Understanding Payroll in Spain: What Global Companies Need to Know About Spain Payroll
With links to Europe through its membership of the European Union, and to Latin America through historical and linguistic connections, Spain represents an excellent opportunity for multinational businesses to expand. Home to around 47 million residents, it’s the fourth-largest EU state by population, and has modernized rapidly since its transition to democracy in the late 1970s.
The Spanish economy suffered greatly from the global financial crisis of 2008 and 2009, and several years passed before it began to recover. Since then, however, Spain’s growth has been significant: GDP rose by 21.8% between 2015 and 2019, prior to the economic effects of COVID-19 felt worldwide.
Spain benefits from an ideal combination of benefits for international businesses: a strong and highly qualified workforce, and relatively low labor costs for a large European country. Spain’s average hourly labor rate is 24% lower than Italy’s, and 40% lower than France’s.
The Spanish government offers various incentives for developing businesses and foreign investment. However, incoming businesses must navigate a complicated minefield of labor and tax laws, many of which are revised often. Exploring the following important aspects of Spanish payroll and working regulations will help you gain an understanding of how you can succeed doing business in Spain:
The first steps to ensuring payroll success in Spain is to become familiar with the country’s labor laws, and how to register a company with the national trade registry, the Registro Mercantil Central (RMC). The requirement to register applies to all businesses operating in Spain, including branch offices of foreign companies.
There are two types of company that can be set up: a Sociedad Anónima (S.A.), meaning a corporation, or a Sociedad Limitada (S.L.), meaning a limited liability company. The fees involved in registration vary depending on the value of the company’s capital stock, and the process normally takes between six and eight weeks.
Many regulations around pay and working conditions in Spain are defined by collective bargaining agreements. These are not only agreed between worker unions and individual businesses, but are often also applied to specific sectors in certain geographical areas. For example, a sectoral collective bargaining agreement exists in the Malaga area for the hospitality industry, principally to cover workers in the hotels, bars and restaurants on the Costa del Sol.
Spain’s standard working week is 40 hours, with no more than nine hours permitted per day, and no more than 80 hours of overtime permitted per year. However, these levels can be altered if a collective bargaining agreement is in place.
A gap of at least 12 hours must separate the end of one working day and the start of the next, and this is now being rigorously enforced. In May 2019, a new law came into force in Spain obliging businesses to record the daily working hours of all their employees, and to retain these records for four years.
Companies must register each employee’s contract with social security authorities and the national employment service. New contracts must be registered with social security any time before the start of employment, and with the Public Employment Service within ten days following the employee’s start of employment. Probationary periods last two months, except for businesses with fewer than 25 employees (up to three months) and qualified technical personnel (up to six months).
Employers in Spain must pay their employees on a monthly basis, or more frequently depending on the employment contract or collective bargaining agreements. In addition to the minimum of 12 monthly payments, many collective agreements require two additional payments in July and December, which are pro-rated and included in monthly payrolls. All payments must be made by check or direct bank deposit, and, for payments made by check, the employer must provide a payslip with the amount of payment and withholdings to be signed by the employee.
Administered by the Ministry of Employment and Social Security, Spain’s labor laws dictate the minimum wage. This has increased significantly in recent years, and stands at €1108 per month (approximately £990, $1250) as of 2020.
If employees are dismissed, they are entitled to 20 days’ salary for each year worked, up to a maximum of 12 monthly payments. This entitlement to severance pay also applies if an employee does not consent to having his/her employment contract significantly altered, or if he/she doesn’t consent to a long-term change of job location.
Tax and Withholding Considerations
Employers in Spain must deduct income tax from their employees’ paychecks. The tax is divided into two equal halves: state tax and regional tax. Rates progressively increase as salaries increase, starting at 19 percent for the first €12,450 (approximately £11,100; $14,100) and reaching 45 percent for all earnings above €60,000 (approximately £53,500; $67,900). Overtime pay is taxable and is also subjected to specific social security tax percentages.
While most employers in the country will have to submit these payments to Spain’s Tax Authority, employers in the Basque and Navarra regions will submit income taxes to local authorities. In addition, there are rules establishing when the company must submit its tax payments; those with more than €6,010,121 to pay in tax revenue are required to pay taxes on a monthly basis, while all other employers must do so on a quarterly basis.
Employers are also required to make monthly contributions to Spain’s National Social Security Institute and withhold contributions from their employees’ paychecks. The amount of these social security contributions, which cover pension plans, labor accidents and illnesses, will vary according to a number of factors, such as length of employment or type of employment contract. As of 2020, the total typical rate of social security contribution stands at 36.25 percent of an employee’s salary: the employer pays 29.9 percent of this and the employee the remaining 6.35 percent.
Paid Leave and Sick Leave
Employees in Spain are entitled to a minimum of 22 business days (30 calendar days) of vacation per year. As with most employment arrangements, this can be increased in individual contracts or through collective bargaining agreements. Employees are also entitled to leave on the ten days of national holiday each year, as well as during the additional local holidays that the various regions of Spain individually observe.
Mothers in Spain are entitled to 16 weeks of maternity leave for the birth of a child, increasing to 18 weeks for twins and 20 weeks for triplets, and includes the six weeks immediately post-birth. They are also able to spread this leave out over a longer period by working part-time. Additionally, working mothers caring for children under eight years old are entitled to the ‘Reduccion de Jornada’, where working hours can be reduced to between one-eighth and one-half of previous full-time levels; salaries are reduced on a pro-rata basis. Fathers are only entitled to five weeks of paternity leave, increased from four weeks in July 2018.
Spain also allows paid leave for a variety of other major life events. These include 15 days for a marriage, one day for moving house, unlimited time for civic or jury duties, and even one hour per working day to care for breastfeeding babies.
Any sick leave compensation depends on the length of the absence. For example, employees out for three or fewer days are not eligible for sick pay, but the employer must pay 60 percent of the employee’s salary for each day of leave between four and 20 days. For a period of leave longer than that, or if an employee is absent due to injuries that occurred on the job, employers must make a payment of 75% of salary, but this is then reimbursed to the employer by Spain’s National Institute of Social Security.
Expanding a business into any new territory will always bring a unique set of challenges and hurdles to deal with. But despite the rich opportunities on offer, the sheer complexity of regulations, especially around collective bargaining agreements, can make moving into the Spanish business world a particularly daunting task. That’s why it’s worth considering a global payroll solution that can equip you with the expertise and experience to deal with the complication, and make your Spanish expansion as seamless and hassle-free as it can be.
This article is for informational purposes only and not intended to convey or constitute legal or any other advice. It is not a substitute for advice from a qualified professional.