Labour costs in Spain: a guide for foreign companies before hiring

When a company from outside of Spain plans to expand and hire staff in the country, one of the most critical factors to understand is the difference between the net salary that the employee receives and the total labor cost that the company actually assumes. This real cost, often significantly higher than the agreed gross salary, includes a series of mandatory concepts that, if not taken into account, can lead to serious budgetary imbalances.

The objective of this article is to clearly break down each of the elements that make up the cost of an employee in Spain, so that you can make informed and strategic business decisions.

Minimum wage and average wage in Spain

Before we dive into the additional costs, it's essential to know the starting point: salary. In Spain, the Minimum Interprofessional Wage (SMI) is set annually by the Government and represents the minimum amount that any worker must receive, regardless of the activity or type of contract. It is a crucial benchmark, but real wages often exceed this figure.

Beyond the SMI, the average salary in Spain is in a significantly higher range. However, this is only an average and the final figure will depend largely on the sector of activity and, above all, on the applicable collective agreement. The agreements, which are sectoral or territorial agreements, set base salaries and minimum working conditions that, in many cases, are above the minimum wage and are mandatory for the company.

Social security contributions payable by the employer

This is where the difference between apparent and actual cost begins. Social Security contributions are a pillar of the Spanish welfare system and an unavoidable obligation for the employer. In general, they represent a notable percentage, which can be around 30-35% of the worker's gross salary.

These payments cover different contingencies and benefits for the employee, such as:

• Common Contingencies: They finance health care, temporary disability benefits (sick leave) and retirement. It is the largest percentage paid by the company.
• Unemployment: They provide financial coverage in the event that the worker loses their job involuntarily.
• Vocational training: They contribute to the financing of continuous training programs for workers.
• FOGASA (Wage Guarantee Fund): It ensures the payment of outstanding salaries and compensation in the event of insolvency or bankruptcy of the company.

It is important to know that these percentages vary depending on the type of contract. For example, a temporary contract may have a higher burden of unemployment contributions than an indefinite one.

Social contributions payable by the worker

The gross salary is the total amount agreed upon before deductions are applied. However, the employee will not receive that full amount in their account. Part of their salary is also allocated to Social Security and Personal Income Tax (IRPF).

The worker assumes a small portion of the social contributions to cover common contingencies, unemployment and training. These percentages are subtracted directly from your gross salary. The sum of these concepts, together with the withholding of personal income tax, determines the net or "liquid" salary that the employee receives each month.

For a foreign company, understanding this difference is vital. An employee can negotiate a gross salary of, say, €35,000 per year, but their monthly take-home pay will be significantly lower, and the total cost to the company will be substantially higher.

Other additional costs and obligations

The cost of an employee in Spain is not limited to monthly contributions alone. Other concepts, often overlooked, directly impact the company's annual budget:

• Extraordinary payments: By law or by agreement, Spanish workers are entitled to two extra payments per year (the popular "summer and Christmas payments"). This means that the annual salary can be divided into 14 payments instead of 12. The company can choose to prorate these payments in 12 monthly payments, but the total annual cost is the same.
• Vacation: Every worker is entitled to 30 calendar days of paid vacation per year. This period not worked is still a cost for the company.
• Severance pay: In the event of termination of the contract, the company must foresee the cost of compensation. The amount varies depending on the type of dismissal (objective, unfair, end of temporary contract) and the worker's seniority.
• Training and prevention: The company must allocate resources to training and occupational risk prevention, either through its own service or an external entity.

Taxation associated with employment: the role of the company as a withholder

The company is obliged to withhold Personal Income Tax (IRPF) from its employees' payrolls and to pay it into the Public Treasury. The withholding percentage depends on a variety of factors, including the employee's annual salary, family situation, and marital status.

The company must comply with the filing of periodic returns, such as Form 111 (which summarizes personal income tax withholdings and payments on account) and Form 190 (an annual summary of all withholdings made).

6. Indirect and management costs

Beyond the direct figures in the payroll, there are other expenses that foreign companies should consider to have a complete view of the costs of an employee in Spain. These are indirect costs, which, although they are not reflected in the payroll, impact the company's budget and operations.

• Administrative cost: Managing payroll, social insurance, contracts, and communications with public administrations (such as Social Security and the State Public Employment Service, SEPE) requires time and resources. Many companies choose to outsource this work to a labour consultancy or agency, which involves a fixed monthly cost that must be taken into account.
• Registration obligations: Spanish labour regulations require, for example, the time control of workers, a record that must be accessible for inspections. Although it may seem like a minor detail, implementing and maintaining systems to comply with this and other registration obligations (such as electronic contract communication) is an investment.
• Impact of collective agreements: As we mentioned at the beginning, collective agreements are crucial. These agreements may introduce mandatory social benefits, such as life or health insurance, transportation bonuses, or productivity bonuses. These costs are not optional and must be foreseen to avoid non-compliance.
• Communication and travel costs: Depending on the role, an employee may incur additional expenses for phone, travel, or specific work tools. While these are not mandatory labor costs, they are part of the total cost of having that employee with the company.

Including these indirect costs in the initial planning is essential to avoid surprises and ensure a realistic and complete budget forecast.

Practical example: the real cost of an employee in Spain

Let's imagine a case study to illustrate all of the above.

• Gross Annual Salary: €30,000
• Social contributions payable by the worker: Approx. 6.4% of the contribution base.
• Personal income tax withholding (estimated): It varies according to the personal situation (approx. 15-20% for single without children).
• Annual Net Salary (approximate): €23,000
• Social contributions payable by the employer: Approx. 31% on the contribution basis. (9.300 €)
• Total cost to the company: €30,000 (gross salary) + €9,300 (employer contributions) = €39,300.

This example shows that a worker who "earns" €23,000 net per year can cost the company almost €40,000. It's a substantial difference that can't be ignored in financial planning.

The importance of career planning

Spain has a labour framework that combines salaries, social contributions and additional obligations that considerably increase the real cost of hiring staff.

For a foreign company, it is essential to calculate these costs in advance and rely on specialised labour and tax advice that knows local and sectoral regulations. In this way, it is possible to avoid budgetary deviations and ensure strict compliance with Spanish legislation.

At Miñana Beltrán Tax & Legal we help international companies to understand and optimize their labor cost structure in Spain, offering comprehensive advice on payroll, contributions and taxation.

Author

Elena Martínez
HEAD OF THE LABOUR DEPARTMENT | INTERNATIONAL MANAGER ITALY