terça, 31 janeiro 2017

Problems that can arise in relation to severance pay when an Executive that provides services to a Groups of Companies is made redundant or dismissed. Possible adverse effects with regard to the quantification of the severance package and the tax pay

VolverIn the Labor Law department at BELZUZ ABOGADOS S.L.P. we frequently encounter problems related with severance pay when Executives working for Groups of Companies are made redundant or dismissed. Although they ought to be easy to solve, this is far from being the case, and can have major adverse financial effects for the executive in question, both in terms of severance pay and of tax.

With regard to problems affecting employment, the Supreme Court has repeatedly ruled that, with regard to the interpretation of Article 56 of the Statute of Workers for the purpose of calculating severance pay in the case of dismissal, a distinction should be made between simple “length of employment” and “years of providing services”, and only the years of providing services should be counted for these purposes.

If the executive has been working for different companies within the same Group of Companies, it may happen that the one from which he or she is dismissed only recognises the length of time the executive has provided his service in the latter company, which obviously means he will not be compensated for the other years he worked for the Group of Companies.

The risk of this happening does not arise in cases where legal subrogation has occurred under Article 44 of the Statute of Workers, i.e. in cases of mergers or acquisitions, where the transfer was has taken place in the form of a succession of companies under the said Article 44 of the Statute. However, it can arise when executives are moved from one company in the group to another and sign a new contract of employment, without the new contract recognising the true length of service for all purposes, especially with regard to the number of years of service that should be recognised for the purposes of calculating the severance package.

Therefore, as lawyers specialising in employment law, we recommend that the clauses of these new Executive contracts should be reviewed when a change is proposed within the group of companies, since it can sometimes jeopardise an executive’s entitlement to a large severance package.

With regard to tax problems, we have to start from the new regulation exempting severance payments for dismissal laid down in article 7 of Personal Income Tax Act, which treats the compensation referred to in the Statute of Workers as being exempt, up to a limit of 180,000 euros, above which the amount becomes taxable.

However, the tax problem arises in what we have called "years of service", since the Tax Authorities have long taken the view that for the purposes of calculating the exempt amount, the number of years of service with the company in which dismissal takes place has to be taken into account, rather than the length of service recognised under an agreement or contract, individual or collective (SC 21-3-00, EDJ 10392, 19-7-12, EDJ 192058, DGT 22-9-99; CV 28-5-09; CV 31-1-11; CV 20-5-13). That is, clauses recognising length of service are not binding on the Tax Authorities for the purpose of calculating the severance payment’s exemption from tax.

However, this doctrine has been qualified in the following cases.

In cases of legal or conventional subrogation (that is, arising from Article 44 of the Statute of Workers, or that produced by applying the rules established in a Collective Agreement), in which the number of years of service calculated must include not only those worked for the new company but also those worked in the previous one (DGT 14-11-01; 6-6-03; 23-9-03; TEAC 6-11-08).

In cases where an executive works for a Group of Companies, the years of service to be take into account for calculating the exempt amount will be those worked for the group. The binding rulings of the Directorate General of Taxes of 16/02/2008, 7/23/2013, 7/14/2014 and 13/06/2012 make this clear.

However, in establishing this rule, the Directorate General of Taxes reserves the right to determine whether the jurisprudential requirements have been met and justified for the purpose of establishing that a group of companies exists for employment purposes that can be tested by any means of proof admitted in law.

In conclusion, the Employment Department of BELZUZ ABOGADOS, as lawyers specializing in Employment and Tax Law as it affects severance packages for executives and senior management staff, recommends that timely legal advice should be obtained beforehand or at the time of dismissal when the executive concerned has worked in a Group of Companies

Pedro-Gomez-Rivera  Pedro Gómez Rivera

Diretor do Departamento Direito laboral | Madrid (Espanha)

 

Belzuz Abogados SLP

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