Wednesday, June 15, 2011

Spain: New Developments

By Sonia Cortes and Sofia Guijarro

The current social and economic recession in Spain has resulted in a good number of developments in employment law. The new legislation has aimed at allowing employers more flexibility in adopting measures to cope with recession, as well as measures to incentivize new hiring. The law has been proposed and/or approved by the government after discussion with employer associations and trade unions so as to achieve their support. Employers have, however, been disappointed with the scope of change that the new legislation has brought about since they were expecting more flexibility. Employees and unions are also not pleased with the changes given the loss of certain protections they had achieved throughout the years.

The main provisions of the labor law reform approved in 2010
[1] are the following:

1. Business Grounds Termination

a. Grounds

THere is new regulation on business grounds termination and collective redundancy. The level of justification (economic, productive, organizational or technical grounds) has been slightly amended to try to ease the use of this procedure, which provides for a lower severance. According to Spanish law, employees terminated through this procedure are entitled to severance of 20 days of salary per year of service, capped at 12 months salary, whilst unjustified termination (the most common termination procedure) entitles employees to severance of 45 days of salary per year of service, capped at 42 months salary. The law contained a highly demanding level of justification for business grounds termination, which courts were interpreting very restrictively. This resulted in this kind of procedure being seldom used; employers preferred to pay a higher severance in order to avoid litigation and the risk of having to eventually pay salaries during litigation.

The labor law reform has broadened the scope of the business-related reasons, allowing more situations to qualify as business grounds termination, with the aim of reducing severance and thus release employers from part of restructuring costs. Although the wording of the law has not changed significantly, the amendments do allow a broader scope for business grounds termination. In fact, the few court decisions that have been issued under the new legislation do show a broader interpretation on the underlying reasons for termination, thus resulting in terminations which would previously have not satisfied the test for a business grounds termination now being deemed to qualify.

b. Formal Requirements

The new law has also reduced the level of formalities required to implement a non-collective business grounds termination. This has removed the old risk that the employee could become entitled to reinstatement simply as a consequence of a formal defect in the procedure, such as not actively making severance available to the employee.

c. Taxation

The tax exemption on severance for business grounds’ termination and collective redundancies has been raised from 20 days’ salary per year of service (capped at 12 months) to 45 days salary per year of service (capped at 42 months). This eases settlement agreements between the parties, which is a very common practice in order to avoid litigation. The higher tax free portion allows the parties to agree on a higher severance without falling into a tax issue.

2. Temporary Lay Offs

The number of collective redundancies in 2010 decreased considerably in comparison with 2009. One of the amendments of the labor law reform made the procedure for temporary layoffs more flexible. This procedure implies temporarily 'staying' employment agreements; employees are then entitled to receive unemployment benefits. Usually employers agree with works councils to pay up part of such amount in order to guaranty a percentage of employees’ usual salary (often 80%), so that employers still have a saving on salaries whilst employees do not lose so much of their income.

The aim of this amendment was to encourage employers to use this structure, instead of collective redundancies, aiming at avoiding loss of jobs. The new law allows greater flexibility in choosing suspension by hours, days or months, and a change in the configuration of the unemployment benefit to be received by the employees whose contracts are suspended. It should be noted that changes implemented in 2009 allowed that, unlike before, the use of this procedure would not impact employee’s right to unemployment benefit, in the event of later termination, as long as a given limit was not reached.

3. Lower Severance for New Hiring

New law has also provided for lower severance entitlement for employees hired on indefinite term agreements. This law aims at encouraging employers to hire employees and to do so through indefinite term agreements so as to reduce the level of temporary employment in Spain.

This contract can be used by employers who hire unemployed individuals under a very broad range of circumstances, including (a) youngsters (between 16 and 30 years of age), (b) elder workers (45 or more years of age), and (c) individuals with difficulties achieving long-term employment (including individuals who have only had temporary agreements for the last 2 years, women in businesses with a low rate of female employment, etc). The situations have been so broad as to even include the circumstance that has become more widely used, ie. individuals who have been registered as unemployed for at least one month.

This contract provides for a lower severance in case of business grounds termination that is declared not to qualify as such, of 33 days salary per year of service, capped at 24 months (instead of the usual severance of 45 days salary per year of service). Besides, if a number of requirements are met, employers may also benefit from a number of interesting reductions to social security contributions.

4. Temporary Employment

A number of measures aimed at reducing the use of temporary employment have also been implemented. There is a big difference in the costs that arise when terminating someone who has an indefinite employment relationship and someone who is linked to a Company with a fixed-term contract. This fact creates a discouraging effect to the hiring of employees with indefinite contracts. As a consequence, the Labor law reform has provided a progressive increase of severance on the expiry of temporary employment agreements. Fixed-term employees are currently entitled to a severance of 8 days’ salary per year of service. This severance will gradually increase by 1 day every year up to January 1st 2015, when it will reach severance of 12 days’ salary per year of service.

5. Retirement Age Increase

Due to an aging population and the increasing need for Social Security funding, there has been an urgent need to modify retirement age as a means to sustain the welfare system. The Government, trade unions and employers’ organizations have been negotiating for months so as to reach the so-called “Social and Economic Agreement” (SEA). This will be tabled in Parliament and is expected to be approved between July and October.

The SEA’s main implication is the gradual delay of retirement age from 65 to 67 years of age throughout a 15 year term. Retirement at the current retirement age of 65 will still be possible for those individuals who have contributed to the Social Security System for 38.5 years.

The current special scheme allowing retirement at the age of 64 will disappear. Early retirement will be delayed from 61 to 63 years of age, the minimum contribution term for this purpose increasing from 15 to 33 years. In order to encourage delayed access to retirement, the Bill allows retirement pension increase for individuals working beyond the age of 67.

6. Collective Bargaining

The legislation regarding collective bargaining is also under review. Employer associations and trade unions have been negotiating for months to try to agree on a more flexible structure. However, after months of negotiations, the negotiations blew up on June 2nd. The main issue on discussion was the legal status of collective bargaining agreements upon expiry. The current legislation provides that they continue to be enforceable in their same terms until a new agreement is reached, which employers argue removes their bargaining leverage. Unions, however, have been trying to avoid giving in to a system that clearly benefits employees and which they achieved back in the 80s.

The Government now has responsibility to solve the situation by approving new legislation allowing more balance in collective negotiation. The Government will be placed in a difficult position given that the European Union is urging Spain to provide for more flexible employment legislation, but at the same time the governing party is concerned about how this will impact their position in the national elections to be called in early 2012. The collective bargaining labor reform is thus not expected to provide a major change in this area.

7. Labor Procedural Law

The procedural law is also undergoing review. A Bill is currently being discussed in Parliament. This Bill provides improvements to procedures for claims for employer liability for work-related accidents, including shifting jurisdiction from civil and administrative courts to employment courts and a simplification of proceedings by unifying claims (except criminal claims) into the same proceedings.

8. Discrimination

The Government has prepared a draft amending the 2007 law on gender discrimination. The chances that this draft finally finds its way to Parliamentary approval are still uncertain.

The above shows the number of changes to employment law. Employers, political parties and unions are trying to improve the legal employment framework in order to help to cope with the current economic scenario. However, unions are fighting to try to avoid losing employee rights they managed to secure during the political transition from dictatorship to democracy in the ‘80s. The government has been trying to avoid imposing the measures in order to avoid strikes and other social action. As a result, the changes are not as ambitious as employers were expecting, particularly as regards flexibility in working hours and job mobility.

Sonia Cortes and Sofia Guijarro, Cuatrecasas, Goncalves Pereira, Barcelona, Spain

[1] Including Act 35/2010 of 17th September