Covid-19 important changes to the ERTE system expected soon

(Updated 13/05/2020)

The article we published on 20 March detailed the regulations (ERTE regulations) for the full or partial suspension of employment contracts during the Covid-19 crisis. The Government of Spain declared a State of Alarm on 14 March, which then allowed it to impose severe restrictions on the movements and activities of the population and business activities. In Spain the lockdown means lockdown.

On Wednesday 6th May, Congress authorised the Government to extend the State of Alarm for the 6th time, until midnight on Saturday 23rd May. However, the Government no longer has the full support of Congress and resistance is building in the country to the often ridiculous restrictions being imposed on businesses and the general public.

There are indications are that this may be the last extension permitted, unless there is a significant increase in Covid-19 infection rates.

As we approach the end of the State of Alarm, the business community has strengthened its protests against the arbitrary nature of the ERTE employment suspension scheme.

The closure of businesses with the termination, suspension or substantial modification of employment contracts is usually subject to a long period of formal consultation that can take up to a month and a half to conclude. During this time employees are entitled to receive their full salaries. Only the smallest of businesses are exempt from this process.

When the Government decided to close down the country on 14 March, it left employers in the dark as to how they would manage their payroll obligations. It took until 18 March before regulations were published allowing businesses to suspend employment contracts during the State of Alarm.

Essentially, the new ERTE rules of the 18th March allowed employers to suspend employment contracts, if explicitly forced to close by the State of Alarm regulations or if business activities were seriously affected by the economic fallout of the State of Alarm regulations.

To the informed observer, the new ERTE rules appeared to have been drawn up on the basis that employers would abuse the regulations as a matter of course. Indeed the Minister of Labour, Yolanda Diaz, appeared on television and before the press on several occasions to emphasise that the priority of her ministry was to root out fraudulent use, by inspecting employers using the ERTE regime. The legion of civil servants under her management will have taken this as a licence to prosecute any unfortunate business person who has misunderstood the labyrinthine ERTE rules.

The Covid-19 ERTE rules allowed, in the case of a business closed down due to force majeure, the immediate suspension of employment contracts, backdated to the start of the State of Alarm on 14th March. Under this regime, the employer ceased to be liable for salaries and social security contributions. The employee would receive (eventually as it now turns out) a very modest unemployment benefit

Force majeure was defined to apply to all businesses listed in the State of Alarm regulations as being required to close. Although not clear at the time, the term is now also regarded to apply to businesses that, although not forced to close, had to do so because of the economic circumstances of the lockdown.

To make use of the regime, the basic condition was that the employer would have to re-employ all employees, on the same terms as before, the moment the State of Alarm came to an end. No provision was made in the regulations that would have permitted an employer to gradually reopen the business and phase the re-employment of staff.

If, upon inspection, an employer was found to have breached the rules, all the benefits of the scheme would have been cancelled and unpaid social security would have had to be repaid to the state plus substantial financial sanctions. A perfect recipe for forcing businesses into closure and the destruction of jobs.

It would have been evident to the most junior economics or business analyst that these rules were completely impractical for a lockdown that was certain to last for several months, a world in economic crisis and severe recession on the cards. These rules were written by politicians or civil servants whose knowledge of the reality of business was either non-existent or whose political belief was that all business owners are abusive and corrupt capitalists, who should be forced to take on the entire burden of the economic losses caused by the Covid-19 crisis.

Finally, seven weeks later, when the politicians can no longer evade the reality that economic and business activity cannot stop and start on the press of a button, and that wealth is created by businesses and not the state, we are finally seeing some movement.

Yolanda Diáz has been widely reported, in the last few days, as accepting that the business sector will not be able to reactivate immediately on the cessation of the State of Alarm. She has assured businesses that regulations will emerge that will allow them to gradually re-employ their workforce.

The sting in the tail is that in order to “incentivise” employers, social security payments will have to be made by employers of increasing amounts each month for the employees they have not taken back into full employment. We are expecting the new regulations in the next few days but if recent patterns continue, then employers should not expect too much.

I abhor the abuse of animals, but this feels like employers are being “thrown a bone”.

One change appears to be (almost) certain and that is instead of the Force Majeure ERTE period ceasing when the state of alarm comes to an end, it will all least until 30 June. Employers can recommence employment earlier if desired.

Oddly, the Government has published in the last week its proposals for the revision and consolidation of the country’s truly useless and awful insolvency laws. It’s no wonder that Spain remains second only to Greece in its unemployment rate, now expected to reach 19% before recovery can commence.

The only way that the law allows an employer to avoid the obligation to re-employ staff as soon as the State of Alarm is over is for the employer to declare a ‘concurso’. This is a court administration process that usually leads to a liquidation, but not always, as there is a preliminary formal step that may cancel the obligation to re-employ staff, without necessarily triggering the start of a liquidation.

Watch this space for more news on the ERTE system changes when they are fixed in new regulations and in the meantime, thank you for reading, stay safe and healthy.