European justice and labor market duality
The recent European Court of Justice (ECJ) judgment of September 14, 2016 has resulted in certain sources hastily announcing the end of the duality between indefinite-term and temporary employment contracts and the immediate equivalence of severance compensation between both types of contract.
It is nevertheless true that the judgment constitutes a legal doctrine innovation, which opens up the possibility, in certain cases and if certain requirements are met, for temporary workers whose contracts are terminated to claim severance compensation of 20 days’ salary per year of service. However, in no way can it be concluded from the judgment that, in all cases, the termination of temporary contracts will from now on give rise to severance compensation of 20 days’ salary (the present severance compensation is 12 days’ salary per year of service, with the exception of relief contracts, under which the worker is not entitled to severance compensation).
The ECJ judgment states that it is unlawful for Spanish legislation to deny any kind of severance compensation for the termination of a relief contract, while at the same time granting compensation for the termination of indefinite-term contracts.
However, the Court itself states that this is not always the case and will only apply when the temporary worker is in a comparable situation.
Therefore, the first conclusion that can be drawn from the judgment is that the right of relief workers to receive severance compensation of 20 days’ salary depends on the situation and whether or not it can be concluded that the relief worker is in a comparable situation to a worker with an indefinite-term contract.
Secondly, it should be pointed out that the Court’s judgment is highly conditioned by the facts of the case (chain of relief contracts for 9 years, to perform work done by replaced employees), which undoubtedly constitutes a major difference with respect to other cases in which temporary contracting is used differently and the conclusion cannot be automatically applied to contracts for project work or services or casual contracts, at least for the time being.
Thirdly, it cannot be concluded that the judgment has done away with the duality of contracts. Temporary contracts still exist, as does the need for legally established grounds in order for a temporary contract to be valid and lawful. Nevertheless, it is true that if this doctrine is generalized, the gap between the two systems will be reduced and thus facilitate indefinite-term contracting.
In any case, it is obvious that the doctrine established could involve an increase in severance compensation for temporary contracts (evidently more so for relief contracts), the effects being particularly serious for companies that frequently use temporary contracts.
Furthermore, the new doctrine also has a relevant effect in relation to tax. The Directorate General of Taxes, in spite of judgments to the contrary, applies the criterion that severance for the termination of temporary employment contracts is subject to personal income tax, meaning that this possible increase in the amount of severance up to 20 days’ salary per year could have a “positive” effect on the collection of tax revenue.
Nevertheless, it should be noted that the 20-day severance compensation for termination of an indefinite-term contract on objective grounds is entirely exempt from tax, meaning that we could again be faced by another difference in the treatment of indefinite-term and temporary contracts.
Garrigues Labor and Employment Law Department