New Possibilities For Layoffs In Companies With Fewer Than 25 Workers

23 July 2009

In companies with fewer than 25 employees, if the contracts are terminated on fair grounds (Art. 52.c Workers Statute) the workers can request 40% of the standard 20 days per year of service compensation from the Salary Guarantee Fund (Fogasa), subject to applicable Fogasa limits, even in cases where the company agrees to pay the workers severance pay in excess of the minimum 20 days per year of service. That is, the employees will receive their severance payment from the Company and, additionally, the 40% amount which is paid afterwards by Fogasa.
The Supreme Court opened the door to this solution with their recent December 4, 2007 ruling.
In this way, employees who have been laid off are provided with an opportunity to increase their net wealth since the company is actually ceding the worker the right to claim reimbursement of the 40% legal severance amount from Fogasa, corresponding to the company’s prior contributions, which Fogasa is obligated by law to pay.

In order to effect this solution, the requirements are: fair grounds for employee layoffs and, during the settlement hearing (either in or out of Court), the employee’s acceptance of the dismissal as valid and the company’s agreement with the employee to pay an amount above the maximum legal severance amount of 20 days per year of service. It should be noted that for tax purposes, in this scenario the additional severance amount paid by the company would not be tax free for the employee but might benefit from a 40% discount as irregular income as long as it enters within a single tax period. Thus only 60% of the excess amount would be taxed.

For further information please contact Ana Gómez Hernández: