There are various types of contract available to the employer depending on the industry and profile of the employee. However, generally the employer will have to choose between offering a temporary or a permanent contract.

It is common practice to commence the employment relationship with a temporary contract and to continue with a permanent contract once the temporary period is over. A temporary contract can only be renewed once; therefore the second renewal needs to be into a permanent contract.

It must be noted that any contract has a trial period during which the employee is deemed unsuitable for the position, the contract can be terminated. Again, the length of this trial period will depend on the industry, the profile of the employee and the contract type.

Similarly to the UK, employers withhold a percentage of the gross salary agreed as a payment on account of income tax of the employee.

Generally, for permanent contracts the amount withheld will depend on the size of the salary and the employee’s personal entitlements given some of their personal circumstances. Therefore, the amounts withheld should be very close to the actual tax liability of the employee, should they then file a tax return following the year end there would only be a small balancing payment or refund due.

However, for temporary contracts the minimum amount withheld is 2%. This means that during the temporary contract phase the employee will probably be under contributing to the actual income tax liability accrued, therefore when the employee changes to a permanent contract the amount under contributed will need to be regularised.

Let’s look at an example, for an employee earning € 1,500 gross per month:

Withholding minimum 2% is an obligation for temporary contracts; however, you may opt by agreement with the employee to retain the correct PAYE percentage hence avoiding three potential problems. On one hand the employee will not get accustomed to an artificially high net pay which could potentially lead to dissatisfaction later on. Secondly, given that the retentions match the income tax liability no large adjustment will be needed. Thirdly, if the pay has been agreed on a gross pay basis there will be no increase in the cost to the employer when the contract is renewed on a permanent basis.

Our recommendation is that salaries are always agreed on a gross pay basis and if at all possible that even if the contract is temporary, you opt to withhold the correct amount.

This element of the employment costs is by far the most controversial amongst employers particularly those new to the Spanish system. In Spain, like in the UK, both employees and employers are liable to pay social security contributions.

Social security contributions are payable as a percentage of earnings subject to social security up to €3,074 per month (€36,889 per annum).

Employee contributions are deducted from the gross salary at 6.40% for temporary contracts and 6.35% for permanent contracts.

Employer contributions represent an added cost to the employer at approximately 40% for all contracts.

Obviously, the impact of this social security cost cannot be ignored hence the need to be fully aware of the system before making an offer to a potential employee.

The table below summarizes our example:

The net pay due to employees is generally settled by the last day of the month, however the employer is entitled to pay between the first and the fifth day following the month of pay.

The income tax deductions applied to the employee salaries are payable once per quarter following the end of each calendar quarter, therefore payments will occur in April, July, October and January.

Social security including both employee deductions and employer contributions are payable by the end of the month following the month of pay.

Any changes to the circumstances of the employment will need to be carefully managed. Regular communication with your payroll adviser is essential to deal appropriately with everything from sickness notes to disciplinary procedures and employee dismissal.

Before taking any employees on:

• Get an estimate from your payroll adviser to ascertain the actual deductions applicable, the total cost to the employer and the net pay for the employee
• Ensure your employee is aware of the system to avoid misunderstandings
• The employment contract has to be formalized from the first day
• Beware of additional benefits as in case of dispute the employee can make claims even in relation to any informal benefits given