Cost of dismissal under debate
Published: 27 December 2000
In late 2000, negotiations over a possible new pact on labour market reform have brought to the fore one of the traditional demands of Spanish employers: cheaper dismissal. Employers' leaders argue that the high cost of dismissal in Spain is an obstacle to recruitment, while trade unions and other critics question whether the cost is really that high.
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In late 2000, negotiations over a possible new pact on labour market reform have brought to the fore one of the traditional demands of Spanish employers: cheaper dismissal. Employers' leaders argue that the high cost of dismissal in Spain is an obstacle to recruitment, while trade unions and other critics question whether the cost is really that high.
The social partners are currently discussing a new reform of the labour market (ES0011219N), to succeed the April 1997 intersectoral agreements on employment stability, collective bargaining and "filling the gaps in regulation" (ES9706211F). Among the key issues for negotiation is the cost of dismissals in Spain.
Some leaders of employers' associations claim that the cost of dismissal is such an important factor that it accounts for Spain's high percentage of temporary contracts and high unemployment. They therefore believe that a new agreement on labour market reform must follow the line of the 1997 agreements, which established far lower levels of compensation for the termination of permanent employment contracts offered to: unemployed people under the age of 30 and over the age of 45; long-term or disabled unemployed people; and temporary workers taken on permanently.
This argument is challenged by critics, especially among trade unions, who refer to the figures for the three and a half years since April 1997. The proportion of permanent contracts rose from 4% to 9% of all new contracts concluded by the end of the first year of the agreements' application, but stagnated at this level thereafter. A professor of labour law, JA Sagardoy, has recently stated that a large number of the new permanent contracts being concluded are not of the type introduced in April 1997 (ie those involving special target groups), but could be described as "normal". The increase in permanent employment is said to have two main causes: the public subsidies available for these contracts; and the good prospects of the Spanish economy in Europe and the world. However, at the same time, many workers are still being dismissed.
Trade union leaders have stated that if cheaper dismissal is imposed by a government decree or becomes an obstacle to a new pact, there will be mobilisations in the street.
The rules governing the cost of dismissal
There are three types of dismissal (despido) in Spain. The first is dismissal of workers on temporary contracts. (despidos de contratados temporales). Some of these workers receive a compensation payment of 12 days' pay for each year of service. Most of them (recruited on "work and service" contracts and contracts "to meet production needs") receive no compensation for dismissal. For this group, the cost of dismissal is irrelevant.
The second type is individual dismissal (despidos individuales) considered as such even if such dismissals affect up to 10% of the workforce. Compensation does not apply if the dismissal is for disciplinary reasons (ie if the workers infringe their obligations). If the dismissal is for objective reasons (which may be economic, technical or organisational reasons or reasons of production – their scope was extended in the 1994 labour market reform, and this was repeated in the 1997 agreements), or if the worker does not accept that the reasons are disciplinary (which is common because otherwise they would not receive unemployment benefit), the case comes before the Mediation, Arbitration and Conciliation Service (Servicio de Mediación, Arbitraje y Conciliación, SMAC) (ES9705107F). If the company and the worker fail to reach an agreement on the amount of compensation at the SMAC, the case is taken to the Social Court (Juzgado de lo Social), where attempts are made to reach an agreement before the court issues a ruling which determines whether the dismissal is justified, unjustified or null. In these cases, the following compensation payments apply:
if the dismissal is found to be justified, the compensation payment is 20 days' pay for each year of service, with a maximum of one year's pay;
if the dismissal is found to be unjustified, the compensation is 45 days' pay for each year of service up to a maximum of 42 months' pay, in addition to the pay due during the period of the legal procedures (from the dismissal to the final decision of the courts). The 1997 agreements reduced the annual compensation from 45 to 33 days and the maximum to 24 months' pay in the event of unjustified dismissal of persons on the new permanent contracts for unemployed people under the age of 30 and over the age of 45, long-term or disabled unemployed people, and temporary workers taken on permanently; and
if the dismissal is found to be null, the worker must be reinstated and receives the pay that was due during the period of legal procedures.
The third type is collective dismissal (despidos colectivos). This applies when the dismissal affects more than 10% of the workforce and is carried out through a redundancy procedure justified to the labour authorities. If the latter accepts the procedure, the compensation is 20 days' pay for each year of service up to a maximum of 12 months' pay. When the company has up to 25 workers, 40% of the compensation is paid by the Wages Guarantee Fund (Fondo de Garantía Salarial, FOGASA), ie by the state. This body also pays the compensation for individual dismissal if the company is declared insolvent. In short, the regulations are quite complex.
The real cost of dismissal in Spain
The above refers only to the regulations relating to compensation payments for dismissal. However, in order to determine whether or not dismissal is actually expensive for employers, one must analyse the practice. The latest figures available are those for 1998 - see the table below.
| Dismissals in 1998 | Average cost (PTA) | |
|---|---|---|
| Conciliation in the SMAC | 146,235 | 2,234,700 |
| Courts: | . | . |
| Conciliation | 10,500 | . |
| Ruling | 23,300 | 922,600 |
| Redundancy procedure | 79,720 | 555,000 |
| Total dismissals | 259,855 | . |
Source: MTAS Annual Report on Labour Statistics.
Compensation for temporary workers is paid in so few cases that it is irrelevant for the purpose of these statistics. Temporary employment is a mechanism that allows Spanish employers to change their workforce at a very low cost. There is arguably nothing comparable in any other country of the EU, and this is something to take into account in terms of competitiveness.
As shown in the table above, most dismissals are individual and compensation is settled by conciliation in the SMAC (in the past few years, these have represented over 60% of the total). Most of these dismissals are not, as one might assume, for objective reasons - reasons which were extended in the 1994 and 1997 reforms - but for disciplinary reasons. As it is not credible that Spanish workers are particularly undisciplined, it might be argued that employers use this system because of difficulties in justifying dismissals. As the workers do not accept this type of dismissal, the case comes before the SMAC and the company seeks to reach an agreement. Though this is the most expensive system, the employers thus avoid not only the cost of unjustified dismissal, but also the labour conflict that would arise because in many cases the dismissals affect large numbers of workers in a company. Furthermore it is a quick procedure. This might be said to counter another common claim by employers, that the courts favour the workers. The reality is that if dismissal for objective reasons were used instead of disciplinary dismissal, far more cases of dismissal would be settled out of court.
Is SMAC dismissal expensive? A recent study conducted by the CC.OO trade union confederation in the county of La Coruña (Galicia) indicated that such dismissals between January and June 2000 had an average cost of ESP 1.8 million, which is equal to eight times the average monthly wage of the workers in the area. It is therefore not expensive in relative terms. The average cost of dismissal in the whole of Spain in 1998 was higher, as is shown in the table. However, dismissals that are taken to court – in which the process is slower – are far less expensive.
When the labour authorities accept a redundancy procedure, collective dismissal is not expensive for small companies (which are the majority), because the state pays 40% of the compensation. Even for large companies, the average cost of this type of dismissal is not high.
In addition, the Wages Guarantee Fund pays the compensation for loss of employment if a company is declared insolvent (in 1998, this involved 129,000 workers).
The highest compensation payments – reached by conciliation – tend to be around 10 times the average monthly wage. The figures for compensation are arguably not high, except for workers with low qualifications and many years of seniority, whom the company wishes to dismiss in order to reduce the workforce, or in order to hire younger and less expensive workers. A different case is voluntary redundancy, which can cost two or three times more.
CC.OO's recent study of the situation in La Coruña claims that the total cost of dismissal is very high, not because dismissal is expensive but because Spanish employers dismiss a lot of workers. It is claimed by the unions that the employers' arguments may hide other objectives, such as getting rid of low-skilled workers over the age of 45 at a low cost. Another alleged employer motive is more basic: to eliminate the need to justify dismissal - that is to say, to achieve freedom to dismiss by eliminating all types of external protection, or at least all types of mediation.
Commentary
The cost of dismissal must be seen within the overall framework of social protection provided in a particular country. If the trade unions and many experts claim that the cost of dismissal should not be reduced, it is because Spanish workers over the age of 45 and with few qualifications – a large number are in this situation – have little protection after dismissal. They receive very low unemployment benefit, it is difficult for them to find another job, and training is unlikely to reinsert them in the labour market. In Spain this lack of protection is higher than the European average, and it is only fair that they should receive a high compensation for dismissal. It is another question whether all of this compensation should be paid by the employers, and in all cases. (Fausto Miguélez, QUIT-UAB)
Eurofound recommends citing this publication in the following way.
Eurofound (2000), Cost of dismissal under debate, article.
