Contract Termination or Dismissal Due to Economic Reasons in Spain

The Spanish Labor Law has recently undergone some major changes. The current crisis and the subsequent executive effort to maintain competitiveness in our economy have motivated the adoption of the Royal Decree-Law 3/2012 of February 10, of urgent measures for reform of the labour market. This Law, among other aspects, has produced certain flexibility with one-way dismissals of employment contracts relating to economic circumstances.

This article does not provide adequate advice. It simply intends to introduce certain essential elements to facilitate initial understanding of the current framework of this particular aspect of Labor Law.

Definition and Legislation

First, it is necessary to define this phenomenon by relying on the most relevant regulations to provide understanding on the matter, which include Articles 49.1.l), 51.1, 52 c) and 53 of the Workers’ Statute. The termination of a contract for economic reasons is one of the objective causes listed for reasons for termination of an employment contract (the other two causes would be for restructuring or technical reasons).

Article 52 of the Workers’ Statute provides a list of reasons that justify the termination of a contract due to objective causes. These reasons are in part c) of the Article, which refers to Article 51.1 of the Workers’ Statute. And while a limitation exists, the Article adopts the causes for redundancy (collective dismissal) as justification for the individual termination of an employment contract.

The main difference between redundancy and terminations of employment contracts for reasons of objective nature lies in the limitation of Article 52 Part c) of the Workers’ Statute, as previously mentioned, which is none other than the failure to achieve the minimum thresholds established layoffs in Article 51 to prevent considering these terminations as a collective dismissal. Evidently, there are other differences between these two situations — especially when there is reference to formal requirements and procedures — but the underlying logic is identical.

Considering the case at hand in more detail — termination of employment due to objective reasons in the context of the economic situation of a business — we should stress that the Labor Legislation introduced by way of the Royal Decree Law 3/2012 of February 10, of urgent measures for reform of the labor market, has altered this case provided that existing limitations to allege the cause have been severely reduced. The current wording of the relevant Article is the following:

It is understood that there are economic causes that occur when company results reveal a negative economic situation. Negative economic situations may include situations of current or anticipated loss or the persistent decline in the level of revenue or sales. In any case, it is understood that the decline is persistent if during three consecutive quarters, the level of revenue or sales for each quarter is lower than in the same quarter of the previous year.

The Law refers to a negative economic situation, which is a vague expression and therefore subject to the possible interpretation of being considered an open list. This reality exists on top of the fact that there is no form of reference regarding the negative economic situation of the entity such as the inclusion of the prevision of losses as a reason.

Lastly, the concept established creates a situation when revenues are decreased, which gives it particular strength to be used as reasoning when filing this type of termination. If the analysis set forth in Article 51 provides a much more flexible framework to invoke economic causes as valid reasoning for the termination of an employment contract, the way the Article is written highlights even further the absence of the previous requirement of reasonableness in regard to the action taken.

Specific Circumstances for Using the Economic Situation as Reasoning

Considering the text of the Workers’ Statute at Article 51.1, as a minimum requirement there exist three circumstances where the business can be in a negative economic position. These circumstances are the following:

Current Losses

This circumstance is the least problematic because it is a negative economic situation that is very easily recognizable — especially when supported with documentation registered in public records or when external auditors have previously examined the documentation.

Expected Losses

We can refer to this circumstance as the opposite of the previous circumstance because expected losses are much more difficult to prove because they are not conclusive results. Despite the difficulties involved, providing a documentation analysis that employs a high probative value and offers a clear picture of the trend should be enough to comply with the law.

The Persistent Decline in Revenue

This circumstance shares many characteristics with that of current losses due to the fact that the same documentation is acceptable. The only varying factor is in the result of the exercise for the business.

Practica Consequences

While it is true that this the Regulation facilitates termination of employment contracts due to objective reasons, the fact remains that the current regulatory framework may condition the labor courts into applying a much more rigorous criteria regarding the procedural issues and values and interpretation of evidence and arguments that the parties submit. By applying these more rigorous criteria, the labor courts avoid any kind of abuse to this Law. For these reasons, it is of great importance to have good advice during all phases of dismissal to avoid any form of error that may cause the invalidity or illegality of the dismissal.

For additional information regarding dismissals in Spain,