Labour and Social Security Law in Portugal

These are the highlights if you want to know more about Labour and Social Security Law in Portugal. This entry was drafted by Sousa Machado, Ferreira da Costa & Associados, Link to E-Iure Network.

This collaboration is a brief step-by-step guidance. In no case it can be considered as legal advice. If you want -or need – legal advice, ask for a lawyer or a law firm. In that case  Sousa Machado, Ferreira da Costa & Associados is an excellent option in Portugal.

I.       General

This chapter provides a brief overview of the main aspects of Portuguese labour law, namely about employment contracts and social security related matters.

Portuguese labour law is governed by the Labour Code, which entered into force on late 2003. On 2009, a new version of the Labour Code has been published and currently provides the regulation of the main employment-related features, such as types of employment contracts, holidays, absences to work, professional training, gender equality, maternity rights, termination of employment contract and health and safety at work.

II.      Employment Contracts

Under Portuguese law, there are 3 main types of employment contracts: permanent, fixed-term and uncertain term.

Additionally, we also highlight the management employment contract, due to the wider flexibility it offers to companies when hiring top employees, because such contracts may be unilaterally terminated by the company without cause, although in such a case, the employee is entitled to compensation (see below II.4).

II.I.    Common provisions

The following aspects are common to every type of employment contracts:

• Retribution: besides the base salary, employees are entitled to an annual holiday allowance and Christmas allowance, which amount is equivalent to the base salary. The minimum national wage is currently €557,00, although the applicable collective agreements, if existing, usually provide higher minimum amounts per each professional category.

Employees may also be paid other allowances, depending on the terms under which the work is performed, such as the nightshift allowance or the shift allowance.

Generally, some of these allowances – such as the shift allowance or the meal allowance – are provided in the applicable collective bargaining agreement, as its payment is not mandatory by law. Besides, the payment of the meal subsidy is a common practice, even if not provided in any collective bargaining agreement.

• Working hours: as a general rule, employees may be committed to a maximum working schedule of 8 hours per day and 40 hours per week. The parties may also agree on a part-time working schedule.

The work performed beyond these limits (and also on resting days) is considered as overtime work, which, itself, is limited to a certain number of hours per day and per year. The performance of overtime work entitles the employee to a special allowance per each hour of overtime work rendered.

Depending on the type of functions, the employer and the employee may agree on a working hours exemption schedule, case where said daily and weekly limits shall not apply. Being the case, the employee is entitled to a monthly allowance, which amount is equivalent to, roughly, 20%/25% of the base salary, save if provided otherwise in the applicable collective agreement.

The Labour Code 2009 has introduced new types of scheduling the working hours in order to adapt the working schedules to the production needs, enabling the employer to concentrate a greater number of hours of work per day and per week or to manage the daily and weekly limits of hours of work in accordance with the production flows. Initially, the implementation of some of these schedules has to be previously agreed with the employee’s representatives in the applicable collective bargaining agreements.

• Holidays and days-off: employees are entitled to a paid annual holidays period of 22 working days. Companies may grant a higher holiday period. Also, the collective agreement, if existing, may provide for a higher duration of the holidays.

In the year of admission, employees are entitled, after 6 months of execution of the contract, to 2 working days of holidays per each month of duration of the contract.

Employees are also entitled to a mandatory rest day (usually, on Sundays) and to a complementary rest day (usually, Saturdays). Additionally, there are 9 paid public holidays and 2 non-mandatory public holidays (local holiday and Mardi Gras).

• Maternity and paternity leave: this is one of the matters that has been amended by the Labour Code 2009, extending the duration of parental leaves and allowing it to be taken jointly or alternatively by the employee and the spouse.

The main difference is now between parental leave taken exclusively by the employee (whether female of male) or jointly with the spouse.

As a general rule, the parental leave is 150 or 180 days after the birth, where 6 weeks are mandatory for the female employee. The spouse (male employee) is always entitled to a leave of 10 working days (consecutive or not) after the birth.

If the parental leave is exclusively taken by one of the spouses, its duration may vary from 120 to 150 days.

During the parental leave, these employees are entitled to a subsidy paid by the social security, as the salary is not due by the employer.

In some cases where parental leaves are extended by decision of the employee, the subsidy paid by the Social Security may be reduced and salary will still not be due by the employer.

There are also other leaves supported by the social security, for purposes of assistance to family, which duration has also been extended by the Labour Code 2009.

The employer and the employee may, at any time, agree on an unpaid leave.

• Sickness and injury: absences to work due to illness or injury are deemed as justified absences. In these cases, the salary is not due by the employer as employees are entitled to a subsidy paid by the social security.

In case of labour accidents, the insurance company shall be responsible for the payment of the salary and other compensation for any damages suffered by the employee as a result of the accident. To such extent, under the law, the employer has to enter into an insurance contract for labour accidents, otherwise it shall be liable for every costs and compensation due to the employee. Moreover, the non-compliance with this obligation constitutes a serious infringement, subject to a fine applied by the Labour Authorities.

• Termination: as a general rule and save in the cases of termination with cause for disciplinary reasons, the employer is absolutely prevented from unilaterally terminate the employment contract.

However, during the trial period, either party may unilaterally terminate the employment contract with immediate effects and no compensation is due, save if agreed otherwise. Should the employer wants to terminate the contract in the trial period and if the contract has been in force for more than 60 days, the termination has to be communicated 7 days prior notice and if it the contract is being executed for more than 120 days, said prior notice is extended to 15 days.

The employee may terminate the employment contract at any time by means of a prior written communication, which varies according to the type of contract (see below).

The employee may also terminate the employment contract with cause, if the employer has breached any legal or contractual rights, case where it shall be liable for the payment of a compensation, to be settled by the court, ranging from 15 to 45 days of base salary per each of seniority, with a minimum equivalent to 3 months of base salary.

Termination with cause

The termination with cause requires a previous internal written proceeding, where the employee may file a reply and require the hearing of witnesses and other means of proof. This internal proceeding is detailed in the law and should the company fail to comply with certain formalities the dismissal is deemed as wrongful. In the course of this proceeding, the workers’ committee (if existing) and the trade union (if the employee is an union representative) have also to be consulted. Additionally, in the case of pregnant and breast feeding employees, the dismissal requires a favourable opinion from a governmental body committed to gender equality and maternity protection.

The law defines cause for termination as a serious and intentional conduct of the employee, which determines the immediate impossibility of maintenance of the employment relation, i.e., the breach of legal and contractual duties.

The employee may judicially dispute the dismissal within the year subsequent to the dismissal. The burden of proof of the existence of cause for termination relies on the employer.

Should the dismissal be ruled wrongful, the employee may opt to be reinstated in the company or to be paid a compensation, to be settled by the court, ranging from 15 to 45 days of base salary per each of seniority, with a minimum equivalent to 3 months of base salary. In the case of small companies (less than 10 employees) or management employees, the company may oppose to the reinstatement, case where the compensation shall vary from 30 to 60 days of base salary per each year of seniority.

Additionally, the company has also to pay to the employee a compensation for any moral or patrimonial damages resultant from the dismissal and also the unpaid salaries due since the date of the dismissal until the date of the court’s ruling. In the case of term employment contracts, the amount of this compensation cannot be lesser than the unpaid salaries due since the date of the dismissal until the term of the contract (or until the date of the court’s ruling, should it occur before the term of the contract).

Individual redundancy and collective dismissal

Besides termination with cause, the employer may only terminate the employment contract grounded on objective reasons, specifically market, financial or technological reasons.  The burden of proof of the existence of these grounds for termination relies on the employer.

If, within a 3 months period, the employer intends to terminate, at least, 2 or 5 employees (whether the company has up to 50 employees or more than 50 employees, respectively) the collective dismissal shall apply, otherwise the individual redundancy procedure shall be the applicable one.

In order to terminate the employment contract, either by redundancy or in the extent of a collective dismissal, the employer has to enact a procedure, which involves the affected employee(s), the workers committee and the Ministry of Labour.

In short, the procedure comprises 3 stages: (i) initial written communication to the affected employee(s), (ii) information and consultation with the employees and their representatives and (iii) decision of the procedure, which has to be communicated with prior notice, from 15 to 75 days, depending on the seniority of the affected employee(s).

The compliance with the several legal requirements foreseen for the initial communication and for the decision is most relevant, otherwise the termination shall be deemed as wrongful..

The termination by redundancy or by collective dismissal entitles the employee to a compensation. The compensation will be calculated in different terms, whether the employment contract has been entered into before of after November 1 2011. 

For contracts prior to November 1 2011, compensation shall be calculated in the following terms: (i) in respect to the period of execution of the contract until October 31 2012, compensation is equivalent to one month of base salary per each year of seniority; (ii) in respect to the period from November 1 2012 to September 30 2013, the compensation is equivalent to 20 days of base salary per each year of seniority and (iii) in respect to the period from October 1 2013 until the date of termination, the compensation is equivalent to 18 days of base salary per each complete year of seniority (in the first 3 years, when the contract has not reached 3 years on October 1 2013) and to 12 days of base salary per each complete year of seniority (in the subsequent years until the date of termination). The compensation calculated in accordance has the following with these rules cannot be lesser than the equivalent to 3 months of base salary. In respect to the periods referred in (ii) and (iii) the relevant salary cannot exceed 20 times the minimum national wage (€11.140,00) with a maximum amount equivalent to 12 times the monthly base salary (or, if the monthly salary exceeds €11.140,00, the compensation cannot exceed €133.680,00 (240 times Portuguese minimum wage).

For contracts entered into between November 1 2011 and September 30 2013, the compensation shall be calculated in the terms referred in (ii) and (iii), with the maximum limits referred above.

However, these rules have the following exceptions:

• When the first parcel of the compensation (i.e., from the admission to October 31 2012 or from the admission to September 30 2013, as the case may be) is equivalent or exceeds 12 times the monthly salary of the employee or 240 times the Portuguese minimum wage (i.e., €133.680,00), the remaining parcels of the compensation shall not be calculated, thus, the compensation shall be exclusively calculated until said dates.
• If the part of the compensation calculated until the dates referred in (a) above does not exceed 12 times the monthly salary of the employee or 240 times the Portuguese minimum wage (i.e., €133.680,00), the total amount of the compensation cannot exceed these limits.
• If the parts of the compensation for contracts prior to November 1 2011 referred in (i) and (ii) above is equivalent or exceeds 12 times the monthly salary of the employee or 240 times the Portuguese minimum wage (i.e., €133.680,00), the parcel (iii) shall not apply. If the same parts of the compensation referred in (i) and (ii) does not exceed 12 times the monthly salary of the employee or 240 times the Portuguese minimum wage (i.e., €133.680,00), the total amount of the compensation cannot exceed these limits.

For contracts entered into after October 1 2013 compensation is equivalent to 12 days of base salary per each complete year of seniority.

If the court rules the termination as wrongful, the terms referred above in respect to termination with cause shall apply.

Termination by agreement

The employer and the employee may, at any time, agree in written on the termination of the employment contract. The law does not provide any minimum or maximum limits for the compensation to be paid (in fact, the payment of a compensation is not mandatory).

The employee may revoke the termination agreement within the 7 days subsequent to the date of its signature, save if it is entered into before a public notary, where it shall produce its effects irrevocably as of the date of signature.

II.2   Permanent employment contracts

This is the standard type of employment contracts, as term employment contracts may only be entered into under specific conditions (see below).

The contract does not have to be executed in written, although under the law, the employer has to render to the employee information on the basic terms of the agreed employment.

The trial period for these contracts varies according to the functions to be performed: (i) 90 days for standard employees, (ii) 180 days for employees holding a trust position or committed to functions requiring high technical skills and (iii) 240 days for management and senior employees.

However, the parties may agree on the reduction or exclusion of the trial period.

Save in the cases of termination during the trial period, termination with cause, individual redundancy or collective dismissal, the employer is absolutely prevented from unilaterally terminating the employment contract.

The employee may terminate the contract at any time by means of a written communication addressed to the employer with 30 or 60 days of prior notice, whether he/she has up to 2 years or more than 2 years of seniority, respectively.

II.3    Term employment contracts

This type of employment contracts may only be entered into to face a temporary need of workforce and for the period of time strictly necessary. Although the law provides an open clause to define said “temporary need of workforce”, it also foresees some situations which generally enable the employer to hire term employees, from which we highlight the following: (i) replacement of employees temporarily prevented from rendering their activity, (ii) exceptional increase of the company’s activity, (iii) execution of a determined work or project (e.g., a services agreement entered into by the company), (iv) start-up of a new company or activity and (v) hiring of first-job seekers or long term unemployed persons.

Failure to comply with these requirements determines that the contract shall be deemed as a permanent one.

There are fixed-term employment contracts and uncertain term employment contracts, where the first are the most common.

Fixed term employment contract may be entered for a maximum of 3 years and within such period be subject to 3 renewals. Uncertain term employment contract are limited to a maximum duration of 6 years.

The employee may terminate the fixed-term contract at any time, by means of a written communication addressed to the employer with 15 or 30 days prior notice, whether the contract has been entered into for less than 6 months or for 6 or more months, respectively.

The fixed term contract terminates in the end of the agreed term (or of its renewals). To such effect, the employer has to communicate the termination to the employee by means of a written communication with 15 days notice before the said term, otherwise the contract shall be automatically renewed or converted into a permanent employment contract (if it cannot be renewed again or if it has reached its maximum duration).

The employee may also terminate the contract in these terms, by means of a written communication addressed to the employee with 8 days prior notice.

The termination of the contract by the employer upon its terms entitles the employee to a compensation, in the following terms:

For contracts entered into before November 1 2011, compensation shall be calculated in the following terms: (i) in respect to the period of execution of the contract until October 31 2012, compensation is equivalent to 2 or 3 days of base salary per each month of duration of the contract, whether the contract has been in force for more than 6 months or up to 6 months, respectively one month of base salary per each year of seniority; (ii) in respect to the period from November 1 2012 until September 30 2013, compensation in equivalent to 20 days of base salary per each year of seniority and (iii) in respect to the period from October 1 2013 until the date of termination, compensation is equivalent to is equivalent to 18 days of base salary per each complete year of seniority (in the first 3 years, when the contract has not reached 3 years on October 1 2013) and to 12 days of base salary per each complete year of seniority (in the subsequent years until the date of termination).

The exceptions and limits to the amount of the compensation provided above for permanent contracts shall also apply.

The termination of a term employment contract by the employee does not entitle him/her to be paid any compensation.

The recent amendments to the provisions on the compensation have enacted a new system of payment of the compensation, applicable only to employment contracts entered into after October 1 2013. To ensure that the compensation is paid by the employer, two public Funds have been created (although the employer may opt by a private Fund). These Funds are funded by the employer, which has to deliver monthly an amount equivalent to 1% of the employee’s salary.

When the contract terminates – except in the cases of agreement – the compensation is paid by the employer but the Find shall support half of the amount paid.

II.4   Management employment contracts

These contracts are less common in Portugal but represent more flexibility to the employer as it may terminate it at any time. The Labour Code has extended the cases where this contract is admissible. Therefore, besides the cases of employees committed to managing (or equivalent) functions directly dependent from the board of directors, as well as to the admission of personal secretaries of employees holding such management positions, management employment contracts may now also be entered into for the so called 2nd line directors (directors dependent of the General Manager).

The main aspects of these contracts remain unaltered, as follows:

• 180 days trial period (may be reduced or suppressed by agreement of the parties);
• Either party may terminate the contract by means of a written communication addressed to the other party with 30 or 60 days of prior notice, whether the employee has up to 2 years or more than 2 years of seniority, respectively (the parties may agree on the extension of the notice period);
• Termination by the employer entitles the employee to a compensation equivalent to 20 days of base salary per each year of seniority, with a maximum amount equivalent to 12 months of base salary, or, if the monthly salary exceeds €11.140,00, the compensation cannot exceed €133.680,00 (240 times Portuguese minimum wage). In any case, the amount of the base salary for calculation of the compensation cannot exceed the equivalent to 20 times the Portuguese minimum wage (currently, €557,00, thus, the limit is €11.140,00).

III.     Social Security

Contributions

The employer and the employee have to pay contributions to social security, which are calculated over the regular salaries paid to the employee, through a 34,75% rate, where 23,75% is supported by the employer and 11% is supported by the employee under a PAYE system.

In respect to members of the board committed to executive functions, since January 1 2013 the social security rate is the same, being applied over the real salary, with a minimum equivalent to the Social Benefits Index (currently, €421,32).

Unemployment subsidy

The termination of an employment contract shall entitle the employee to the unemployment subsidy whenever the unemployment has not resulted from a decision of the employee (save in the cases where the employees terminates the contract with cause).

The unemployment subsidy is granted by the social security services. Its amount is calculated in accordance with the salary of the beneficiary in the 14 months preceding the unemployment and shall be equivalent to 65% of that salary. The amount of the unemployment subsidy is limited to 2,5 times the Social Benefits Index (currently, €1.053,30 – €421,32 * 2,5).

This subsidy is granted for a period which duration varies in accordance with the age and the contributions record of the employee/beneficiary, from a minimum of 150 days to a maximum of 780 days.

The beneficiary is prevented from cumulating the unemployment subsidy with other income resultant from a professional activity, save in limited cases of low income.

Retirement

The statutory age for retirement is currently 66 years and 4 months, and the applicant to the pension has to have a minimum of 15 years of registered and paid contributions to social security.

As a general rule, the beneficiary may cumulate the retirement pension with income resultant from the performance of a professional activity.

In specific case, depending on the contributions record and on the age at the date of unemployment, an anticipated retirement may be requested by long-term unemployed persons, after the termination of he granting period of the unemployment subsidy.