Spain's High Dismissal Costs Force Factory Liquidation

Severance Pay: The Final Nail for Spanish Employers

A textile factory in northern Spain is closing its doors and must liquidate every asset, including spools of thread, to cover severance payments. This case, widely reported recently, has reignited a debate that never dies in Spain: why is firing so expensive, and who should foot the bill? The short answer is that the law obligates the employer, not the State. The long answer is more complex.

The legal framework is clear: the Estatuto de los Trabajadores (Workers' Statute) sets severance for unfair dismissal at 33 days per year worked, capped at 24 monthly salaries. For an employee with two decades of tenure, this amount skyrockets. There is no public fund to cover it. When a company goes bankrupt, this cost comes from whatever assets remain: buildings, machinery, stock. Hence, even the spools are sold.

Why Pay Severance If the Factory Closes?

Because the law assumes workers should not bear the consequences of management errors. This is the argument used by those defending the current system: severance does not reward the employee but covers the transition to the next job. If the business fails, the worker did not choose the risk. The cost falls on those who made the business decisions.

Opponents offer another interpretation, increasingly common: the system penalizes hiring. A small business owner with employees puts it bluntly: in Spain, it is more expensive to hire than to have a child. According to this view, the practical result is minimal hiring, outsourcing everything, and relying on freelancers rather than salaried staff. The labor market becomes dualized: protected permanent employees versus temporary ones without safety nets.

The Calculation No One Wants to Make: 20 Days Per Year

The most cited figure in analysis is 20 days per year worked for objective dismissal, compared to 33 for unfair dismissal. With an average salary, dismissing a worker with 20 years of service can exceed €30,000. For a SME with tight margins, this equals a year’s profit. A detailed breakdown reveals differences that surprise those who only know the headline.

Some argue the problem is not severance itself, but the lack of an efficient guarantee fund. In other countries, the State absorbs part of the cost when companies cannot pay. Here, Fogasa (Wage Guarantee Fund) covers a portion, but the process is slow, and the employer remains the primary payer. An alternative proposed is the Austrian model: individual accounts per worker, monthly contributions, and free dismissal at the end. No one has implemented it.

Is Free Dismissal the Solution or the Problem?

Free dismissal already exists in practice: you can fire anyone at any time; the issue is whether it is justified. The difference lies in the cost. Without severance, workers who underperform due to age or illness leave empty-handed. This is the counterargument used by defenders of the current system. They argue that probation periods already allow cost-free termination when an employee does not fit.

Another frequent criticism of the incentive structure is that increasing severance discourages effort. Someone with 25 years in the company knows their dismissal is costly and their position secure. New hires give 100% effort for lower pay. The result is an internal productivity gap that no reform has fixed. The same logic applies to the pension system: today’s contributors support those who no longer produce.

When Closure Becomes an Auction

The textile case is an extreme example. The company is not closing because it wants to, but because it cannot survive. The liquidation process turns into a forced auction: machinery, goods, spools. Everything counts toward covering severance. The insolvency administrator manages the mess, but the outcome is the same. The owner’s assets are liable.

The lingering question is whether this model protects workers or merely delays their dismissal. An employer who knows closing will cost them every last asset hires less, invests less, and holds on until bankruptcy is inevitable. By then, there is nothing left to sell. And the worker gets paid, if they get paid at all, late and poorly.

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The debate continues: neither those demanding free dismissal nor those defending current severance rules have a solution that avoids harming someone. What seems clear is that the current system turns every closure into a spectacle of total liquidation.