Spain’s Unfair Dismissal Compensation System Faces Legislative Overhaul Amid European Scrutiny

A recent parliamentary decision in Spain has officially mandated the government to begin revising its legislation concerning unfair dismissal compensation. This significant development follows years of consistent criticism from the Council of Europe, which has repeatedly asserted that Spain’s rigid, formula-driven system fails to provide adequate safeguards for employees dismissed without legitimate cause.

The current Spanish framework for termination, largely stemming from the 2012 labor reform, operates on a principle of mathematical certainty. It establishes a compensation rate of 33 days’ wages for each year worked, with a maximum cap of 24 months’ salary. This structure was designed to offer clarity, allowing businesses to precisely calculate the potential cost of a dismissal in advance. However, this very predictability has drawn disapproval from the European Committee of Social Rights (CEDS), the body responsible for monitoring adherence to the European Social Charter, which Spain formally endorsed in 2021.

CEDS’s position is rooted in Article 24 of the Charter, which stipulates that employees who are unjustly terminated must receive “an indemnity or other appropriate reparation.” The Committee has interpreted this to mean that compensation should not only cover the harm incurred but also function as a preventive measure against employers. From CEDS’s perspective, a fixed, capped formula like Spain’s often proves insufficient for employees with short service periods or modest salaries. This approach, they argue, effectively transforms termination into a manageable business expense rather than an action of last resort. For many years, these CEDS decisions remained merely suggestions, lacking the legal authority to compel legislative changes, which consequently allowed the issue to persist without resolution.

The political landscape shifted dramatically when a non-binding motion, known as a Proposición no de ley, introduced by the Sumar political group, narrowly passed Congress. This unexpected outcome was reportedly due to a voting error by an opposition deputy. While this vote does not directly alter existing legislation, it establishes a clear directive, compelling the government to initiate formal discussions with both unions and employer groups to formulate a reform proposal. Although the path to enacting a new law is typically lengthy, for the first time, the executive branch is officially obligated to address this long-standing matter.

An individual is seated by themselves at a desk, in an office representing the solitude and doubt that come after being let go from a job.

Central to the suggested reform is the concept of a “dissuasive dismissal.” This term, despite its potentially confusing nature, does not introduce a new category of termination, such as disciplinary or objective dismissal. Instead, it signifies a fundamental change in the method of calculating compensation. The primary objective is to move away from the current fixed formula, empowering judges to determine an indemnity that accurately reflects the specific damage inflicted upon the individual. Within this proposed framework, a judge could consider a range of personal and work-related factors. These might include the employee’s age, family responsibilities, their genuine prospects of securing new employment, and the broader economic and individual consequences resulting from job loss. Additionally, the financial condition and scale of the dismissing employer could also become relevant considerations. For instance, while two employees dismissed from the same organization—one a 24-year-old without dependents, the other a 60-year-old primary household provider—would receive identical payouts under the current fixed formula, a judge in the new system might award the senior employee significantly larger compensation. This would acknowledge their reduced re-employment prospects and the more severe financial hardship caused by termination. However, the potential for judges to exercise considerable discretion under this approach could lead to varied decisions, potentially introducing a new form of legal ambiguity for companies managing their staffing.

This revised approach is founded on two core principles. Firstly, it aims to provide compensation that genuinely reflects the actual impact of job loss on the individual. Secondly, it is intended to act as a deterrent. When the financial cost of a termination becomes uncertain, businesses can no longer simply budget for it as a fixed expense. In theory, this uncertainty might encourage employers to implement only genuinely valid objective dismissals, driven by economic necessity, and to offer greater protection to vulnerable employees—such as younger workers, women, or those in precarious positions—who are currently inexpensive to terminate. Furthermore, proponents of this reform advocate that reinstatement should become a court-mandated solution, rather than an option solely dependent on the employer’s discretion.

Historically, Spanish courts have operated under significant restrictions. Despite frequent urging from the CEDS to do otherwise, judges have consistently denied requests for compensation that exceed the boundaries established by Article 56 of the Workers Statute. They have been constrained by the absence of specific legislation that would permit such awards without introducing legal uncertainty. The current political momentum, therefore, represents the first tangible step toward developing the necessary legal framework to enable these changes.

Spain now stands at the threshold of a complex legislative journey, poised to potentially redefine the delicate balance between employer predictability and employee security. The proposed transition from a rigid mathematical formula to a nuanced, judge-led assessment of damages signifies a fundamental re-evaluation of the financial and social costs associated with an unfair dismissal, carrying far-reaching implications for the future of the Spanish labor market.