Spain: Social partners agree on further labour market reform

Representatives of the government, trade unions and employers have signed their fourth labour market reform agreement within a period of nine years. This latest reform focuses on improving stable employment levels by means such as curbing the conclusion of successive fixed-term contracts, offering bonuses to employers that recruit on open-ended contracts, and strengthening protection for workers faced with redundancy.

After more than a year of negotiations, the government, the employers' organisation CEOE and the trade union confederations UGT and CCOO have agreed on a package of labour market measures designed to reduce the incidence of temporary working and the conclusion of successive fixed-term contracts.

Background - Spain's labour market

Spain's labour market problems include a relatively high level of unemployment and a high level of temporary and fixed-term working, with many people struggling to find any kind of open-ended employment relationship. Figures for March, issued by the EU statistical body Eurostat, show that average unemployment in Spain is 8.7%. Although this figure is lower than in some other countries, it is above the eurozone average of 8.1% and the EU25 average of 8.4%. However, this is down from the 9.9% recorded in March 2005. National statistics recently released for April 2006 also show some improvement, with a total of 2,075,600 people out of work, compared with a high point of 2,171,500 in January 2006.

There are estimated to be 5.3 million people working on temporary and fixed-term contracts in Spain, representing 34% of the country's workforce. Of these, around 1 million have been in their post for more than two years, with most working on contracts of a temporary or fixed-term nature that are renewed when they expire. These workers do not, however, have the status and employment security of employees in open-ended employment relationships.

This high level of temporary working in Spain is attributed largely to the fact that severance payments in the case of unlawful dismissal are high for open-ended contracts, at 45 days' pay per year of service, up to a ceiling of 42 months' pay. The normal practice is for employers to offer severance payments of this level when terminating contracts to avoid being brought before an employment tribunal, which is costly and time-consuming for the employer.

1997 labour market reform

Recognising that the expense is a serious deterrent to employers offering open-ended contracts - preferring instead to hire new recruits on temporary and fixed-term contracts, which are not subject to these severance provisions - the social partners put into place the first labour market reform in 1997 (EIRR 280 p.24). This reform concentrated on reducing potential severance payments for new workers by introducing a type of open-ended contract of employment that was subject to lower unfair dismissal payments than normal (33 days' pay per year of service, up to a ceiling of 24 months' pay). These new contracts were on offer to specific groups of workers: unemployed people under the age of 30; long-term unemployed people; unemployed workers aged 45 years and over; people with disabilities; and people on temporary contracts.

Second labour market reform

In 2001, a second reform (EIRR 327 p.27) widened the categories of worker that could be offered these new open-ended contracts that were subject to the cheaper severance arrangements. The 2001 reform also attempted to introduce more flexibility by allowing the social partners to negotiate on tailoring fixed-term and part-time contracts to individual situations. However, this reform was criticised by trade unions; they argued that the government had taken on board the views of the employers to a greater extent than those of the trade unions. The government was also criticised at the time for pushing through the reforms without waiting for the consent of the social partners.

Third labour market reform

The third reform, announced in March 2002 (Spain: Labour market reform causes controversy), concentrated on reducing the cost of employment, modifying the social protection system in order to encourage unemployed people to re-enter the labour market, increasing productivity and improving regional and occupational mobility. The changes focused on tightening up on access to benefit for unemployed people who refuse job offers, and abolishing the employer obligation to pay a maximum of 60 days' pay to employees while they are contesting that their dismissal is unfair.

Latest reform

Despite these three sets of reforms, the Spanish labour market continues to suffer from the same problems as a decade earlier. Specifically, 34% of people are still employed on fixed-term and temporary, rather than open-ended, contracts.

The government therefore proposed, in March 2005, a package of further reform measures aimed specifically at encouraging the use of open-ended contracts by reducing the cost of their termination. The proposals were based on suggestions made by employer and trade union representatives at a social dialogue meeting earlier that month. Negotiations between employers and unions subsequently began, but failed to reach consensus during 2005. One of the main sticking points during the talks was the differing views on severance payments for open-ended contracts. Employers were keen to see the 33 days' pay per year of service provision extended to all new open-ended contracts, but unions were more reluctant (EIRR 379 p.14).

The government started to lose patience and threatened to issue legislation if unions and employers could not agree. The parties began to form a consensus towards the end of 2005 (EIRR 383 p.14) and agreement was finally reached at the end of April 2006 and signed on 9 May (EIRR 388 p.15). A decree law was issued by the council of ministers on 12 May, which will enter into force on 1 July 2006. This is a type of provisional legislative decision that the government can issue for matters that it deems to be extraordinary and urgent. It is subject to subsequent ratification by the Spanish parliament. In this case, parliament is not expected to make any changes to the law.

Detail of the reform

This latest reform is centred around three main principles:

Curbing fraudulent labour market practices

Limiting successive fixed-term contracts

The reform restricts the practice of employers concluding successive fixed-term contracts with employees. In future, employers that have employed a worker on two or more contracts of a duration of more than two years over a 30-month period will be obliged to offer that worker an open-ended contract. Until now there have been no restrictions on the conclusion of successive temporary contracts.

Hiring out workers and subcontracting

The situation governing the hiring out of workers is clarified by the labour market reform. Prior to the reform, this was possible only through authorised employment agencies. The reform sets out more clearly the circumstances in which the hiring out of workers will be considered to be lawful and those in which it will be considered to be unlawful. The law will now state that the hiring out of workers will be considered to be unlawful in any of the following circumstances: if the aim of the contract between the company hiring out workers and the user company is limited merely to placing the workers of the hiring-out company at the disposition of the user company; if the hiring-out company does not carry out any stable activities of its own; or if the hiring-out company does not have the necessary means to carry out activities or if it does not carry out functions that companies would normally carry out. This is intended to curb the practice of companies setting up as agencies without using the proper procedures.

The arrangements for employee representation in subcontracting situations have been improved. In future, employee representatives in a contracting company may represent workers in the subcontracting company if they share the same place of work and the workers in the subcontracting company do not have any existing representatives. A list will be drawn up of all the subcontractors that share a place of work.

Improving labour inspection

Labour-inspection procedures will be improved. The number of labour inspectors will rise by 20%, from 772 to 904 by the end of 2007, and to 954 by the end of this legislative period in March 2008. The 799 sub-inspectors will increase to 923 by the end of 2007, and to 968 by the end of this legislative period. Further, a state coordination body will be created and it is envisaged that regional coordination bodies will also be set up. The reform will increase the budget of the public employment services, with details to be provided in the next state Budget.

Promoting open-ended employment relationships

Incentives for hiring workers

The reform keeps the two types of open-ended contract already in place: ordinary contracts, subject to severance payments of 45 days' pay per year of service; and contracts subject to the lower severance payments of 33 days' pay per year of service.

Bonuses paid to employers that hire workers on open-ended contracts will be paid for four years instead of the current two years. They will take the form of a defined payment, rather than a percentage of social insurance contributions, as is currently the case. The payments will range from e500 to e3,200 a year and will be paid for the hire of women, young workers, people with disabilities and trainees. For more details, see the table below.

By contrast, the so-called insertion contract (contrato de inserción) will be abolished. This contract was created in 2001 with the aim of helping young people gain access to the labour market by placing them in public administration bodies or not-for-profit organisations and paying them a small wage. These contracts have not been in use for some time.

Transforming fixed-term and temporary contracts

The reform offers incentives for employers to convert fixed-term and temporary contracts into open-ended employment relationships. Employers will receive an annual bonus payment of E800 for each contract, for a maximum of three years, for contracts converted before 1 January 2007. In addition, all temporary contracts may be converted into open-ended relationships and benefit from the cheaper severance arrangements (33 days' pay instead of 45 days' pay per year of service) if this is done before 2008.

Improved protection for workers facing redundancy

Changes to unemployment insurance and insolvency guarantees

The reform also lowers employer unemployment insurance contributions by 0.25 of a percentage point in 2006 and in 2007 and by 0.5 of a percentage point in 2008 (the current level of contributions is 6% of the payroll). Contributions to unemployment insurance funds by temporary employment agencies will be reduced from 7.7% to 6.7% of the wage bill.

Employer contributions to the Fogasa wage guarantee fund will be halved, from 0.4% to 0.2% of the wage bill. This fund provides wage guarantees for workers whose companies go into bankruptcy and it is currently in surplus. However, the reform states that any future changes to the funding of this body will depend on the future economic situation. The maximum payments made by this body will be increased, from double to three times the monthly minimum wage (currently e540.90). The duration of payments will also be increased, from 120 to 150 days. In future, temporary workers will be covered by the scheme, which was previously not the case.

The reform also provides for some extension of benefits. At present, people over the age of 45 who have a family are entitled to unemployment benefit for six months even if they are not eligible for full benefit because they have not paid into unemployment insurance funds for at least 12 months. This provision will now be extended to the over-45s who do not have children.

Reactions

The agreement was signed on 9 May by the Spanish prime minister José Luis Rodríguez Zapatero, representatives of the trade union confederations CCOO and UGT and of the employers' organisation CEOE and the small employers' organisation Cepyme.

All the reactions have been positive so far, with the UGT calling the accord a "useful tool" for promoting employment stability and the rights of workers. The CCOO has also stated that the agreement will do much to combat fraudulent labour market practices and increase stability.

The centrepiece of the reform is the provision obliging employers to offer an open-ended contract if a worker has been employed on a temporary or fixed-term contract for more than two years over a 30-month period. It would appear that there is a need to ensure greater employment stability - the Spanish social security service has recently issued figures showing that of those currently covered by the social security system, only just over 62% were covered for the whole of 2005. Further, of those who had been covered for 12 months, just 17% were working on a fixed-term contract.

Employment Secretary Valeriano Gómez has stated that the reform will be implemented by decree law because this will allow it to be brought into force rapidly. The aim is to put the reform into place by 1 July 2007. This is a provisional legislative decision that will be subsequently ratified by parliament.

The goals of the reform would seem to be valid. Lowering employers' labour costs, curbing a range of sub-legal employment practices and offering employers financial incentives to recruit workers are areas that should be targeted by any reform that tries to increase stable and open-ended employment levels. The only worry is that this is the approach that the social partners have been taking for almost a decade, with some effect on unemployment but a more limited influence on the country's high levels of precarious employment. Time will tell whether or not this latest reform will make a real dent in the levels of unemployment and temporary employment that dog the Spanish labour market.

Details of incentives to boost employment