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Making It Harder For Job Creation

As If Things Weren’t Bad Enough In Puerto Rico, Existing And Proposed Local Labor Laws Are Squashing The Competitiveness Of Doing Business


April 24, 2003
Copyright © 2003 CARIBBEAN BUSINESS. All Rights Reserved.

Pushing the economy backward: Recent legislation ignores the areas of greatest concern to local businesses, offering no real solutions to problems such as the costly and paternalistic labor laws, the ever-increasing energy costs, and the slow and complex permitting process.

"No matter how strong the winds that lash at us, we will keep sailing a straight course until we reach our destiny. Our optimism and our confidence are what will allow us to overcome. Our main objective has to be creating the necessary conditions to attract more investment and to generate employment opportunities for the Puerto Rican people."

Thus is Gov. Sila Calderon quoted in a supplement titled "Pushing the Country’s Economy Forward" published in the island’s daily newspapers late last year. The supplement purported to provide a synopsis of the laws approved during the first half of her term to promote Puerto Rico’s economic development. The promise of economic development is a common cry of past and present political leaders on the island, but one that is rarely fulfilled.

It should come as no surprise then that the short list of economic development laws presented in the publication ignores the areas of greatest concern to local businesses, offering no real solutions to problems such as Puerto Rico’s costly and paternalistic labor laws, ever-increasing energy costs, and slow and complex permitting process.

A review of the bills proposed and the laws passed since Calderon took office in 2001 reveals that little has been done to push forward the economy and that the strong winds lashing us sometimes come from the Capitol. Haphazardly proposed measures, which sometimes become law, continue to erode the island’s competitive edge. Meanwhile, and with few notable exceptions, most legislators avoid proposing well-researched, far-reaching reforms to ease the burden of doing business in Puerto Rico.

The cost of doing business in Puerto Rico is already bogged down by some 25 government holidays, closing laws, and other antiquated regulations. Puerto Rico is the only jurisdiction in the U.S. where a worker on the clock automatically jumps to double time pay after eight hours worked--even if a 40-hour week has not been completed. Most states require time-and-a-half wage paid after 40 hours. These and other business burdens are outlined in the accompanying charts.

Proposed legislation that reeks of antibusiness mentality

Puerto Rico’s complex labor laws represent one of the greatest costs for businesses in Puerto Rico. "Puerto Rico’s labor laws were crafted in the 1940s and 1950s under much different competitive economic circumstances than we have today," said Miguel Soto Class, executive director of the Center for the New Economy. "They’ve been patched up over the years, when they actually need to be overhauled."

Legislative proposals that could further complicate the labor scenario are of tremendous concern to the private sector, particularly to the labor-intensive manufacturing industry, which is still considered the backbone of our island’s economy. Legislators have proposed a flurry of amendments to the Working Mothers Law that would increase maternity benefits far beyond the almost gratuitous nature of the existing legislation. House Bill 1504 proposes granting one hour of rest at the beginning of the work shift and another hour before the end of the work shift during the week after women return from maternity leave. Maternity leave right now is up to almost three months. House Bill 43 proposes an extension of prenatal and postnatal leave as well as an increase in the pay to which women on maternity leave are entitled. Working mothers in Puerto Rico are already entitled to 12 weeks of paid maternity leave.

"Private-sector employees already enjoy the broadest legislated work benefits of any jurisdiction in the U.S. As recently as the year 2000, three laws were approved to increase the benefits that working mothers enjoy, including the extension of the Working Mothers Law to adoptive mothers, the 100% increase in the length of the maternity leave, and the establishment of a 30-minute breastfeeding period in the 12 months after giving birth," said Jose Reyes, vice president of technical & legal services at the Puerto Rico Chamber of Commerce (PRCC). Far from benefiting working women, the costly cumulus of legislation could actually limit the career opportunities for women in their reproductive years by dissuading employers from hiring them.

Reyes said that Law 425 of Oct. 28, 2000, which increased maternity leave pay from half the total salary to full salary over 12 weeks, costs the private sector $16.7 million every year.

Another measure that could impose still higher labor costs on employers is a newly proposed House Bill 70, which would amend the Minimum Wage, Salary & Sick Leave Law to make its benefits for private-sector employees equal to those for public employees and to extend those benefits to part-time employees.

The PRCC warned the House of Representatives that the bill was clearly in conflict with the goals of increasing the competitiveness of local operations and attracting new businesses to the island. According to PRCC estimates, approving House Bill 70 would cost the private sector $630.4 million, causing a highly negative impact on its competitiveness.

The banking industry stands to lose if House Bills 3496 and 3546 are approved, said Jose Ramon Gonzalez, president of the Puerto Rico Bankers Association. The bills propose amending the Regulatory Law of the International Banking Center to impose a 10% tax on the net revenue that International Banking Entities (IBEs) derive from activities legally allowed in Puerto Rico.

"These bills essentially propose that the government abandon its policy to insert the island into the global financial currents," said Gonzalez at a hearing before the House Treasury Committee. "IBEs will naturally contemplate establishing their operations in more competitive fiscal environments, and there are many jurisdictions that would be more attractive than Puerto Rico if these measures are approved."

The flight of IBEs from Puerto Rico would turn back the clock on the expansion of the service sector, the growth of economic activity, and the creation of direct and indirect jobs that the island has seen since Law 16 of July 2, 1980 established Puerto Rico as a competitive jurisdiction for the development of an International Banking Center, according to Gonzalez.

Other proposals endanger the growth of the construction industry, one of the five largest employers on the island. House Joint Resolution 698 ordered the Planning Board and the Regulations & Permits Administration to stop issuing construction permits for shopping malls for six months to conduct a study of the economic and social impact of shopping malls on the island.

The PRCC vehemently opposed the resolution. "The construction industry has been instrumental in injecting life into the local economy. The joint resolution is a step in the wrong direction. Far from halting construction projects, we need to speed up the process to start new projects and propose incentives to support them," said the PRCC’s legislative report on the matter.

Legislative proposals also threaten to deal a blow to advertising agencies’ revenue. House Bill 1370, for example, proposed a law to regulate the advertising and promotion of alcoholic beverages. The measure would have limited the advertising of alcoholic beverages at school campuses, on TV and radio, and in movie theaters and public parks, allowing it only during certain time slots. Juan Arteaga, president of the Association of Advertising Agencies of Puerto Rico (AAPPR by its Spanish acronym), explained that the measure was completely unnecessary because the alcoholic beverage industry regulates itself to keep advertising from reaching minors.

Retail and commercial establishments could be the objects of costly measures aimed at offering discounts and other privileges to senior citizens. Should the Legislature approve Senate Bill 1290, for example, senior citizens would have the right to cancel a service contract and to return merchandise within 30 days without penalty. Similarly, House Bill 2294 proposes offering senior citizens a 50% discount on parking at private and public hospitals.

In opposing the two measures, the PRCC said they are unnecessary, that they could hamper the functioning of the market, and that they could place a financial burden on retailers, service companies, and parking operators. Meanwhile, House Bill 2045 proposed amending the Workplace Health & Safety Law to require that employers and owners of shopping malls provide security escorts to every employee who requests it, which would impose an unnecessary increase on the cost of operating shopping malls.

Approved legislation barely skims the surface

Some laws already approved during this administration are making it more difficult to operate a business in Puerto Rico.

Law 24 of Jan. 25, 2002, for example, grants athletes representing Puerto Rico in competition who are employed in the private sector up to a year’s leave of absence to train or to provide training. Employers who fail to comply with the law must compensate athletes for tort claims, plus they must pay double indemnity and reinstate them if they were fired.

"While there isn’t a direct cost related to this law, it does entail an additional administrative process and a risk that must be considered," said William Riefkhol, executive vice president of the Puerto Rico Manufacturers Association (PRMA). "In a jurisdiction where labor laws are so complex, laws such as these only add to an employer’s burden."

The PRCC opposed Law 24, stating in a published report that "the granting of an additional leave of absence for athletes is yet another benefit granted under local labor laws that wouldn’t contribute at all to improving the present economic situation." The report mentions that an earlier law, Law 49 of June 27, 1987, already gave athletes the right to a leave of absence of up to 30 days to represent the island in competition. "The creation of new benefits through legislation increases the operational costs of businesses and affects their competitiveness," stated the PRCC in the report.

"It’s important to analyze these laws in their context. Some may say it’s just an insignificant athletic leave of absence. In fact, it is one more in a set of labor laws that were designed to serve an agrarian economy in the early 1900s," said Riefkhol. The core of the island’s labor legislation was devised when agriculture was the motor of the economy.

New excise taxes on cigarettes, alcoholic beverages, and sport utility vehicles (SUVs), achieved through Laws 63, 69, and 70, have had devastating effects on those industries and have failed to yield the tax revenue hoped for by the local Treasury Department. These laws have been widely criticized by business associations, whose recommendations for alternative methods of tax revenue growth have fallen on deaf ears at the Legislature.

Another bill that could be detrimental to businesses is Law 81 of June 10, 2002. It amends the Internal Revenue Code of 1994, which eliminated the waiver on 7% tax withholdings of individuals or corporations that provide services. The purpose of the law was to expand the taxpayer base and reduce tax evasion by identifying income that wasn’t being taxed.

Law 81, however, bogs down the cash flow of service companies, especially those that claim losses and end up not having to pay taxes at the end of the year. After heavy lobbying, the law was passed to impose a 3% tax withholding (instead of 7%). However, that still cramps cash flow and provides the Treasury with artificial revenue that eventually must be returned.

"The law created a conflict of interests," said Gustavo Velez, executive aide to House Vice Speaker Ferdinand Perez Roman. "On the one hand, there was the state’s need to collect tax revenue and remedy the budget deficit. On the other, there was the need to protect the cash flow and financial integrity of service companies, which are generating a lot of jobs."

The PRCC made a strong case against Law 81 as originally proposed. "The proposed increase in withholding has a negative effect on the working capital of the self-employed and the service sector," it claimed. "If the tax withholding is increased when we all acknowledge that the economy is going through a recession, what we achieve will be to affect the finances of the service industry and to create a fictitious tax-collection structure to finance government work with money that doesn’t belong to the government."

Beyond passing legislation, the current administration is engaging in a series of practices that make it difficult for businesses to thrive, complained representatives from the island’s professional organizations. A major complaint of PRMA members in the past two years has been the mathematical-error notices sent by the Treasury Department every now and again.

"The notice itself doesn’t explain the cause of the alleged mathematical error, forcing business owners to spend hours waiting in line at the Treasury Department only to be told they have to return to provide evidence," said Riefkhol. "This is a long and costly process, especially if you consider that it entails paying fees to lawyers and accountants and taking time off work. The worst part is that Treasury, not the taxpayer, is often at fault for the errors."

Riefkhol also condemned the government’s sluggishness in paying suppliers. Although this is an old problem of every administration, it has gotten much worse lately. "It is a nefarious practice of the current administration," he said. "It goes beyond the parameters of what is reasonable. They have millions of dollars tied up in overdue invoices, which certainly makes it costlier to do business in Puerto Rico." The PRMA is taking a survey of overdue balances the government has with its members to document the severity of the problem.

The PRCC does support, however, House Resolution 2014 to conduct an investigation into the effectiveness of Law 25 of Dec. 8, 1989, which established a mechanism for speeding the payments to suppliers of goods & services to the government. According to the PRCC, 31% of its members stopped providing services to the government because of late payments, which proves that Law 25 hasn’t fulfilled its purpose.

Many have also complained about the frivolity with which some municipalities put into practice the Law of Autonomous Municipalities. Municipalities in financial straits hire lawyers and accountants on commission to collect patentes (municipal business licenses), a mechanism that doesn’t exist in any other jurisdiction in the U.S. Riefkhol said the collection of patentes is often carried out in a excessive, frivolous manner.

The municipality of San Lorenzo took the law one step further, imposing a tax on any project that requires moving earth, such as bulldozing before construction or extracting sand for aggregates. The tax effectively diminishes the competitiveness of aggregate companies operating out of San Lorenzo, raising their operating costs and putting them at a disadvantage over rivals in other municipalities who don’t have to bear the cost of the earth-moving tax.

What needs to be done

In order for Puerto Rico’s economy to thrive, the government must establish a speedy permitting process, train skilled human capital, act as a facilitator to businesses, and promote quality of life, said Velez, executive aide to the House vice speaker. "We believe the government needs to stop pushing a tax-sheltered economy and start fostering competitiveness," he said. "The state of California, for example, imposes high taxes, yet that is where Silicon Valley is, because it offers the most favorable conditions for businesses to prosper."

The PRCC echoed Velez’s thoughts, saying that Puerto Rico’s economic development laws need to undergo a major overhaul, particularly in the area of labor, said Reyes. "This legislative reform about which everyone is up in arms really just touches on little things," he said. "The legislative process to approve measures should not allow arbitrary decisions that could be detrimental to the economy."

Soto Class of the Center for the New Economy said low labor costs and tax incentives are no longer the factors determining Puerto Rico’s global competitiveness. "If companies are moving out of Mexico because labor is too expensive, then we have a snowball’s chance in hell of competing in that respect," he said.

The so-called digital economy holds the promise of prosperity for Puerto Rico, so long as telecommunications companies are allowed to build high-tech infrastructure without having to pay excessive fees to the government, said Soto Class.

An overhaul of the island’s labor laws is also necessary to compete in the global marketplace, said Soto Class. "We have to roll up our sleeves, take a good look at our labor legislation, and bring it up-to-date," he said. "It’s not impossible. Back in the 1950s, our labor laws were the most progressive of the time. Who says we can’t do that again?

"Economic growth is a good thing for all sectors," continued Soto Class. "We need to get together and propose creative solutions that are equitable, progressive, and good for everyone. We have all the elements to make that happen, if only we could learn to see this island as an economic ecosystem, where we all depend on each other to make it work."

Local consumers and industries still smarting from excise tax hike

The excise tax increase signed into law in summer 2002 is weighing heavily on consumers’ pocketbooks and having a harsh effect on their purchases of cigarettes, alcoholic beverages, and sport utility vehicles (SUVs), said representatives from those industries.

According to estimates by V. Suarez & Co., the largest liquor distributor on the island, beer sales in the first quarter (1Q) of 2003 were down 18% to 20% from the same period last year. Similarly, the spirits category saw a 22% to 25% decrease in sales and wine sales were down 14% in 1Q03, said David Allio, senior vice president at V. Suarez.

"This law--combined with the fact that we’re at the bottom of the economic cycle, the aftermath of 9/11, and the war--has had a terrible effect on businesses and consumers. It’s timing was ill advised," said Allio.

"We’re seeing signs of moderate pickup in the beer category, and we are hopeful the wine category, which was a growth market before the law was passed, will pick up as well," added Allio. "The spirits category, however, is showing no signs of going back to where it was before. The market has been devastated."

According to Allio, the Puerto Rico Treasury Department’s numbers on tax collections have been "sticky" lately, prompting suspicion that the revenue from the higher excise taxes isn’t meeting expectations.

The island’s auto industry has also been hit. According to Timothy Velez, sales & marketing manager at Suzuki del Caribe, SUVs accounted for 55% of sales before the law was passed. Their market share has gone down to 44%, although Velez believes that a spike in sales just before the law was implemented may be affecting the numbers.

"While auto sales in general are down 4.8% in comparison with last year, SUV sales are 18% lower than they were last year. It doesn’t get any clearer than that," said Velez.

Industry statistics don’t indicate that the drop in SUV sales has been offset by a rise in sedan sales. In fact, Velez said consumers are holding on to their cars longer than they used to.

"It’s a shame, really, because the weight of this law falls on auto dealers, and in some cases that weight translates into job cuts," said Velez. "The primary motivations for purchasing an SUV are security and the poor conditions of Puerto Rico’s roads, which call for tougher vehicles. SUVs aren’t a taxable luxury."

Meanwhile, R.J. Reynolds, which manufactures Winston, Camel, Doral, and other cigarette brands, has been feeling the pinch from the excise tax increase on cigarettes. Not only has the company had to raise its retail prices while reducing its profit margin, but decreasing sales will probably result in more layoffs in the industry this year.

According to Denise Santos, R.J. Reynolds’ vice president of human resources & corporate affairs, the company’s local sales volume declined 15% from July to September 2002 in comparison with that period in 2001. She expects this trend to continue this year.

Cost of Doing Business In. . .

Puerto Rico / U.S. Mainland (Average) / Ireland / Singapore / Mexico / Dominican Republic

Average Labor Compensation per Hour: $12.28 / $23.44 / $13.57 / $7.18 / $2.12 / $1.44

Minimum Wage per Hour: $5.15 / $5.15 / $4.40 / $1.56 / $1.53 / $1.51

Industrial Electricity (Cents per 1 kWh Hour): 9.34¢-15.4¢ / 4.5¢-8.3¢ / 6.0¢ / 7.2¢-9.1¢ / 5.0¢-6.0¢ / 18.0¢

Effective Corporate Income Tax Rate: 2%-7% / 6.9% / 10%-12.5% / 0%-4.7% / 35% / 5.7%

Sales Tax / Value-Added Tax (VAT): 10%* / 5.2% / 0%-21% / 3% / 15% / 8%

* It is estimated that the 6.6% excise tax of 6.6%, when it reaches the consumer, is actually close to 10%.

Sources: Forbes, Caribbean Business Book of Lists, Colliers International, Fortune magazine’s Best Cities Survey, Arthur Andersen’s Business Location Services, Central Intelligence Agency’s The World Factbook, U.S. Department of Labor, Federation of Tax Administrators, Finfacts Worldwide 2002 Cost of Living Survey

CB graphic by Ingrid V. Reyes

Employee Benefits Under Puerto Rico Law

Breast-feeding breaks: Two 15-minute breaks per day during year after returning from maternity leave

Christmas bonus: 6.25% of annual salary, minimum $200

Maternity leave: Eight weeks at full salary, distribution to be determined between employer and employee

Official government holiday: 18 days in the year

Overtime pay: After 8th hour, employee is paid twice the regular hourly wage

Sick leave: Accumulates at the rate of one day per month for a total of 12 days in the year

Vacation time: Accumulates at the rate of 1.25 days per month for a total of 15 days in the year

Source: LexJuris de Puerto Rico

CB graphic by Ingrid V. Reyes

Leaves of Absence Allowed Under P.R. Law

  • Family emergency
  • Jury duty
  • Maternity leave
  • Military duty
  • Nonoccupational disability
  • Occupational disability
  • Sick leave
  • Vacation

Source: Puerto Rico Chamber of Commerce, "Informe Legislativo" (Oct. 31, 2001).

This Caribbean Business article appears courtesy of Casiano Communications.
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