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07. Termination of Employment Contracts

Grounds for Termination

In Spain, the following are grounds for termination:

 

  • mutual consent of the parties;
  • grounds established in the contract;
  • expiration of the contract term or end of the specific job;
  • employee’s resignation;
  • employee’s death or permanent illness;
  • retirement of the employee;
  • employer’s death, retirement or permanent illness;
  • force majeure that makes it impossible to continue rendering services;
  • collective dismissal based on objective grounds;
  • employee’s voluntary departure based on breach of contract by employer;
  • disciplinary dismissal of the employee.

Collective Dismissals

Terminations based on economic, technical, organisational or productivity grounds are deemed collective when: ten (10) workers are affected in companies with less than one hundred (100) workers; at least 10% of the employees are affected within a period of ninety (90) days in companies that have between one hundred (100) and three hundred (300) workers; thirty (30) workers in companies with three hundred (300) or more workers.

Individual Dismissals

Termination can be based on objective grounds or disciplinary grounds.

Reasons for objective dismissal

  • worker’s incompetence;
  • worker’s inability to adapt to technical change;
  • layoffs based on economic, technical, organisational and or productivity grounds.

Given that labour courts are so restrictive in accepting dismissals based on business grounds, this procedure is seldom used, unless the grounds are absolutely clear (e.g., bankruptcy).

Reasons for disciplinary dismissal

  • repeated and unjustified tardiness or lack of attendance at work;
  • lack of discipline or insubordination;
  • verbal or physical offence towards the employer, other people working in the company or residing family;
  • contravention of contractual good faith and misuse of trust;
  • continuous and voluntary decrease of the worker’s normal or agreed performance;
  • intoxication due to alcohol or drugs, when causing a negative effect in work;
  • harassment based on: race, religion, birth, gender, age, disability, opinion, social condition and sexual orienatation.

Is Severance Pay Required?

A disciplinary dismissal is one wherein the cause is based on the employee’s behaviour, which constitutes a punishable offense. Disciplinary dismissals must be communicated by a written letter to the worker, stating clearly and sufficiently the facts that motivate it and the date on which the dismissal will take effect. A disciplinary dismissal does not entitle an employee to receive any compensation from the company. A severance payment will only be required in cases that involve a court ruling declaring the dismissal unfair.

Severance pay resulting from objective dismissal

The severance pay resulting from an objective dismissal is a tax-free payment in the amount of twenty (20) days’ salary per year of service, up to twelve (12) months’ salary. If the dismissal is not correctly proven in court, the employee will be entitled to the severance explained below for unfair dismissals.

Severance pay resulting from disciplinary dismissal

If the dismissal is proven in court the employee is entitled to no severance. However, if the dismissal in deemed unfair by the judge or acknowledged as unfair by the company before the Conciliation Chamber or the Court, the relevant tax-free severance is thirty-three (33) days’ salary per year of service, up to twenty-four (24) months’ pay. However, this calculation must respect the following:

  • for the period of seniority rendered before 12 February 2012 (the day the labour reform was approved) the employee is entitled to the indemnity arising from a calculation based on 45 days per year of work, with a cap of 42 months.
  • for the period of seniority as from 13 February 2012 until termination date, the employee will be entitled to compensation based on 33 days per year of work, with a cap of 24 months. The sum of both amounts will be the legally established compensation for the employee.

The maximum cap is now 720 days. However, when the calculation to determine the severance for dismissal before 12 February 2012 results in a number of days greater than 720, the cap will then be 42 months.

The parties may agree to a lower or higher compensation. Higher compensations that exceed the ones described above will be subject to tax and social security contributions (in case of mutually agreed terminations), in the amounts described below.

Calculation formula and basis for calculation

Severance compensation is calculated under two criteria: seniority and daily salary. In case of objective or unfair disciplinary dismissal the severance will be calculated by multiplying the seniority by the daily salary and the days (20 in case of objective dismissal/ 33 in case of unfair dismissal). The daily salary is calculated taking into consideration the twelve (12) last payments, and the company shall include all salary concepts. This also includes salary in kind and extra-hours. Only extra-salary concepts should be excluded. Therefore, bonus, incentives and irregular payments are included.

Stock Options will be calculated for the severance under certain circumstances: in case of voluntary leave or disciplinary dismissal declared fair, the employee will lose the right to include the stock options in the severance for dismissal. The Supreme Court has said that in the event the dismissal was declared unfair and was carried out a few months before options could be exercised, they will be included in the severance for dismissal. The same will occur in the event of death, disability and retirement, in which the employee or his/her heirs will be able to claim these. In case of unfair dismissal, the employee will be entitled to exercise the right to stock options after the contract is terminated even if a “permanence clause” has been signed.

Separation Agreements

Termination of contracts based on mutual consent does not entitle the employee to severance payments (unless specifically agreed) or unemployment benefits.

Is a Separation Agreement required or considered best practice?

Should a severance be agreed, it would be subject to taxes and social security contributions. To avoid the aforementioned, the general practice for companies is to dismiss the employee so that he/she is entitled to the legal severance and also to unemployment benefits. Although this system is used in a clear majority of cases by employers, a termination agreed by mutual consent that has the appearance of a dismissal (by giving a dismissal letter to the employee in order to receive the severance free of taxes as well as unemployment benefits), is unlawful and considered fraudulent.

What are the standard provisions of a Separation Agreement?

A mutually-agreed termination will only require a simple agreement by both parties that puts an end to the employment relationship. In said agreement, we recommend the parties include certain background information that briefly explains the grounds for termination, the agreed compensation and the means and timing of payment, a specific mention to gross and net amounts, and several other clauses such as confidentiality, non-disparagement, waiver against future actions and possibly a non-compete, whenever appropriate.

Does the age of the employee make a difference?

A mutual agreement may be reached between parties independent of the employee’s age. That said, we need to be careful of those separation agreements with employees near retirement age, that are dressed as “dismissal letters”, as they could be subject to inspection by the state who will be in charge of paying said employees their unemployment benefits and subsequent retirement pension.

Are there additional provisions to consider?

In principle, the employee that signs a separation agreement is not entitled to additional benefits beyond agreed severance payment, the final payments, and any other amounts, agreed upon. If no dismissal letter is given and both parties agree to mutually terminate the contract, income tax payments and social contributions will be due by the employee in the event that the contract is terminated by mutual consent not only for the amount that exceeds that of an unfair dismissal, but for the whole severance paid.

The company will have to take the whole severance compensation and apply to it the employee’s existing tax % in his ordinary payroll. Likewise, it will also contribute to the social security as explained above.

If a mutually agreed termination (with no severance payment) is not correctly addressed, for example by not having a detailed termination agreement, with inclusion of a waiver clause, the employee may challenge the termination by filing a dismissal claim against the employer. In this case, if the employee proves that the termination was really a dismissal and not a mutually agreed termination, the employer may be liable to pay the maximum severance explained for unfair dismissals. These amounts would then be free of taxes and the employee would be entitled to unemployment benefits.

Remedies for Employee Seeking to Challenge Wrongful Termination

An employee is entitled to appeal against any such dismissal. However, prior to filing a claim with the courts, the parties are required to try to reach an agreement before the Mediation, Arbitration and Conciliation Service. When the employee files a claim before the court, the court will render one of the following judgments:

Fair Dismissal – in which case, the employer will not be subject to any penalties or further obligations towards the employee.

Unfair Dismissal – if the employee is successful in his claim, the principal remedies available are:

  • reinstatement, with financial award to cover lost remuneration; or
  • an award of 33 days salary per year of service, subject to a maximum of 24 months’ salary.

The choice of remedy, whether to make severance payments or to reinstate, is the decision of the employer. However, in cases involving the termination of an employees’ representative, the representative is the one who will enjoy the choice of remedy.

Null and Void Dismissal – a court will declare the dismissal null and void (and will award reinstatement, with financial award to cover lost remuneration) where a fundamental right of the employee has been breached during the course of the dismissal procedure, for example:

  • where the dismissal involves an element of discrimination prohibited by the Spanish Constitution or statute, or which otherwise violates the employee’s fundamental rights;
  • where the employer should have used the collective procedure;
  • where the employer has dismissed any of the protected categories of employees and has not justified the dismissal correctly.

If the worker is an employees’ legal representative or a trade union representative, there will be formal adversarial procedures, during which the worker and other members of the union to which he or she belongs, may be heard. If the worker is a member of a trade union and the employer is aware of this fact, representatives of the corresponding trade union must be heard in advance. Lastly, in the event of collective dismissal, the workers’ representatives have priority for remaining in the enterprise.

There is no absolute protection against dismissal in cases of pregnancy, suspension of the contract due to maternity leave, risk during pregnancy or breast-feeding leave; adoption or fostering; family leave to care for children or handicapped persons; and certain circumstances where female workers have been victims of gender violence.

Dismissal in such cases will be allowed if not motivated by reason of pregnancy or the exercise of the right to the abovementioned leaves (dismissal for an objective cause and disciplinary dismissal).

Whistleblower Laws

There is no specific employment legislation in place that provides legal protection for whistleblowers. However, internal company policies usually provide for protection as well regulate specific procedures to report illegal practices. Internal policies must be implemented in accordance with what is established within the law and regulations. The most recent reform of the Criminal Code, which came into force on 1 July 2015, introduced the need to have internal prevention mechanisms and channels in order to reduce or avoid any potential criminal liability for companies or their representatives. Whistleblower programs have also been regulated by the Data Protection Authority’s (‘DPA’) guidelines, in particular by the “Guide for Data Protection in Labour Relationships”. Usually, protection in an internal policy will be limited to the company’s employees, which have a direct hierarchical relation with the company.

Outsourcing services, agency workers or independent contractors do not fall under the organisational scope of the employer, but this does not mean that they cannot be protected in case any breach needs to be violated. The reporting system must rely on wrongdoings, which could affect the contractual relationship between the companies and the incriminated employee. There are some companies that have created “ethical mailboxes” where an employee can report alleged breaches of the company’s internal code of conduct. The company will need to ensure that its employees are well-informed about this system, how it works and most importantly, how their privacy and confidentiality concerning the information in the complaint will be guaranteed. The reporting system is created to uncover wrongdoings by other employees or company officials, which could be considered a breach of their contractual relationship.

The main principle, however, is that confidential information is only available to those people who are essential to the investigation of the complaint. The whistleblower’s identity will only be revealed if he/she acted in bad faith. The accused person will need to be informed of the accusations against him, without further delay, and usually there will be a department responsible for the investigation and the rights concerning data protection, although this can be delegated to an external advisor, as well. The registered information will be destroyed within a maximum of two months after the end of the investigation if nothing comes out of it. If there is a legal case, the information can be retained as long as needed by the company.

The possibility of filing an anonymous complaint is generally prohibited, because there is a real need to identify the complainant and the accused party. Finally, the body responsible for the investigation will need to inform the accused party regarding the protection and confidentiality of their personal information during all stages of the process, even upon its conclusion.

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