A guide for businesses employing staff in Spain

There comes a time in the life of any business, perhaps at its inception, when the owners have to take on staff to deal with demand.  If your business is in Spain you will find that wage rates are still lower than in many European countries but also that the bureaucracy can be more burdensome and the risks greater because of a certain amount of inflexibility built into a system that strongly favours employee rights.

Basic information on Spain employment law

• Employees must have employment contracts from their first day of employment

• Pay and conditions are set by “Convenios Colectivos” in different sectors and regions e.g. hotel and catering trade workers in Granada province.

• There are a variety of contract types but essentially the choice is between offering a fixed term contract or a permanent contract.  Contracts can also be tiempo completo (full time being usually 40 hours) or parcial (part time).  In the latter case wages are scaled down according to a weekly number of hours stated in the contract.  There are some special contracts with government tax incentives to take on for example unemployed workers or women in sectors where they are underrepresented.

• Redundancy pay is payable once an employee has served a year and can be up to 3 ½ year’s salary (it goes up 45 days a year served, although this can be less on the incentivised contracts).

• The main problem with Spanish employment and why some employers break the law by hiring off the records is the high level of employer’s social security contributions and other non wage costs.  As a rule of thumb add on 40% to the basic wage for budgeting purposes.

• The employer is responsible for deducting Spanish social security contributions (approximately 6% of pay) and income tax, similar to UK PAYE, from the monthly wage or “nomina”.  A full analysis of the employee’s wages and deductions for the month must be presented to them and a signed copy kept by the employer.

• Other employee rights: normally 23 days a year holiday entitlement plus national and local fiestas (depends on the Convenio as employees in certain sectors expect to work holidays but are compensated elsewhere).  The employee can chose to have pay spread over 14 instead of 12 times a year with additional pay days in July and December.  Maternity leave is 4 months and there is other time off built in for marriage, deaths, births and moving house.  Sick pay is usually paid by the social security system.

Employment pitfalls in Spain

Black economy hiring

The obvious temptation is to keep some employees off the books but falling foul of the law can lead to heavy fines and the authorities are strict because they know abuse is widespread.  For example if you have an uncontracted worker helping you out during an unscheduled visit from government inspectors do not expect to be able to use an excuse even if it is a family member helping out.

Under-estimating employee rights

As we have seen the main effect of the heavy regulatory framework, the tax laws and the Covenios is to protect and promote the rights of the employee.  It is the employer that pays the price for this, parhaps not in terms of basic wages which are still lower than in many European countries, but in terms of non-wage costs and employee rights to severance pay and other benefits.  Possibly the biggest risk to a small business is taking on staff on the basis of a headline wage and not appreciating the additional burdens of being a Spanish employer, particularly when offering full time permanent contracts.

Timing of payments - cashflow implications

If you fail to understand and then budget for paying all associated employment costs at the right time, there is a real danger of cashflow difficulties or profits being eroded.  Salaries are paid monthly in arrears and national insurance a month later.  Income tax withheld from employees is payable at the end of each quarter which can be a nasty shock for the uninitiated.  As has been mentioned severance pay  can be substantial.

Reducing employment risk

Many businesses in Spain avoid some of the costs and burdens of employment law by going “black” and paying workers cash in hand.  This is of course risky as it is fairly easily detected by government agencies particularly if the “employee” has no contract whatsoever.  If an employer gives a part time contract to staff actually working full-time and then tops up the wages in cash this is harder to detect but still carries a risk.

Staying within the law you can reduce the risk of large unsustainable employee obligations by using temporary or "casual" contracts.  For example a new business with an unproven sales model might be unwise to offer all staff permanent full time employment contracts.  Spanish employers often start with a time-limited contract and switch to permanent when it is less risky to do so.  Note however that you cannot renew a temporary contract so “rolling” short term commitments to staff are not an option.  If your business is in any way seasonal then  “casual” contracts can be offered for part of the year (maximum 6 months out of any 12).

With regard to high social security costs it is important to plan cashflow properly but also look at ways of reducing national insurance contributions.  Ask your advisor about government incentives and subsidies.  For example there are trainee contracts available for young workers which dramatically reduce the national insurance payable.

For more Spanish business advice see the guide Starting a business in Spain.