The Employment Department of Herbert Smith Freehills's Madrid office has prepared a summary of case law that has implemented the Labour Reform in Spain since it entered into force on 8 July 2012, as well as on other labour-related issues in Spain. To date, legal doctrine has primarily focused on the grounds and judicial control of collective dismissals, although the courts have yet to analyse other aspects of the Labour Reform.

1. CONSTITUTIONALITY CHALLENGE AGAINST THE LABOUR REFORM

On 5 October 2012, two of the leading political parties lodged a constitutionality challenge to the Spanish Constitutional Court against the Labour Reform Act 3/2012 ("Act 3/2012"). The challenge was admitted on 5 November 2012, but no decision has yet been rendered.

The Spanish Constitutional Court has, nevertheless, already rejected a constitutionality challenge, lodged on 16 April 2012 by Labour Court 30 of Madrid, challenging the constitutionality of some provisions of Act 3/2012 – mainly the abolition of processing salaries when a dismissal is declared unfair. The Constitutional Court deemed it inadmissible on 16 October (Decision 191/2012) on the basis that it did not properly comply with constitutional importance requirements in connection with the Labour Court's decision in the main trial.  

2. JUDICIAL CONTROL OF GROUNDS FOR DISMISSAL (INDIVIDUAL OR COLLECTIVE)

In relation to judicial control over the grounds for dismissal, Labour Court 3 of Pamplona, in a decision rendered on 27 September 2012, rejected the claim submitted by two employees who were dismissed for objective reasons.

Indeed, Act 3/2012, following the criteria established by Royal Decree-Law 3/2012, introduces more flexible criteria to determine whether or not a company can claim economic causes as grounds for an objective dismissal. A company is no longer required to justify that the dismissal will contribute to improving its situation in the future or that the dismissal is reasonable with the aim of boosting its position in the market. The new wording clarifies the definition of negative economic situation; this is understood to exist, among other reasons, when there is evidence of a persistent decrease in ordinary income or sales. The decrease is understood to be persistent if it lasts for three consecutive quarters.

Although the new wording constricts judicial interpretation in this regard, the court has nevertheless determined that Act 3/2012 does not completely remove judicial control over the grounds for dismissal. The court's decision clarifies that, according to Spanish constitutional labour provisions and article 158 of the International Labour Organization, there must always be good grounds for dismissals and they must be subject to real judicial control. Therefore, although Act 3/2012 seems more permissive and clarifies when a negative situation may constitute sufficient economic grounds for dismissal, the courts may still use their judgement as to the reasonability of the dismissal. The dismissal cannot be left to the sole and unchecked discretion of the employer; the company's freedom to dismiss is not an absolute right and could constitute an abuse of law.

A decrease in sales or income for three consecutive quarters does not per se constitute an objective economic ground for dismissal; it must be combined with other evidence of a company's negative position. However, when there is sufficient evidence of a company's negative economic situation at the moment of the dismissal and the company has tried to implement other possible flexibility measures before resorting to the dismissal, the dismissal may be understood to be fair or for good cause – as was the case in the court's decision.  

3. COLLECTIVE DISMISSALS BASED ON OBJECTIVE GROUNDS

Evidence of the cause for dismissal, compliance with information or documentation obligations

The High Labour Court of Madrid rendered two decisions, on 30 May 2012 (415/2012) and 11 July 2012 (542/2012), regarding the evidence presented as to the founding grounds for dismissal and on the documentation and information requirements in the context of collective dismissals.

In addition to the new wording of the economic grounds for collective dismissal (as mentioned above), the purpose of the consultations period has also been modified. As a result, there is no longer a need to negotiate on the grounds of dismissal, only on the consequences of the dismissals. However, the good faith required in the course of negotiations, which is linked to the information and documentation required by law and now also by Royal Decree 1483/2012, of 29 October, on collective proceedings (such as current annual accounts, criteria used by the company in choosing the affected employees and positions, etc.), remains untouched as a guiding principle of consultations with the workers representatives.

According to the court, the company failed to provide proper evidence of its losses and the required documentation, which was too generic and not sufficiently accurate. According to the court, the company's failure to provide the required documentation and its intransigence during the negotiation process showed a lack of good faith on its part.

The Higher Court of Madrid has therefore declared those two collective dismissals null and void on the basis that the company's duty to inform the workers' representatives before and during the consultation period was not sufficiently fulfilled.

However, the Spanish Labour Court has in the meantime rejected a claim lodged against a collective dismissal (decision 142/2012, dated 21 November 2012). The court rejected the claim on the basis that the collective proceedings had been properly lodged, despite the fact that workers' representatives' preferential right to employment had been violated as this did not amount to sufficient grounds to annul the entire proceedings. Furthermore, the court considered that the company had sufficiently proven the claimed economic and production-related grounds for dismissal as the company's overall economic situation was clearly negative and the positions made redundant were reasonably linked to the losses detected.

These differing conclusions are not evidence of the courts using different criteria when assessing the different cases, they merely highlight the significance of a case-by-case study and the judicial control exerted when assessing the grounds and the lawfulness of collective dismissal proceedings since the Labour Reform entered into force. Before the Labour Reform came into being, judicial control was wielded by the Labour Authority, which was then responsible for authorising – or otherwise – the collective dismissal. However, that body now has a different role.

Bad faith in negotiations and rendering the consultation period devoid of purpose

In addition to decision 415/2012 dated 30 May, in which Higher Court of Madrid declared a collective dismissal null and void, the Spanish Labour Court has also declared a collective dismissal (decision 162/2012 dated 15 October) null and void due to bad faith on the part of the company during negotiation process. In this case, the company notified the affected employees of their dismissal when the compulsory consultation process with the workers' representatives had not yet finished.

Labour courts agree that good faith during the negotiation process is a priority and a requirement for the consultation process to have a successful outcome.

Generic criteria in choosing employees for dismissal

The Higher Court of Cataluña, in its decision 13/2012, dated 23 May, declared a collective dismissal null and void, as the company failed to properly express the criteria it had used to choose which employees it would be making redundant. The company failed to notify the professional categories of the affected employees and that, according to the court, constitutes a breach of the purpose of the negotiation process. Moreover, the dismissals were not individually notified to the affected employees at the end of the consultation process.

Inadequate level of negotiation

In its decision 90/2012, dated 25 July, the Spanish Labour Court declared null and void a collective dismissal that had been partially negotiated for each of the company's work centres.

As consultation processes in collective dismissal scenarios must be conducted in a single process for the entire company, the court understood that the partial negotiations breached the purpose of the consultation process in this context.

Although Act 3/2012 and Royal Decree 1483/2012 of 29 October on collective proceedings expressly allows different negotiation processes being conducted per work centre, this court's decision seems to exclude that possibility.  

4. INDIVIDUAL DISMISSAL AND CALCULATION OF SEVERANCE PAY AND PROCESSING SALARIES

In its decision 75/2011, dated 1 May 2012, Labour Court 3 of Pamplona clarifies the method for calculating severance payments for unfair dismissal. The case refers to an employment contract that was entered into before 12 February 2012 (the date when the Labour Reform entered into force via Royal Decree-Law 3/2012) and that was terminated after that date.

As severance pay must in these cases be calculated in two phases (firstly, 45 days' salary per year of service for the period from the employment contract start date and 11 February 2012; secondly, 33 days' salary per year of service for the period between 12 February 2012 and the contract termination date), the decision clarifies that the legal round-up formula only applies to the second, post-12 February 2012 period.  

5. NEW STRUCTURE AND PRIORITIES OF COLLECTIVE BARGAINING

On 10 September the Spanish Labour Court issued its decision 95/2012 declaring that a sector-wide collective bargaining agreement ("CBA") (in this case, the recently adopted CBA for the cement sector) cannot force companies in the sector to set salaries above the amounts established by the sector CBA.

The structure of collective bargaining has indeed been changed by Act 3/2012. From now on, the specific conditions of employment established in plant-level CBAs (retributive amounts, among other issues) shall prevail over sector CBAs that provide for the same condition of employment.

Therefore, the decision follows the rule of prevalence on remuneration established by the Labour Reform in respect of plant-level CBA's.

6. INTERNAL FLEXIBILITY AND SUBSTANTIAL CHANGES TO CONDITIONS OF EMPLOYMENT

In its decision 61/2012, dated 28 May, the Spanish Labour Court validated a substantial modification of employment conditions affecting remuneration schemes in IBM, thus taking advantage of the more permissive criteria established in the Labour Reform regarding the economic grounds for internal flexibility as an alternative to restructuring through dismissals.

Indeed, Act 3/2012 only requires that the claimed economic reason behind the measure be linked to the company's competitiveness, productivity, or technical or work organisation.

In this particular case, the workers' representatives failed to display constructive conduct during the negotiation process, whereas the court believed that the company has sufficiently evidenced the economic reasoning behind its decision. The modification has therefore been confirmed.  

7. SICK LEAVE DURING THE HOLIDAYS

The Spanish Supreme Court has declared (in its decision dated 3 October 2012) that an employee on sick leave – when this occurs during his/her holidays or event before those holidays start – is entitled to benefit from his/her holiday period in full, even after the year in which that holiday period accrued.

Act 3/2012 has also introduced a new provision, which expressly provides for scenarios in which sick leave occurs simultaneously with a holiday period. In these cases, employees may benefit from their holidays in full when they return from their sick leave within the 18 months following the end of the year in which the holidays accrued.

The decision follows and defines the criteria already set by the European Court of Justice in its Decision of 10 September 2009 (Pereda) and a decision handed down by the Spanish Supreme Court on 24 June 2009, which had already declared that employees on sick leave during their holidays are entitled to benefit from them in full afterwards.

This recent decision therefore ratifies already established criteria in this regard.  

8. ANNULMENT OF DISMISSALS OF TOP EXECUTIVES

In its decision dated 18 June 2012, the Spanish Supreme Court declared that the dismissal of a top executive was null and void due to breach of his fundamental rights.

Although a top executive employment contract is based on a relationship of trust and good faith between the parties, industrial action on the part of the executive does not constitute justification to terminate the employment contract.