The 1997 labour reform in Spain: the April agreements

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Spanish trade unions and employers' organisations recently agreed on a major labour market reform. The three objectives of the "April agreements" of 1997 are to reduce the instability of the labour market, to promote collective bargaining, and to plug the gaps in sectoral regulation that were left following the final repeal of the Labour Ordinances.

On 7 April 1997, after several months of tough negotiations (ES9703205N), the Spanish employers' associations - represented by the Spanish Confederation of Employers' Organisations (CEOE) and the Spanish Confederation of Small and Medium-Sized Enterprises ( CEPYME) - and the most representative trade unions - the Confederation of Workers' Commissions (CC.OO) and the General Workers' Confederation (UGT) - signed three important intersectoral agreements. The three accords are entitled For employment stability, On collective bargaining and On filling the gaps in regulation. These are documents of very different significance and scope, but all three deal with problems that remained unsolved after the major reform of labour regulations carried out by the Socialist Government in 1994.

The first of these agreements has led to the promulgation of two Decree-Laws, Nos. 8 and 9/1997 of 16 May, which were ratified as Acts by the Spanish Parliament on 5 June. Hence, in 1997, the Government of the People's Party (PP) and their Catalonian nationalist associates has managed to carry out further reform of labour regulations. However, unlike the previous reform, which was approved amidst great protest from the unions, the new reform has been supported from the outset by the social partners. The other two agreements involve commitments by the social partners in terms of collective bargaining in the immediate future, as we will see below.

Promotion of permanent employment contracts

On the basis of the requests contained in the social partners' intersectoral agreement For employment stability, the Government passed Royal Decree-Law 8/1997 of 16 May on urgent measures "for the improvement of the labour market and the promotion of permanent employment contracts", and Royal Decree-Law 9/1997 of 16 May "regulating social security and tax incentives for the promotion of permanent contracts and secure employment".

The starting point for these measures was the fact that the Spanish labour market suffers from an extremely high level of unemployment, amounting to 3,442,400 people, equivalent to 21.49% of the active population, according to the Survey of the Active Population for the period January-March 1997. Furthermore, there is a very serious problem of insecure employment: in 1996 permanent - that is indefinite - employment contracts represented less than 4% of the total of number of contracts signed, and as stated in the preamble to Royal Decree-Law 8/1997, the rate of temporary employment amongst the active population was no less than 34%, which is more than three times the European Union average.

The 1997 reform attempts to solve this problem of insecurity. However, it should be pointed out that this is not a new problem, having been already noted by those responsible for the 1994 reform. At that time it was considered sufficient to abolish the "temporary contract for employment promotion" - the most widely used of all types of temporary contract in Spain - in order to reduce the rate of temporary employment. However, the experience of the last three years has revealed that such a hope was in vain. It is now thought that the most effective course of action is not to reduce the opportunities for temporary contracts - since the restriction or even abolition of one type of temporary contract has only led to the greater use of other types - but rather to encourage the use of permanent contracts.

To achieve this goal a new type of contract called "permanent employment promotion contracts" (contrato para el fomento de la contratación indefinida) has been introduced. They will be available over the next four years, after which their impact on the labour market will be evaluated and a decision will be taken on whether to abolish them, modify them or - as seems probable - to adopt them as a permanent fixture.

The legal framework for this new type of contract differs from that of "normal" permanent contracts on only one point: the reduction in the compensation payable for dismissal. However, this does not cover all compensation for dismissal, but is restricted exclusively to one case: when an individual dismissal or multiple individual dismissals for objective reasons (that is to say, not a collective dismissal for objective reasons or a disciplinary dismissal) are ruled to be unfair. In such a case, when this kind of contract is involved, compensation payable by the employer will be 33 paid days per year of service of the employee up to a maximum of 24 months' pay, which is the compensation applicable for the other cases of unfair dismissal.

Everything suggests that this exclusive case will from now on become the basis for the termination of the new permanent contracts by employers. Indeed, with the exception of very clear cases of disciplinary dismissals that are fair and are therefore not subject to compensation, it would be logical for employers to adjust their workforce by means of individual/multiple dismissals for objective reasons, even when these reasons do not exist. This is because even if they are ruled unfair, compensation will be at the new lower rate of 33 paid days per year of service, with a ceiling of 24 months' pay.

Two things must also be remembered. The first is that unfair individual/multiple dismissal for objective reasons involves (as up until now) an even lower compensation: 20 paid days per year of service with a ceiling of 12 months' pay. Secondly, in companies with fewer than 25 workers the Wages Guarantee Fund pays 40% of the compensation owed by employers in cases of individual/multiple or collective dismissals for objective reasons "of an economic, technical or organisational nature or reasons of production" (that is, for practically all reasons). That is, for companies with fewer than 25 workers an unfair dismissal carries a compensation cost - in the case mentioned - of 19.8 paid days per year of service. If it is ruled fair, then the cost will be 12 days per year. This is the case, provided that the daily wage for the purposes of calculating compensation does not exceed twice the national minimum wage, since the excess is not covered by the Wages Guarantee Fund.

Since it is always cheaper to dissolve a temporary contract than a permanent contract - the cost of compensation is zero and one merely has to wait until the end of the contract, which tends to be very short - the 1997 reformers, undoubtedly aware of this, decided to accompany the measure with a series of economic incentives laid down in Royal Decree-Law 9/1997 of 16 May. These incentives consist basically of a substantial reduction in the employers' social security contributions (a cut by 40%-80% in contributions for common contingencies - that is, excluding accidents at work, occupational illnesses or unemployment) when the new permanent employment promotion contract is used. This reduction in labour costs, which will in principle last two years (unless unemployed people over the age of 45 are contracted, in which case the incentive will last for the duration of the contract), may prove to be a powerful inducement to use the permanent contract.

We should add that this new type of permanent contract is applicable only to certain categories of worker, mainly young unemployed people (under 30 years of age), long-term unemployed people (for over one year) and unemployed people aged over 45. However, this new type of contract may also be used - under certain conditions - to transform a temporary contract into a permanent one. It is therefore foreseeable that over the next few years the new type of permanent contract will be used far more often than the "common" permanent contract.

Royal Decree-Law 8/1997 contains some other novelties. Firstly, it redrafts article 52 (c) of the Workers' Statute, with the declared intention of making it easier for employers to use individual/multiple dismissal for objective reasons of an economic, technical or organisational nature or for reasons of production. However, the new formula does not differ substantially from the previous one. Secondly, it improves the regulation of training and part-time and discontinuous permanent contracts. Finally, it modifies Law 14/1995 on temporary employment agencies by giving the workers' representatives of the user company certain rights to defend the interests of workers who are under contract to the temporary employment agencies.

Intersectoral agreement on collective bargaining

One of the recurring concerns expressed by the social partners in debates on the future of industrial relations in Spain has been the unstructured and chaotic nature of collective bargaining. It is a structure inherited from the Franco period, and is based largely on provincial agreements that coexist with numerous company and nation-wide agreements, which all repeat the same content with no attempt to reflect a division of responsibilities: all agreements deal with all imaginable issues, irrespective of level or geographical scope.

This problem is even more surprising because, since 1980, the Workers' Statute has contained article 83.2 that authorises intersectoral agreements "to establish the structure of collective bargaining, as well as to establish the rules that must resolve conflicts of competition between agreements of different areas and the principles of complementariness of the various contracting units". However, the social actors did not tackle this issue for 17 years, until the intersectoral agreement of April 1997.

This problem has now been dealt with, but with arguably excessive caution. The social partners state that "in this agreement we have attempted to distribute issues among the different negotiating areas according to their area of specialisation." However, the agreement does not actually distribute these issues but merely "advises" the negotiators in the various sectors to follow certain guidelines. So, for example, it is said that "a hypothetical sectoral collective agreement should exhaust the issues reserved for it under article 84 of the Workers' Statute ". (This reservation is non-existent, but the allusion is to types of contract, occupational groupings, disciplinary systems, health and safety at work and geographical mobility). To these issues reserved for sectoral agreements, others would be now added: pay structures (without fixing levels of remuneration), maximum effective working hours and criteria for allocating working hours.

Agreement on filling gaps in regulation

The third agreement aims to solve another problem that has been pending since the adoption of the Workers' Statute: replacing the Labour Ordinances of the Franco regime with sectoral collective agreements. This replacement has been carried out very slowly over the years. At a time when there were still around 100 Ordinances, the 1994 reform was forced to issue the ultimatum that on 31 December 1995 they would all be abolished, whether or not there was an agreement to replace them. The ultimatum was effective, but at present there are still 23 very heterogeneous sectors (covering stockbrokers, estate agents, trawler fishing, radio communications, theatre, circus, varieties, folklore, funeral services and so on) without ordinances and without collective agreement . The third intersectoral agreement of April 1997 attempts to fill these gaps in the regulations at a sectoral level.

It does so under the powers granted by article 83.3 of the Workers' Statute, which authorises the most representative employers' associations and trade unions to "draw up agreements on specific matters". In fact, what the negotiators have done is not to try and cover all types of issue for each of the 23 sectors but rather to conclude a single agreement for the 23 dealing only with those issues that are considered indispensable, in which a common treatment can be applied across all the sectors. Four subjects were tackled in this way: occupational structures, career structures, pay structures and disciplinary systems. The main points are as follows.

  • Occupational structures (ES9706110F) are based on vocational groupings each of which is identified through certain defining factors such as knowledge, experience, initiative, autonomy, responsibility and complexity. These groupings replace the former occupational categories under the terms of the guidelines of the 1994 reform. Furthermore, the agreement includes an important new feature, namely refinement of the occupational classification system through the subdivision of the groupings into functional areas "to which workers can be assigned according to their suitability for the job". For example, possible functional areas are administration, sales, technical, production and auxiliary services.
  • In practice, the promotion of workers is left to the unilateral decision of the employer, although it is established that, apart from certain posts requiring the employer's confidence, promotion must conform to objective criteria of merit and ability.
  • The section on pay structures contains nothing worthy of mention: it does little more than reproduce the legal provisions on the matter - arguably in a fairly confused way and even with certain major technical defects.
  • Finally, the section on disciplinary systems contains a list of infringements classified as slight, serious and very serious, and the corresponding severity of sanctions.

This agreement has a duration of five years from 1 January 1998, and during this period it is hoped that collective bargaining will provide complete regulation for the 23 sectors involved.


For a large number of cases, the cost of dismissal in Spain is considerably lower than the "prototype" of 45 paid days per year of service that has been taken as the only frame of reference in public discussions on the topic. It is as yet unclear whether the cuts in compensation and the reduction in employers' social security contributions introduced by the present reform will be sufficient to encourage employers to use the new form of permanent contract.

The social partners' programme of action in the area of collective bargaining is advancing slowly. The only commitment established by the signatory organisations is to consult their federations and associations so that they can issue a report on action concerning the structure of collective bargaining in their sector, which gives a fairly exact idea of how little ground has been covered so far.

Finally, the agreement on filling gaps has led to the regulation of working conditions across all sectors, though there are still shortcomings that will remain until all the subjects have been dealt with individually or as a whole (Manuel Ramón Alarcón, Professor of Labour Law and Social Security, University of Seville)

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