Hiring a local employee in Spain

Several foreign companies try to hire employees in Spain outside the Spanish procedures and applicable regulations for establishment of the company, among other ways local temporary employment agencies or the like, and not many become aware that the regulations are being circumvented before it is too late.

Leasing of employees – authorized temporary employment agencies

Art. 43.1 in the Spanish Labour Act allows leasing / hiring out of workers, when this is for a temporary period and is done by an authorized temporary employment agency (ETT).

However, such agencies may not allow the assignment of a worker in the following cases:

  • To replace striking employees.
  • For carrying out work hazardous to safety or health.
  • When, within the previous 12 months, the company has eliminated the position, which is now wanted to be re-filled by a substitute, through unjustified, collective, or objective dismissal.
  • From one temporary employment agency to another.

The period must be temporary, otherwise it will be an illegal transfer of the employee.

It is not permitted to make successive temporary contracts, and these will be considered permanent and thus constitute an illegal transfer.

If the purpose is to complete a company’s general or structural organization, it will be an illegal transfer that will be considered a serious violation of the regulations.

When is it considered an illegal transfer of an employee?

It is determined in the Spanish Labour Act art. 43.2 that there is an illegal transfer of an employee when the lessor / front company does not exercise managerial and disciplinary powers over the employee, and the lessee / the foreign company contributes personal and material resources and uses its own organization. In other words, instructional powers and obligations towards the employee have been transferred to the foreign company.

It is necessary to make a case-to-case based assessment of the specific conditions in relation to the employee’s performance of his work, the real relationship between the employee and the companies involved as well as the contractual relationship between the companies.

For example, the following must be investigated:

  • Control and work organization. Who controls holidays, working hours, suitability, subordination of employees, management and control of work, the direct implication, organization of employees, technical instructions to employees, etc.
  • Who has the authority to decide on dismissal, sanctions, etc.
  • Material and resources. Who owns material, hardware, etc.
  • What does the foreign company pay to the agency for the employee(s).
  • From where the work is carried out.

Transfer of employees within the same group

The general rule is that the transfer of employees between companies within the same group is not considered an illegal transfer of employees, since the purpose of the transfer is not to hide the real employer but takes place as part of organizational and / or financial criteria. Seniority for the employee in the group must be recognized.

Sanctions because of illegal hiring or transfer of employees

Both companies that participate in an illegal transfer of an employee are jointly and severally liable in relation to the obligations towards the employee (salary, compensation for dismissal…) and in relation to the correct payment of Spanish social contributions, seguridad social, and the fines and penalties that may be imposed.

According to current Spanish labour law, an illegal transfer of an employee can be considered a very serious offense and a fine between 7,500 and 225,000 euros can be imposed.

In addition, there may be a criminal liability, as the relationship may be considered illegal trafficking and thus a crime against the workers’ fundamental rights.

Local employment can be regarded as a permanent establishment for tax purposes

Regardless of whether the local hiring takes place regularly or illegally via a Spanish temporary employment agency or by direct employment, the employee can be considered for tax purposes to constitute a permanent establishment in Spain for the foreign company.

This applies particularly in relation to Danish companies, as there is currently no double taxation agreement between Denmark and Spain.

Establishment in Spain opens up new opportunities

When a foreign company wants to employ a local employee in Spain, the main rule will be that it will be necessary for the company to establish itself in Spain, after which one might start to consider whether it is worth it.

In relation to this, and since Spain is an attractive country to live in, it should be considered whether the necessary establishment in Spain could be used to attract additional qualified employees and thus strengthen competitiveness. Apart from the good climate, the special Spanish tax scheme, “the Beckham law”, allows low-income taxation of the salary for people who move to Spain to work, so what is not to like.