Spain's employment law reforms offer law firms unprecedented flexibility

Law firm managing partners, like any other business leaders, need to be aware of the recent significant changes to Spanish labour rules. This is not only because of revisions to the protections now afforded to employees in Spain, but also because it affects their ability to utilise the legislation to resize or restructure their practices in response to client demand.

A major reform of Spain’s Labour Code was presented in December 2011 and again in February (Royal Decree-Law 3/2012) and July 2012 (Law 3/2012), the latter introducing an unprecedented degree of flexibility in employment contracts for employers able to demonstrate an adverse economic impact on their business.

Old restrictions

Spanish employment law has historically taken a pro-employee stance. Even in very difficult economic circumstances, employers often found it difficult to renegotiate contractual terms, including salary levels or working hours. The result was that businesses would often have to revert to a formal collective dismissal procedure in order to reduce costs.

Even so, many businesses found that redundancy protections, and specifically the level of compensation payable, could negate any short or even medium-term cost savings. In addition, collective dismissal proposals had to gain prior approval by a local labour authority – which was often perceived as ?being pro-employee.

The economic grounds by which employers could seek to justify such changes were unclear. There was no single objective economic test and employers were often presented with inconsistencies in the way such ?issues were interpreted by ?employment tribunals.

New employer flexibility

The depth of the economic downturn affecting Spain since 2008 has however prompted efforts to give businesses greater flexibility in how they can react to falling revenues or reduced cashflows as clients take longer to pay bills. Efforts have also been made to limit the degree of interpretation open to tribunals in assessing the relative economic pressures facing them.

The changes introduced in February 2012 specifically sought to rebalance employee protection against the imposition of new contractual terms and to safeguard against unfair dismissal vis-a-vis the ability of employers to adapt their operations and staffing to the wider economic reality.

The new law offers Spanish employers – including law firms – much greater flexibility to reorganise their operations than was previously the case. There is greater emphasis on negotiated agreements, including the ability to reduce salary ?levels, to change the way in which pay ?is assessed and to reduce working hours to help match reduced demand. In addition, the rules surrounding the grounds for collective dismissals have been simplified, removing the need for prior administrative approval.

In order to benefit from such changes, law firms need not demonstrate that they are making a loss, but merely that month-on-month, over three successive quarters relative to the previous year, revenues are down. Law firms do not need to be failing to restructure.

For those able to meet the new objective economic test, reduced redundancy terms now apply for collective dismissals. Employees still retain the right to challenge such decisions, in which circumstances actions may be upheld or deemed to be unfair or invalid, in which case negotiations must be reopened and any dismissed employees reinstated. Most successful appeals to date relate to procedural irregularities.

Salaried partners

Despite the new flexibilities introduced ?by the 2012 reforms, large-scale contractual renegotiations or collective redundancies have not yet been a feature of the Spanish legal market – firms seem to prefer to manage attrition levels or ?deal with individuals on a one-to-one ?basis. Nonetheless, law firms in Spain are getting smaller.

In recent months, there has been a trend among the major firms to open up their equity, remove salaried partner bands to help reduce fixed costs and to encourage a greater sense of cohesion in these more challenging times.

But, such a move also removes legal uncertainties. The legal position of salaried partners under Spanish law has proved debatable and, while managing partners may not think that the employee protections outlined above extend to the partnership, on closer inspection they may well do.

Reflecting the tests outlined in the 2006 legislation (and previous rulings) focusing on dependency, partners with fixed remuneration and defined working hours may be classed as employees under Spanish labour law.

As law firm leaders increasingly consider the degree of flexibility available to them to reduce costs by changing staffing and remuneration levels, they may need to consider the relevance of the recent labour reforms not only to their support staff and associates but also to some in their partnerships as well.

Sagardoy is a member firm of employment law alliance Ius Laboris