Termination indemnities to be paid in the case of the termination of an employment contract by the employer
Spain has one of the most protective forms of employment legislation within the European Union and such protection of employees' rights is particularly strong in the event of a termination of an employment contract initiated by the employer. However the level of protection varies according to the job position of the employee. The higher the position of the employee is in the company the less effective his labour protection.
Board members and chief executives
Mercantile law ("contratos mercantiles"), and not employment law will, exclusively govern the working relationship of individuals who only hold the position of a Board member. They can be dismissed at will and are not entitled to receive any compensation. Therefore, in practice, such a category of Directors will often hold another position within the company, which affords better protection such as the one corresponding to chief executives ("contrato de alto cargo") or ordinary employees ("contrato de derecho común"). Moreover, it is common that such Directors benefit from a special coverage in the form of a golden parachute mechanism established in a contractual provision, in case of dismissal. However, it is worth mentioning that some Spanish courts have denied the application of such a mechanism in the event of a termination decided by the employer and based on justified economic grounds.
Chief executives are subject to a special labour regulation established by the Royal Decree 1382/1985, which defines such a category according to the following: "Those employees who exercise powers inherent to the legal representation of the company and relating to the general purposes of the same, with autonomy and full responsibility, only being limited by the direct instructions given by the individual or the superior governing body of the company entitled to do so."
One of the main features of a chief executive contract is the financial consequence of its termination when initiated by the employer. In case of a dismissal with good cause, the high/chief executive will only be entitled to receive compensation equivalent to 7 days of salary per year of service capped at 6 months of salary unless other terms are agreed in the work contract. If the dismissal is considered as unfair, the chief executive will be entitled to receive 20 days of salary per year of service with maximum compensation of 12 months of salary unless other terms are agreed in his work contract. The Spanish case law has very strictly construed the definition of the chief executive category as provided by the RD 1382/1985. As a result, under Spanish law, most terminations of work contracts cases fall under the scope of the legislation applicable to common employment law contracts.
Ordinary labour contracts
The common employment contract is, principally, governed by the "Estatuto de los Trabajadores" (hereafter referred to as E.T.). Article 49 of the E.T. provides for different causes of termination of a contract. Some of the grounds for termination are self explanatory and may not, generally, give rise to a dispute between the parties such as: mutual agreement, death, expiration of the contractual term, retirement, etc. We will focus on the ones that, in practice, generate litigation between the employer and the employee who is dismissed. Generally, when the cause for termination alleged by the employer is of an economic nature, it is quite likely that the dispute between the parties will be solved in the form of a settlement made outside of court. When other reasons are alleged, it is quite frequent to have such dispute settled by the court after years of litigation, especially when important termination indemnities are at stake.
Under Spanish law, the termination indemnities depend on whether the work contract is for a limited period or not.
There are two types of contracts with a definite duration: the general category of contracts for a limited period and specific training contracts. The general category comprises, inter alia; contracts entered into for a specific project or to perform a specific service, contracts whose purpose is to adjust to temporary market needs contracts to substitute temporarily some employees on leave of absence, etc. As for specific training contracts, they apply mainly to junior college graduates or unqualified workers between 16 and 21 years of age. In accordance with article 49-c of the E.T., in the case of termination of such contracts at their normal expiry date, the employee is generally entitled to receive a termination indemnity based on 8 days of salary per year of seniority. If the employer terminates the contract before its agreed expiry date, the rules corresponding to contracts for an indefinite period apply.
A contract for an indefinite period may only be terminated, under Spanish law, according to legally defined causes and an unfair dismissal can be very expensive for the employer in comparison to the European average. Indeed, if an employer terminates such type of contract without good cause, the employee will be entitled to receive a severance compensation based on 45 days of salary per year of service in the company capped at 3 and ½ years of salary (which corresponds to more than 28 years of service).
In practice, the employer can base his decision to dismiss the employee on one of the causes defined by the E.T, which are organised into three categories:
- Dismissal for objective reasons (articles 52 and 53 of the E.T.)
- Disciplinary dismissals (articles 54 and 55 of the E.T.)
- Collective layoff (article 55 of the E.T.)
Dismissal based on objective reasons
Legal grounds for an objective dismissal may take many forms such as the employee's failure to adapt to technical changes or the need to suppress a job position due to economic, technical, production or organisational needs.
In such event, the employer will have to serve to the employee a termination letter and offer him an indemnity based on 20 days of salary per year of service in the company, with a maximum set at one year of salary. In practice, it is very difficult for the employer to be able to defend, before the court, his decision and the parties often end up with a negotiated settlement based on 35 days of salary per year with the company which is about the average between the termination indemnity corresponding to a justified dismissal (20 days / year of service) and the termination corresponding to an unfair termination (45 days / year of service).
We can also note that, in the case of a dismissal for an objective cause, the notice period is usually 30 calendar days (unless the collective bargaining agreement provides for a longer term) but the parties can agree that it will not be performed in which case the employee will receive the corresponding compensation.
Disciplinary dismissals
Legal grounds for a disciplinary dismissal are strictly defined by the law and such termination of a work contract may only be based on repeated absenteeism or lack of punctuality, insubordination or disobedience, physical or verbal abuse, breach of contractual good faith, voluntary and continuous reduction of job productivity, habitual drunkenness or drug addiction that negatively affects job performance.
In this type of procedure, the effect of the termination is immediate and no compensation is to be paid to the dismissed employee. However, the employer faces a financial risk in case of a dismissal considered to be unfair of 45 days of salary per year of service. The facts that are alleged to justify such disciplinary dismissal must, therefore, be very precise and well detailed in the termination notice served to the employee. Such facts are statutorily barred after a period of 60 days computed from the date they are discovered and, in any event, after 6 months of their occurrence. Nevertheless, in practice, this procedure is quite frequent in Spain as it allows the employer to state that the payment of a notice period and the financial sanction in case of a dismissal recognised as unfair is not higher than for a dismissal based on an objective cause.
Collective layoff
The collective layoff procedure ("Expediente de Regulación de Empleo") is applicable when, in most cases, within a period of 90 days at least 10 % of the workforce of a company is dismissed for economic reasons. Such procedure is very strictly governed, as its impact on the company and on the social environment is important.
First of all, such a measure must be absolutely necessary for the future operation of the company due to the existence of severe losses or a drastic change in market conditions and not only to contribute to the higher profitability of the company. A collective layoff in Spain must have the prior approval of the Employment Authorities before being implemented and will also give rise to compulsory negotiations with the employer's representatives, which shall last at least 30 days (or 15 days for companies with less than 50 employees). In practice, such negotiations can last for a long time, as the law does not provide for a maximum period of negotiation. If the parties agree to the economic plan presented by the employer, the Employment Authorities will simply endorse such an agreement and the dismissed employees will receive at least 20 days of salary per year of service with a maximum indemnity of one year of salary. If the parties do not reach an agreement, the Spanish Administration will decide whether the social plan presented by the company is acceptable, totally or partially, or must be rejected. Quite often, in order to speed up the procedure and reach an agreement with the employee's representatives, the employer is willing to offer 35 days of salary per year of service.
It should also be noted that, if the collective layoff affects employees over 55 years of age, the employer will have to enter into a special agreement with Social Security, at its own cost, in order to guarantee to the employee, that until he is 61 he will not lose any right in relation to retirement benefits.
Specially protected employees
Under Spanish law, certain categories of employees are covered by a special employment law protection in case of termination of their contract. Therefore, dismissals of such employees on objective or disciplinary grounds are almost always considered as null and void and the employer may be compelled to reinstate the employee in his former job position. As a result, the termination of such specific contracts gives rise to specific negotiations, which can result in the payment of very high indemnities. It is not uncommon to reach agreements based on more than 60 days of salary per year of service.
The main categories of specially protected employees are:
Employees' representatives: Under articles 56.4 and 68 of the E.T, when the employer dismisses an employees' representative, he must respect a procedure during which the employee dismissed and the rest of the employees' representatives will be heard. Such procedure does not apply to ordinary dismissals, whether objective or disciplinary.
Pregnant women or workers on parental leave: The Spanish law nº 39, 1999 of November, 5th, 1999 for promoting conciliation between work and family life provides for a special protection for pregnant women or employees on parental leave. Such protection is very strong as Spain has one of the lowest birth rates in the world and the protection of pregnant women and employees benefiting from parental leave clearly follows an important political objective. Therefore, the vast majority of objective or disciplinary dismissals affecting this category of employees are declared null and void.
Special compensations
Apart from the termination indemnities generally mentioned above, some specific financial compensation may be awarded in certain circumstances, for example in the case of clientele indemnity or when a non-competition clause limits the ability of the dismissed employee to find another job.
The indemnity for clientele may be due if there is an unfair benefit for the employer related to the clientele created or developed by the employee (RD 1438/1985 art-11). However, such a specific indemnity is only due if the employee is restricted to compete with his former employer because of the existence of a non-competition clause in his contract. If these criteria are met, the compensation to which the employee is entitled can not exceed, in any case, the equivalent of a year of commissions based on the average amount of commissions received during the last three years or the duration of the contract if it represents a shorter period.
To be valid under Spanish law, a non-competition clause must be limited in time and must be compensated for. Such clause can be agreed between the parties at any time. In other words, prior to the initiation of their working relationship, during the work contract or even after its termination. Spanish case law provides that the compensation for such clause must be adequate (in practice, it should bear a relation with the ordinary compensation of the employee) and its duration can not be more than 2 years for technicians and 6 months for the other employees. The employer can lift such restrictions on non-competition and the employee will then, correspondingly, be free to find any kind of job.
For further information, please contact Alexis Baelen at bflmadrid@bfl-abogados.com or on +34 91 43 6 45 31
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