The Spanish labour market reform, approved in September 2010, aims to boost the creation of stable and quality jobs; strengthen flexible employment arrangements so that employers can easily adopt them during times of crisis; and increase work opportunities for the unemployed.

One of the main problems of the previous regulation was the vague definition given to the different grounds that justify objective dismissals based on economical, technical, organisational or productive reasons.

It is important to point out that these types of dismissals allow employers to pay a reduced severance payment, provided that the employment termination is considered fair. In particular, a fair objective dismissal entitles the employee to receive compensation equal to 20 days of salary per year of service, up to a maximum sum of 12 months' pay. By contast the compensation for unfair dismissal is equal to 45 days of salary per year worked, capped at 42 months' pay.

The Spanish Labour Courts used to restrict the ability to make employment terminations based on objective reasons on the basis of the previous regulation. This restrictive position of Labour Courts meant that in situations of economic crisis, such as the current one, companies could not easily adjust their workforce to the negative financial position. Therefore, companies tended to acknowledge the dismissals as unfair, paying the severance of 45 days of salary in order to save time, costs and effort, since there was a high risk that judges would consider the objective dismissal to be unfair.

As a result, the aim of the labour reform is to make objective dismissals more flexible. So, the new law clarifies the definitions for economical, technical, organisational, or productive reasons and broadens the conditions and requirements that justify collective or individual dismissals, encouraging Courts to make a less restrictive interpretation of the causes that allow companies to carry out objective dismissals in times of crisis.

Thus, now economical causes are deemed to occur when the company presents a "negative economic situation", such as current or expected financial losses, or the continuous reduction of revenue, which may affect to the company's viability or its ability to maintain employment levels. In addition, valid technical, organisational or productive grounds to terminate employment contracts would occur when there has been any relevant change within the productive means or the working methods within the company, or when the company faces a significant decrease in demand for its products in the market.

In any event, the company would have to demonstrate the alleged objective reasons and prove that these reasons are appropriate for the specific situation of the company.

In the time since the reform was enacted, Labour Courts of first instance have had the opportunity to look at these types of cases in accordance with the new regulations. Although the reasons for implementing objective dismissals have been made more flexible, in practice the interpretation of these grounds has not been broadened as much as was expected. The Courts have tended to follow the provisions contained in case law prior to the reform.

However, High Courts and the Supreme Court, which are the judicial bodies that would have to establish case law on this matter, have not had the chance to interpret the new regulations. From employers' point of view, it is hoped that Labour Courts do make the ability to implement this type of dismissal more flexible and employers' associations are lobbying for companies to be able to take the appropriate measures to adapt their human resources to the difficult economic situation.