Article 2.1 a) of the Spanish Labour Relations Act considers a special labour relationship as that of senior management staff not included in Article 1.3 c) of the same regulation and therefore it has its own system by virtue of which the ordinary rules of the other workers are not imposed. However, we can very often find in the real situations of companies that it is legally complicated to determine whether a contract is a senior management contract or an ordinary employment contract, which can lead to serious consequences when the contract is terminated.

The system that regulates senior management contracts is governed by Royal Decree 1382 of 1 August 1985, (The Special Labour Relationship of Senior Management Staff), and this states that a senior management contract can be terminated when decided by the employer by means of withdrawal, which we will deal with below, or by disciplinary dismissal, in the latter case the dismissal letter must meet the formal requirements and basis required according to the ordinary employment system.

Which requirements must the company meet in order to terminate the Senior Executive’s contract?

In order to terminate a senior management contract by means of the company’s withdrawal, the company must meet the following requirements:

1. Written notification of the senior executive’s termination, with no need to state any reason that could justify it.
2. Such notification of termination must be provided to the senior executive with at least 3 months prior notice before the effective date of termination and, in the case of partial or full breach of the obligation to provide such prior notice, the senior executive would be entitled to compensation equivalent to the salary payable during the period that has been breached, in other words, the employee’s cash salary plus any salary supplements (e.g. bonus).
3. The senior executive must be paid the legal severance pay equivalent to 7 days cash salary per year worked, up to a cap of 6 monthly payments, or the amount agreed in the contract, which may never be lower than the legal severance pay.

What are the legal and financial consequences if the senior executive challenges the termination?

This dual termination system, either by withdrawal or disciplinary dismissal, means that if a senior management relationship is judicially categorised as an ordinary relationship and the dismissal is ruled unfair, this results in the compensation due to lack of prior notice not being possible and that for withdrawal from the executive contract, already paid at the time the contract was terminated, cannot be offset with the compensation for unfair dismissal ruled in the judgement, resulting in the company needing to file a claim against the worker in separate proceedings for the extra amount that could have been paid to him/her due to payment of the severance pay for unfair dismissal stipulated in the judgement.

What judgement did the Supreme Court rule?

In this respect, the Labour Chamber of the Supreme Court finally ruled on this in the recent judgement of 10-5-2022 on an appeal (cassation) for unifying doctrine in which it determined that the compensation for failure to provide prior notice in a case of withdrawal from a special senior management relationship can be compensated with the severance pay for unfair dismissal stipulated in the judgement that ruled the labour relationship between the parties was an ordinary one.

In the case the judgement refers to, the worker’s dismissal was ruled unfair, due to having been carried out under the presumption of withdrawal from a senior management contract when in fact the labour relationship was actually an ordinary one and the question to be resolved consisted of determining whether or not the compensation paid due to failure to provide prior notice and for termination of the contract in the case of withdrawal from the special senior management relationship can be compensated with the severance pay for unfair dismissal stipulated in the judgement that, after examining the challenge against such withdrawal, ruled that the labour relationship between the parties was an ordinary one and in which it did not acknowledge the right for it to be compensated with the amount paid due to lack of prior notice.

The Supreme Court ruled that the company was indeed entitled to be able to make this relevant compensation for the following two reasons:

• The debt owed due to the error made regarding the categorisation of the labour relationship had already been paid and the judgement imposed the obligation to pay, for the same termination concept, the amount corresponding to the ruling of unfair dismissal.
• Receiving both kinds of compensation would imply the worker’s unfair enrichment, because he would receive, on the one hand, the amounts payable for termination of a non-existent labour relationship and, on the other hand, those payable for termination of an ordinary labour relationship, as categorised in the judgement.

The Supreme Court stated that we are faced with a method for terminating obligations (in accordance with the provisions contained in Articles 1156, 1195 et seq. and 1202 of the Spanish Civil Code, the first describing the reasons for termination of the obligations and the last one the effects of the compensation) and that, in view of the provisions in Article 26.5 of the Spanish Labour Relations Act, the rule for compensating the salaries referred to in such provision is valid since such provision includes the principles for compensation contained in Article 1195 of the Spanish Civil Code, as in the case referred to in the judgement in question hereby and in which it is clearly sustained that the worker was the debtor and his debt was due, liquid and payable. This is why the High Court deemed that the compensation must be automatically payable and therefore the company can validly make the relevant deductions in the amounts that it must finally pay the worker, due to being debts in which the legally stipulated requirements have been met, even more so when the second debt arises by virtue of a judicial order that categorises the relationship as an ordinary one and the payment made by the company becomes erroneous that was made when terminating the relationship that was  considered to be a senior management type. The aforementioned termination effect hence avoids, as stated by the court, unnecessary transactions, without it being necessary to claim what the worker would need to fulfil.