Labour Reform in Spain through Royal Decree-Law 10/2010

On June 16, the Government of Spain passed Royal Decree-Law 10/2010, with urgent measures for reforming the labour market. This is a reform that has been developing over last three years, and where social agents, companies, and unions have not been able to reach any agreement. In light of this lack of accord, as well as the pressures from our Eurozone neighbours, the Government has found itself compelled to establish a reform that pleases no one.

This reform has one true objective, which is to calm the increasingly heated composure of our European partners who have demanded an expansive reform in Spain. Precisely because of this objective, the Royal Decree-Law is provisional: enactment by Congress is undertaken as a Bill (proposed law) instead of a Decree. Whereas the Constitution on Decrees-Laws places a limit on Parliament to determine only if the situation at hand was of of extraordinary and urgent necessity, a bill allows amendments to be made by Parliament during the enactment process. Thus, all parts of this newly effective Royal Decree-Law that run counter to the actual Law will have been repealed by the time it is passed. It is estimated that the definitive reform will be in place by the end of 2010.

Let us analyze the most important changes established through this last reform€”which is provisional€”that will take effect starting 18 June 2010.

First, and most importantly, the use of the contrato de fomento del empleo (contract for job creation) has been generalized. This title was previously applicable to individuals between 16 and 30 years and adults over 45, to those who have been unemployed for over 6 months (the reform changes this requirement to three months), to victims of domestic violence, and the socially excluded. Following this reform, the scope of application of this type of contract has been broadened to include people between the ages of 31 and 44 who have been dismissed within two years prior to the reform, as well as those whose contract is converted from temporary to open-ended before the end of this year or the end of 2011, depending on whether the original contracts were concluded before or after the 18 June 2010.

The motive behind this generalization of job creation contracts is to encourage open-ended contracts by reducing their costs for dismissal. This will by no means affect employees who executed open-ended contracts prior to the effective date of this reform, as they will continue to receive 45 days’ compensation for each year worked in the event of a wrongful dismissal.

Second, this reform was expected to have specified the objective grounds that justify dismissal for objective reasons, which reduces the compensation employers must make to 20 days per year worked. Due to its uncertainty, the determination of what constitutes an objective ground is largely placed in the hands of a judge, making it in reality impracticable. That is what the Ministry of Labour declared from the inception of this mechanism that grants companies the right to dismiss for objective reasons if they can show proof of six months of losses€”simply an objective showing of these losses is sufficient. Yet instead of providing further specification, the text of the reform renders this more ambiguous. The literal text of the newly effective Royal Decree-Law considers the following as an objective reason for a dismissal:

Economic causes are understood as being when results indicate that the enterprise is in a negative economic situation. To this end, the enterprise will have to demonstrate the alleged results and prove that the results justify the rationale for its decision to dismiss.

Clearly, this does not specify economic causes and instead remains ambiguous. It leaves the decision as to the appropriateness of dismissal with 20 days’ compensation in the hands of the judiciary, and it does not appear that the judges and magistrates will change their tendency to deem improper dismissals on account of economic reasons.

Another outstanding measure established in the labour reform is that of federal subsidies for dismissals through the Fondo de Garantía Salarial (Fund for the Guarantee of Salaries), better known as FOGASA, starting the effective date of this Royal Decree-Law, part of the worker’s compensation will be funded directly by FOGASA in an equivalent amount to eight days of salary per year worked, even though this measure will only be applicable to open-ended contracts that have been concluded after the effective date of the labour reform. What we are really dealing with is a mechanism of distraction, as FOGASA is no more than an administrative organization financed by the fees of companies€”in other words, a public piggybank funded by companies. It is not crazy to think that there will be greater costs, and therefore the fees companies must pay will increase, and the companies that do not engage in dismissals will find themselves in an unfavourable position with this new regulation as they must face increasing costs.

One area that has provided greater certainty, and which this reform practically ignores, is that of collective bargaining. There was a great deal of speculation regarding the possibility of a reform on collective bargaining. Yet the `reform’ in this case is simply the option€”and not the obligation, as was proposed initially€”of voluntary arbitration in the event the company wants to proceed with a so-called descuelgue salarial (salary system suspension). The text of the reform defines salary system suspension as the impracticability, after a period of consultations with representatives of the workers, of the salary system provided for in collective agreements, beyond the scope of the company, when the economic situation and perspectives of the company could be harmed as a consequence of applying this system, and the possibilities of remaining employed would be affected.

Lastly, it is worth recalling that there has been much talk about setting up a Capitalization Fund in Spain, in essence setting up in our country a so-called Austrian model. The labour reform has given the government one year to propose a bill through which, without increasing company fees, the establishment of a capitalization Fund for workers is regulated, which will be maintained throughout their work life, for an amount equal to the days of salary per year of service to be determined. The Austrian model runs on the assumption that the creation of a fund for every worker, which will work essentially as a piggybank, will increase with the contributions that workers make over the course of their work life. The idea is that a worker’s fund does not disappear simply because the worker changes jobs, and it is an available source of savings if the worker is dismissed, is relocated, or engages in educational activities. It is available upon retirement if, at that time, there is still a balance above zero in the worker’s private fund. As the law expressly states that this will not increase company fees, it makes one think that either these contributions will come from the fees that companies are to pay to FOGASA or companies and workers will share the costs of the contributions. In any case, the Royal Decree-Law has made 1 January 2012 the deadline for operating these funds.

To sum up, this is a reform that must be understood in context of the pressure that our European partners have placed on our leaders. As it is a Bill, it will be subject to parliamentary debate, and parties have already announced their intent to include amendments to the text of the legal reform effective 18 June 2010.

This article is not considered as legal advice

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