Just like in the UK and many European countries, hiring employees in Spain comes with a substantial increase in business risks and administrative complexities.
In general, Spain offers lower wages but imposes higher administrative and non-wage expenses. It’s crucial to thoroughly comprehend and minimize these risks and costs before hiring employees to prevent unexpected challenges that could jeopardize the success of your entire business. This article outlines the key aspects of Spanish labor law and employment practices while also exploring strategies to mitigate these challenges.
Fundamentals of Spanish Labor Law
- Employment Contracts: Employees must have employment contracts from their first working day. UK expatriate employees should possess NIE documents and residency.
- Wage and Working Conditions: Minimum wages and working conditions, such as disciplinary procedures and leave rights, are established by “Convenios Colectivos” in different sectors and regions.
- Contract Types: A range of contract types is available, with options for fixed-term or permanent contracts, full-time (40 hours per week), or part-time work. Special contracts with tax incentives exist for hiring underrepresented groups like the unemployed or women in specific sectors.
- Termination Payments: Termination payments are applicable after one year of service, potentially reaching 3.5 years of salary, increasing by 45 days per year of service. Contract incentives may affect this calculation.
- Non-Wage Costs: Anticipate around 40% of the basic salary to cover non-wage costs, primarily employers’ high social security contributions. Some incentive contracts can reduce this cost by up to 75%.
- Deductions: Business owners are responsible for deducting employee social insurance contributions (about 6% of the salary) and income tax, similar to the UK PAYE, from the monthly salary.
- Employee Rights: Employees typically receive 23 days of annual leave in addition to national and local holidays. The option to divide the salary into 14 payments instead of 12 is available. Maternity leave is four months, and other leaves are provided for marriage, death, birth, and illness.
- Social Security: The social security system typically provides sickness benefits.
Consequences of Non-Compliance
As a foreign business operating in Spain, it’s essential to comply with employment regulations to avoid hefty fines. Spanish authorities rigorously enforce these rules, as they are aware of common violations. Even if someone not under contract assists you during an unscheduled visit by government inspectors, you cannot rely on excuses.
Impact on Financial Health
Failing to understand your budget and pay obligations in a timely manner can lead to cash flow issues and reduced profitability. Wages are paid monthly in arrears, and national insurance payments are due after one month. Employee income tax is withheld and paid quarterly.
Some companies in Spain evade labor law costs by engaging in off-the-books, cash payments. However, this is risky and may be discovered by government agencies. A more prudent approach involves exploring various contract options and aligning your commitments to employees with your anticipated revenue. Temporary contracts or those eligible for government support can be beneficial. Another option is to have some individuals work independently, handling their social security and tax obligations while working exclusively for your company. For more information, refer to the effects of social security.