.e., that a law would impair or defeat the purposes of PROMESA] triggers a statutory prohibition on action by the Government to go forward with the targeted statute, . . . but it does not empower the Oversight Board unilaterally to void the legislation or create an injunction." In re Fin. Oversight & Mgmt. Bd. for P.R., 511 F. Supp. 3d 90, 134 (D.P.R. 2020).

Consequently, the government’s actions forced the FOMB to seek judicial review to pursue nullification of Act No. 41.

Recent litigation

On September 1, 2022, the FOMB filed a complaint against Puerto Rican Governor Pedro Pierluisi to invalidate Act No. 41, pursuant to section 204(a)(5) of PROMESA. Both parties filed dispositive motions. On September 29, 2022, Governor Pierluisi moved for judgment on the pleadings on the basis that the Title III Court – the Federal District Court that considers PROMESA matters – lacked subject matter jurisdiction over the complaint.

On that same day, the FOMB moved for summary judgment to nullify Act No. 41, alleging that it was enacted in violation of PROMESA and impairs and/or defeats the purpose of PROMESA in numerous ways. On October 13, 2022, Governor Pierluisi opposed the FOMB’s motion for summary judgment, stating that PROMESA does not empower the board to override government regulation of private markets on the basis of unsupported speculation about unknown, incidental effects on future Commonwealth revenues.

On October 21, 2022, the FOMB replied by stating that its position is not arbitrary, and that the governor did not comply with its obligation of preparing a formal estimate of Act No. 41’s fiscal impact, as required by PROMESA.

Finally, on March 3, 2023, the District Court issued its opinion and order on the dispositive motions. First, the Court denied the governor’s motion for judgment on the pleadings, explaining that the Title III Court did in fact have jurisdiction to entertain the matter. The Court specifically referred to the language of PROMESA, which provides for it to entertain adversary disputes between the FOMB and the government of Puerto Rico about matters arising under or related to PROMESA.

Second, the Court granted in part and denied in part the FOMB’s motion for summary judgment. The Court explained that it was undisputed that the Government of Puerto Rico had failed to comply with section 204 (a)(2)(A) by failing to submit an estimate, formal or otherwise, of the impact on revenues and expenditures that Act No. 41 would have. The Court explained further that the government of Puerto Rico failed to certify that the law was consistent with the Fiscal Plan, another violation of section 204(a) requirements.

Moreover, the District Court concluded that Act No. 41 is plainly contrary to the 2022 Fiscal Plan, which directs the government to refrain from repealing the 2017 Labor Reform. The net consequence of this ruling is that Act No. 41 was declared null and void ab initio.

Takeaways for Puerto Rico employers

The opinion and order specifically instructs the government of Puerto Rico with respect to Act No. 41 as follows:

Act 41, and any actions that have been taken to implement it, are null and void ab initio. The Court further permanently prohibits and enjoins the Governor or other persons who are in active concert or participation with the Governor from taking any acts to help private parties implement or enforce Act 41.

As such, employers should be aware that all employment statutes revert to the language established by the 2017 Labor Reform.

It is worth noting that the Court’s ruling, while currently binding, is still not final. Parties may file a notice of appeal within 30 days of the ruling. PROMESA requires the Court of Appeals to “expedite to the greatest possible extent the disposition of any matter brought under this Act,” but the consideration of an appeal may nevertheless take several months, and the parties may seek revision from the US Supreme Court following the process.

In essence, at this time, employers may revert their benefits to the 2017 Labor Reform or continue offering benefits pursuant to the 2022 Labor Reform until the ruling becomes final.     

For more information or assistance on this opinion and order and potential courses of action to pursue, please contact the authors or your DLA Piper relationship attorney.