Spain: Termination Pay Can Include Bonuses and Other Variable Pay

by Dentons
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In the past few years, the Spanish financial crisis, which has persisted since 2008, has led to many companies choosing to assign a more significant role to bonuses or variable pay rather than fixed salary. By granting incentives linked to the achievement of specific goals, companies are guaranteed that employees' pay will be proportionate to their performance.

First of all, it is important to briefly discuss variable salary regulation. Royal Legislative Decree 2/2015, of October 23, which approves the Workers’ Statute (Employment Act), establishes the definition of salary in Article 26.1 as:

“The totality of the economic payments received by employed workers, in cash or in kind in exchange for actual work, whatever the form of compensation is, or for the rest periods that can be counted as work, shall be considered as salary.”

In keeping with the above, it is clear that a bonus (or variable salary) must be defined as salary, since it is awarded in exchange for work carried out by employed workers, as opposed to other payments, such as severance compensations, expense disbursements, Social Security contributions, etc.

Moreover, Section 3 of the above-referenced Article 26 states that:

“The structure of salaries shall be determined through collective bargaining or, in its absence, through the individual contract. This shall include basic salary as fixed compensation (…), and, if applicable, the salary supplements established depending on the circumstances regarding the employee’s personal circumstances, the services carried out, or the company’s situation and results, which shall be calculated in accordance with the criteria agreed. Likewise, there shall be agreement as to whether or not such salary supplements are subject to consolidation. Unless otherwise agreed, those supplements linked to the job position or the company’s situation and results shall not be consolidated."

In other words, the Employment Act gives the parties the freedom to establish the salary structure, which allows them to include salary supplements, such as a bonus or variable pay.

Based on the above, it is clear that (i) a bonus/variable pay is considered salary, and (ii) the parties are free to agree to such forms of compensation. Therefore, unless stated otherwise in the applicable collective bargaining agreement (CBA), variable pay is supplementary and subject to a margin of discretion by the company since its granting is voluntary (i.e., the company can set the benchmarks, as long as they are achievable).

Once the concept and the legal nature of the bonus/variable pay have been clarified, it is important to assess what happens to this supplementary payment when an employee leaves the company. Should the bonus always be paid? If so, should it be paid in full or proportionately? Will the type of termination and the granting and the fulfillment of objectives affect the bonus payment? Finally, should the bonus amount be taken into account when calculating severance compensation?

The general rule holds that if an employee does not fulfill the objectives set by the company, he or she will not be entitled to receive the bonus. Notwithstanding the foregoing, several points must be taken into account:

The Supreme Court has held that if a bonus has already been fully accrued because all previously designated goals have been met, its payment cannot be conditional upon the employee permanency in the company until such time that the bonus is paid. Thus, any provision in the permanency clause stipulating that a bonus will not be granted because the company has yet to pay it, even though the employee has fully met the bonus conditions and has completely accrued its totality, shall be declared null and void.

In addition, the Supreme Court established that the bonus must be paid when non-compliance with the permanency condition is due to the company’s unilateral decision (for instance, if the employee is terminated prior to the bonus full accrual due to unfair dismissal). On the other hand, courts have accepted the non-payment of the bonus when the permanency condition is breached by unilateral decision of the employee, such as in cases of voluntary resignation, or when lack of payment takes place as a result of employee misconduct which leads to a disciplinary fair dismissal.

But what happens if the bonus does not have a permanency condition and the employee voluntarily leaves the company? The Supreme Court established that in the case that the bonus payment is not conditional upon the employee’s permanency in the company until the goals have been fully reached, and if the employee voluntarily resigns from the company or is fairly terminated, he or she shall receive the bonus in proportion to the objectives achieved.

Moreover, it is important to refer to a recent National High Court (Audiencia Nacional) ruling which declared that a company had to pay the full bonus for the year 2015 to its employees because the specific goals to be reached during that year were not communicated to them and, therefore, it could not be fairly argued that they had not reached such objectives. The ruling states that targets must be known by the employees in advance (i.e., prior to the beginning of the bonus accrual). In this specific case, since the company could not provide evidence that such goals were communicated, the court saw the company as carrying out a substantial modification of the employees’ working conditions without using the legal procedure established by law and, therefore, declared such modification null and void.

Bearing in mind the above, one can conclude that the (full or partial) payment or non- payment of a bonus will depend on several factors, such as the inclusion of a permanency condition, the initial setting (and communicating) of objectives and the achievement (or failure to achieve) such goals, as well as the kind of termination (resignation or fair/unfair dismissal).

Finally, we provide below a discussion of whether or not one must include variable salary in a severance compensation payment, an important question as the answer can have a considerable impact on the amount to be paid to an employee upon his or her termination.

As a general principle, in accordance with case law, taking into account, as stated above, that bonus or variable salary is considered salary, it must be included in a severance compensation payment. As stated by the Supreme Court, this includes any bonus or variable salary paid within 12 months prior to termination, even if such bonus has accrued prior to such payment.

The following are exceptions to the general rule that variable pay be included in a severance compensation payment:

  1. If the parties have expressly agreed that the bonus will not be included in the severance compensation payment. However, this statement is contestable and depends on the specific case. Note that this exception contradicts the above-mentioned settled case law holding that all forms of salary obtained by the employee must be included for severance compensation calculation purposes.
  2. If it is an exceptional and extraordinary bonus. According to case law, the severance compensation need only include variable salary granted and accrued on a permanent / stable basis.
  3. If it is a variable salary that accrues within several years (pluri-annual bonus). In such a case, unless otherwise agreed, only the portion of the bonus paid within 12 years prior to termination must be included for severance compensation calculation purposes.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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