IESE Insight
User's Guide to Spanish Labor Reforms
Segarra, José Antonio; Carrillo, Jordi
Artículo basado en: Las medidas laborales de la empresa en situación de crisis
Año: 2012
Idioma: Spanish

Adapt to the new reality or perish: This is the dilemma faced by many Spanish companies, which are hanging on by the skin of their teeth in very hard economic times.

To help companies survive and preserve as many jobs as possible, the Spanish government has introduced several major changes to labor legislation related to the terms of employment and severance pay, the procedures to be followed in the event of mass layoffs, and the handling of collective bargaining agreements, among many other issues.

All of these changes are designed to strengthen companies' competitiveness and ensure their continuity in the face of a crippling economic crisis.

By changing work conditions related to wages and productivity, the reforms aim to make the Spanish labor market more stable and limit layoffs as much as possible.

In their technical note, IESE Prof. José Antonio Segarra and Jordi Carrillo review the legislative tools that are now at companies' disposal.

Greater Flexibility in Laying People Off
The most drastic measure is the termination of workers' contracts.

In the case of a wrongful dismissal, the reforms stipulate severance pay of 33 days per year worked, rather than the 45 days that applied before, with a maximum of 24 months' pay.

For a legitimate dismissal, the severance pay rate is 20 days' pay per year worked, with a maximum of 12 months' pay.

Significantly, legitimate grounds for dismissal can now include a company seeing its revenue fall for three straight quarters. This marks an important shift, as it is now easier for the employer to apply the 20 days per year clause, and it means fewer dismissals for market-based reasons will end up in court.

The authors also review the grounds for terminating an employee's contract under the Workers' Statute and the different procedures to follow depending on whether the dismissal is individual or collective.

The reforms have done away with a previous rule that required government permission for a company to carry out a mass layoff.

Once a layoff is announced, the company and its workers have one month to reach an agreement on severance terms. If no deal is reached, the company can still go ahead with the layoff, although workers maintain the right to appeal the decision.

Less Traumatic Alternatives
The reforms also allow for less drastic measures, such as modifying working conditions: temporary suspension of contracts, imposing geographic mobility and temporary wage cuts.

To this end, companies may modify collective bargaining terms, so long as certain economic, technical, organizational or production-related conditions exist.

The reforms let companies sidestep sector-based or geographic collective bargaining agreements for reasons beyond their control or if sales fall for two straight quarters.

Furthermore, the new regulations limit to a maximum of two years the indefinite extension of collective bargaining agreements if management and labor are unable to come up with a new one.

All of this weakens the negotiating leeway of major unions and business federations, enhancing the role of collective bargaining accords within the company itself.

In the technical realm, the authors note that during the application of a temporary mass layoff, the social security payments of workers who have been suspended, or who have seen their workdays reduced, are cut by half.

What's more, workers in this situation do not accrue vacation days or the proportional part of their Christmas and summer bonus pay.

As for early retirement, the reforms force large companies that are making a profit to pay the government a high percentage -- between 60 percent and 100 percent -- of what the government employment service pays to compensate workers who accept early retirement.

The authors point out that the reforms also address the problem of temporary work contracts, although in a timid fashion, by limiting to 24 months the maximum stretch of time that fixed-term contracts can be rolled over.

If a company declares itself bankrupt, the Wage Guarantee Fund guarantees disbursement of unpaid wages and severance pay.

However, this does not let the company off the hook completely. The government agency will seek to recover what it has paid out, working out a payment plan with the company that is in receivership, so long as this is possible and the company wants to stay afloat and not just fold.

Acting in Time
Even though the overriding goal of the labor reforms is to create stable and lasting jobs in the long term, the authors acknowledge that the short-term effect could be more unemployment.

The reforms opt for internal flexibility within a company, so as to keep layoffs from being the only alternative in a critical situation, aligning Spanish legislation with that of the rest of the European Union.

It's no magic wand, they say, but the reforms might just pave the way for job growth that is healthier and more robust in the future.

© IESE Business School - University of Navarra