Unfair Dismissal: Calculation, Time Limits and Strategy for the Company

Unfair dismissal (despido improcedente) is the characterisation given by the Social Court (Juzgado de lo Social) — or the parties' own conciliation agreement — when a company terminates an employment relationship without sufficiently establishing the grounds or without complying with the formal requirements set out in the Workers' Statute (Arts. 54–56 of Royal Legislative Decree 2/2015). The financial consequence is clear: compensation rises from the 20 days per year of service of a correctly executed objective dismissal (capped at 12 monthly payments) to 33 days per year of service with a cap of 24 monthly payments, with a dual-calculation rule for contracts that existed before 12 February 2012 (where the pre-reform period is compensated at 45 days per year of service). For many companies, the difference between a correctly grounded termination and one declared unfair amounts to several months of the affected employee's salary.

Types of dismissal: the legal map that determines the cost

The Workers’ Statute recognises various modes of termination of the employment contract with radically different financial consequences. Understanding the map is the first step to making the correct decision.

Disciplinary dismissal (Art. 54 ET). Disciplinary dismissal is based on the employee’s serious and culpable breaches: repeated and unjustified absences or lateness, insubordination, verbal or physical offences, breach of good faith in the contractual relationship, continued reduction in performance, habitual drunkenness or substance abuse affecting work performance, or harassment on grounds of racial or ethnic origin, religion, disability, age, sexual orientation or sex directed at the employer or co-workers.

If the grounds are established, a disciplinary dismissal generates no compensation. If they are not established or the formal requirements are not met (written letter, date and grounds), the dismissal is declared unfair.

Objective dismissal (Art. 52 ET). Objective dismissal arises from economic reasons (current or forecast losses, sustained revenue decline), technical, organisational or production reasons, or from the employee’s supervening incapacity, or from absenteeism exceeding 20% of working time in two consecutive months (or 25% in four non-consecutive months within twelve). It requires 15 days’ notice, simultaneous payment of the 20 days-per-year compensation (capped at 12 monthly payments) at the time of notification, and a written letter with adequate explanation of the grounds.

If the formal requirements are not met or the grounds are insufficiently justified, the dismissal is declared unfair.

Compensation table: comparison by type

Calculating the compensation step by step: dual-period example

To illustrate the calculation under the pre/post-2012 blended system:

Employee data:

• Open-ended contract from 1 March 2008
• Dismissal notified 1 March 2026
• Annual gross salary: €42,000
• Total service: 18 years

Calculation:

Step 1 — Daily salary: €42,000 / 365 days = €115.07/day

Step 2 — Pre-reform period (1 March 2008 – 12 February 2012): Approximately 3 years, 11 months → 3 years, 11 months (rounded to complete months per case law) Compensation tranche 1: €115.07 × 45 × 3.92 = €20,284 Tranche 1 cap: 42 monthly payments = €42,000/12 × 42 = €147,000 (not applicable here)

Step 3 — Post-reform period (12 February 2012 – 1 March 2026): 14 years, 1 month Compensation tranche 2: €115.07 × 33 × 14.08 = €53,480 Tranche 2 cap: 24 monthly payments = €42,000/12 × 24 = €84,000 (not applicable here)

Step 4 — Verify overall cap: Total compensation: €20,284 + €53,480 = €73,764 Overall cap: 24 monthly payments on total salary = €84,000 (not exceeded)

Unfair dismissal compensation: €73,764 (compared to 20 days/year for a valid objective dismissal: €115.07 × 20 × 18 = €41,425)

The difference is €32,339 — solely due to the characterisation of the dismissal.

The 20-business-day time limit: why it is critical

The employee has 20 business days from the date the dismissal is communicated to challenge the termination before the Social Court (Art. 59.3 ET and Art. 103 LRJS). This is a forfeiture (caducidad) period: once it expires without action, the claim is extinguished and cannot be revived. It is not a prescription period, which can be interrupted.

The typical itinerary:

1. Day 0: Dismissal communicated to the employee
2. Days 1–20 (business days): Time limit for filing the SMAC conciliation papeleta
3. Papeleta filed: Suspends the 20-day time limit
4. Conciliation hearing (10–15 business days): If no agreement, time limit resumes
5. Claim filed: Employee brings claim before the Social Court
6. Trial: Typically 3–6 months after the claim (varies by court)

The SMAC papeleta: the mandatory pre-litigation filter

The extrajudicial conciliation attempt before the SMAC (or equivalent regional body) is a mandatory pre-litigation requirement before a dismissal claim can be filed. Without this step, the court will not admit the claim.

From the company’s perspective, the conciliation hearing is a strategic opportunity: at this stage, an agreement can be negotiated that avoids the cost, time and uncertainty of a trial. The terms of the agreement are freely negotiable: the company may offer the statutory compensation, a higher amount, or additional conditions (reference letter, waiver of future claims, etc.).

85% of dismissal cases that reach the SMAC are resolved at this stage without trial, which makes preparation and conciliation strategy a worthwhile investment.

Null and void dismissal: the most costly scenario

A null and void dismissal generates no compensation: it requires the reinstatement of the employee on the same terms as before the dismissal, plus payment of all processing wages accrued from the dismissal through to actual reinstatement. The courts can also order the company to pay additional compensation for non-material harm.

The most common grounds for nullity:

• Dismissal during pregnancy: Art. 55.5 ET establishes a rebuttable presumption (iuris tantum) of nullity where the company knew or should have known of the pregnancy, even if the stated grounds are different.
• Retaliation for exercising rights: Reports to the Labour Inspectorate, claims for unpaid wages, participation in strikes, trade union activity.
• Workplace or sexual harassment: Dismissal of an employee who has reported or suffered harassment is automatically null and void.
• Discriminatory dismissal: On grounds of sex, sexual orientation, disability, age, racial or ethnic origin, religion or any other prohibited ground of discrimination.
• RD 1026/2024 LGBTQ+: Dismissal of workers in retaliation for exercising rights under Law 4/2023 may be characterised as null and void.

Company’s option: reinstatement vs. compensation

Where the dismissal is declared unfair by judgment, the company (not the employee) has the right of choice: to reinstate the employee or to pay the compensation. It must communicate its choice within 5 days of receiving the judgment. If it does not, the law presumes it has opted for compensation.

The exception is workers’ representatives: shop stewards, works council members and trade union delegates. In their case, the right of choice belongs to the employee, not the company. If the representative chooses reinstatement, the company is obliged to comply and must also pay all processing wages.

Total cost to the company: beyond the compensation

The most common error in calculating dismissal costs is overlooking items beyond the compensation:

Social Security contributions are one of the most frequently underestimated items: the income tax exemption for unfair dismissal compensation covers the statutory minimum under the ET (33 days per year of service), but the portion exceeding that minimum or amounts agreed above the statutory compensation are subject to Social Security contributions and withholding.

Regulatory framework

• Workers’ Statute (ET), Arts. 54–56 (Royal Legislative Decree 2/2015 of 23 October)
• Social Court Procedure Act (LRJS), Arts. 103–113 (Law 36/2011)
• ET 5th Transitional Provision: Blended pre/post-2012 compensation rule
• RDL 3/2012 and Law 3/2012: Reform fixing 33 days for dismissals after 12 February 2012
• Law 10/2021 on Remote Work: Dismissal of teleworkers requires analysis of the telework agreement
• RD 1026/2024: Measures for equality and non-discrimination of LGBTQ+ persons

This service is part of our employment law advisory practice.