(Bloomberg) -- The European Union’s top court has thrown Spanish labor laws into confusion by granting temporary staff the same rights to severance pay as permanent workers in a ruling that may end decades of segregation in the employment market.
The EU’s Court of Justice said Spanish labor market laws are in breach of common EU rules as it discriminates workers based on their contract, arguing both categories are entitled to the same compensation in a ruling dated September 14. The ruling, which cannot be appealed, has cast doubt on how companies should treat temporary workers who are at a disadvantage to their colleagues on permanent contracts when it comes to severance pay.
Job creation has become a battleground for political parties as they make their pitch to voters to end the political limbo caused by inconclusive elections in December and June. While unemployment has fallen to about 20 percent from a peak of 27 percent in 2013, the labor market remains highly fragmented by contract type, with employers often preferring to take on temporary staff at lower salaries and with less job security than permanent workers.
“The sentence is unequivocal and will undoubtedly lead to a change in the current legislation when it comes to compensation,” said Anna Gines, professor of labor law at the Esade Business & Law School in Barcelona. “Spain cannot discriminate based on contract type and will have to equalize severance pay.”
Acting Prime Minister Mariano Rajoy has set a target of creating 500,000 new jobs a year in Spain, a goal he says has been made possible by tweaking labor laws to making hiring arrangements more flexible for employers.
Under the current Spanish labor legislation, workers on a permanent contract are entitled to compensation equivalent to 20 days per year worked if they’re fired. Temporary staff are given compensation of 12 days while substitute temporary workers aren’t entitled to compensation at all regardless of the amount of time worked or duties carried out.
The Labor Ministry said in a statement that it would study the ruling and denied it would represents a ban on temporary contracts, which account for a quarter of all jobs, the second-highest rate in the European Union after Poland. Acting Economy Minister Luis de Guindos said in an interview with Onda Cero radio Thursday that the number of temporary jobs is excessive and more should be done to make permanent hiring attractive for companies.
In the meantime, unions have already called on temporary workers who have lost their job over the past year to take legal action against their former employers demanding more compensation based on the ruling. The liberal Ciudadanos party said the ruling validates its proposal to introduce a single contract for all workers. De Guindos argued a single contract over-simplifies the nature of Spain’s labor market, which is highly seasonal.
The business lobby CEOE criticized the ruling, saying it applies to a specific type of temporary contract for substitute workers and should not be applied to the rest. There are approximately 300,000 workers temporarily substituting other staff in Spain, all of which according to the EU ruling, are now entitled to equal compensation under the ruling.
“Does it represent a setback for the labor market reform? Not entirely, but it does put the brakes on the liberal turn that the law had taken,” said Eduardo Penacoba, head of employment law at Simmons & Simmons in Madrid, adding that the ruling is open to different interpretations by the courts. The ruling eliminates legal grounds for temporary employment agreements and the legal uncertainty that may cause may have a detrimental effect on hiring, he said.
The interpretation of the ruling by Spanish judges will be key, as they may decide to adopt a watered-down version, said Penacoba. Until then, the existing legislation prevails, although Penacoba said he anticipates a wave of lawsuits.
The ruling came about after a temporary substitute worker challenged the Spanish government after she was fired in 2012 without any compensation from the Ministry of Defense, where she worked for seven years replacing a colleague who had taken a position at a trade union. European justice officials stated her contract alone does not provide sufficient reason to deny her full compensation in a challenge to the current Spanish legislation.