Just as in the UK and most European countries, taking on staff in Spain means a sharp increase in the amount of risk and bureaucracy involved in the business.  In general Spain has lower wages but more bureaucracy and non-wage costs.  The risks and costs must be understood and minimised prior to taking on staff to avoid nasty surprises and burdens which can threaten the success of the whole enterprise.  This article looks at the main features of employment law and hiring staff in Spain and discusses some of the ways of mitigating the risks.

Employment law – the basics

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

• Minimum wages and employment conditions such as disciplinary procedures and holiday entitlement are set by “Convenios Colectivos” in different sectors and regions e.g. hotel and catering trade works in Malaga province.  You can use the information on this website to get an idea of wages you would need to pay staff you might employ:

http://convenios.juridicas.com/convenios-sectores.php

• 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).

• Expect to pay approximately 40% of the basic wage in non-wage costs, mainly being employer’s social security contributions which are very high in Spain though some incentivised contracts reduce this cost by up to 75%.

• The employer is responsible for deducting employee national insurance 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.   Here is a link to the government’s calendar of holidays in every province and locality:

http://www.seg-social.es/Internet_1/Masinformacion/CalendarioLaboral/index.htm

Employing staff – the risks

Breaking the law

As a foreigner setting up a business in Spain it is important to understand the rules and regulations governing employment and attempt to stay within them.  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 the “helper” is a spouse.

Under-appreciating 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.

Cashflow and profitability 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.

Risk mitigation: smart staffing

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.

A smarter approach is to take advice on the different contracts available and match the commitments you are making to staff with how definite you are about future income levels.  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).  As in the UK it is possible to use agency workers rather than take on staff for short term needs.

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.