A senior management employment contract is often signed with the expectation of contractual freedom, only to end up in litigation over what was not written. Royal Decree 1382/1985 does indeed allow considerably more room for negotiation than the Workers’ Statute. But that flexibility has three limits that are often overlooked: certain severance payments cannot be excluded by contract, certain basic rules only apply if they are expressly included, and there are situations, such as when the executive is also a board member, in which the employment contract effectively disappears.
What follows is what we review in a senior management employment contract before it is signed and what we look at first when a dispute is already underway.
The Title Does Not Decide: What Actually Constitutes Senior Management?
Article 1.2 of Royal Decree 1382/1985 defines a senior executive as a person who exercises powers inherent to the legal ownership of the company, relating to its general objectives, with autonomy and full responsibility, limited only by the criteria and instructions of the company’s highest governing and management body.
The courts interpret this concept restrictively and, in practice, require three elements to exist together:
1.1. That the powers concern the company as a whole, rather than a department, division or workplace.
1.2. That the reporting relationship is directly to the management body or the chief executive, without intermediate levels.
1.3. That there is genuine decision-making autonomy, rather than the execution of decisions made elsewhere.
This is why the most common situation in multinational groups is also one of the most fragile: the general or financial director of a Spanish subsidiary who reports to a regional manager and implements a budget approved outside Spain will hardly qualify as a senior executive, regardless of what the contract calls the position or the fact that it has been drafted under Royal Decree 1382/1985.
The Cost of Having a Court Reclassify the Relationship
If the relationship is declared to be an ordinary employment relationship, the Workers’ Statute applies in full and retroactively:
1.4. Compensation for unfair dismissal increases from 20 days per year of service, capped at 12 months’ salary, to 33 days per year, capped at 24 months’ salary (for service accrued after February 2012). With ten years of seniority and €200,000 in fixed remuneration, the difference is approximately €70,000.
1.5. Termination without cause only exists while the relationship remains classified as senior management. Once the relationship is reclassified, there is no legal provision supporting termination without cause, and the dismissal letter already issued will be assessed as a dismissal.
1.6. The applicable collective bargaining agreement becomes relevant, including its salary scales, working time and allowances.
1.7. The obligation to record working hours arises, together with potential claims for overtime for the previous four years, including surcharges and penalties.
1.8. The non-compete agreement becomes subject to Article 21.2 of the Workers’ Statute — six months, or two years only for qualified professionals — and the nine-month probationary period is no longer valid.
For this reason, the first question is not how to draft the contract, but whether that individual can sustain their status as a senior executive before a court. If the answer is uncertain, the senior management contract does not protect: it exposes.
The Basic Mistake: The Workers’ Statute Does Not Apply
This is the rule that breaks the most contracts and is explained the least. Article 3.2 of Royal Decree 1382/1985 establishes that ordinary employment legislation, including the Workers’ Statute, only applies to this relationship where the Royal Decree expressly refers to it or where the parties agree to apply it in the contract. Otherwise, Article 3.3 refers to civil and commercial legislation.
The consequence operates in both directions:
2.1. What is not included in the contract does not exist. Working time, holidays, leave, variable remuneration, expenses, company car, insurance, notice periods and severance: if they are not regulated, there is no ordinary employment rule to fall back on.
2.2. Every reference to the collective bargaining agreement or the Workers’ Statute that finds its way into the contract through copy-and-paste from an ordinary employment contract template introduces rights that would otherwise not exist. These references should be reviewed individually before signing, because they are often there through inertia rather than by deliberate decision.
Article 4.2 establishes the mandatory minimum content: identification of the parties, purpose, remuneration broken down by components — in cash and in kind — duration and the other clauses required by law. In practice, this minimum is insufficient for any contract intended to last.
Severance: The Figures and the Minimum That Cannot Be Excluded
3.1. Employer termination without cause (Article 11.1). The company may terminate the contract without stating a reason, in writing and with three months’ notice — extendable to six months if agreed in writing for indefinite contracts or contracts lasting more than five years. The severance payment is the amount agreed and, in the absence of an agreement, seven days of cash salary per year of service, capped at six months’ salary.
3.2. Disciplinary dismissal declared unfair (Article 11.2). The severance payment is the amount agreed and, in the absence of an agreement, twenty days of cash salary per year of service, capped at twelve months’ salary.
So far, this is what the legislation says. What matters is what the legislation does not say and the case law does:
A Zero-Cost Exit Cannot Be Agreed
The Plenary of the Fourth Chamber of the Spanish Supreme Court, in its judgment of 22 April 2014, declared invalid a clause in a senior management contract that excluded any severance payment in the event of employer termination without cause. The main reasoning was based on the interpretation of Article 11.1 of Royal Decree 1382/1985 in conjunction with Article 3: the legislation recognises a severance entitlement for senior executives that may be modified by agreement, but not eliminated. As an additional argument, the Court recalled that performance of a contract cannot be left to the sole discretion of one of the parties (Article 1256 of the Civil Code).
In practice, this clearly excludes a zero-severance agreement. Agreeing an amount below seven days is a different matter and requires caution: subsequent tax case law has characterised this figure as a mandatory minimum severance amount, meaning that an agreement below that level has uncertain prospects from both an employment and tax perspective. Agreeing a higher amount, by contrast, presents no such issue and is common in senior executive recruitment.
“Cash Salary”: Two Words With Consequences
The legislation calculates the seven and twenty days based on cash salary, excluding benefits in kind. In executive packages involving a company car, housing, health insurance or significant pension arrangements, the difference in the calculation base can be substantial and is one of the issues most frequently debated when negotiating an exit.
Even Nullity Does Not Guarantee Reinstatement
Article 11.3 provides that, where dismissal is declared unfair or null and void, the company and executive agree whether reinstatement or compensation will apply, and that, in the event of disagreement, compensation is deemed to be chosen. This is a substantial difference from the ordinary regime, where nullity requires reinstatement. The issue remains debatable where nullity arises from a violation of a fundamental right, but that is the statutory starting point.
Tax Treatment of the Exit: An Issue Many Contracts Do Not Address
For years, tax doctrine considered that severance payments for senior executives were fully taxable, on the basis that Article 11 of Royal Decree 1382/1985 referred to what the parties agreed and did not establish a mandatory minimum. The Supreme Court has subsequently corrected this position in relation to employer termination without cause.
4.1. Employer termination without cause. Supreme Court Judgment 1528/2019 of 5 November (appeal 2727/2017), followed by Supreme Court Judgment 1139/2020 of 4 September and reaffirmed by Supreme Court Judgment 805/2025 of 24 June, establishes that seven days of salary per year of service, capped at six months’ salary, constitutes a mandatory minimum severance payment. This amount is exempt under Article 7(e) of the Personal Income Tax Law.
4.2. Unfair dismissal. The National Court, in its judgment of 21 October 2021 (appeal 684/2019), extended the same reasoning to unfair dismissal of senior executives and recognised an exemption for the minimum amount of twenty days per year of service, capped at twelve months’ salary, based on the same reasoning as employer termination without cause. This approach has been adopted by the Central Economic-Administrative Tribunal (decisions 2766/2019 and 7269/2018, both dated 25 February 2022), giving it administrative relevance. Nevertheless, it should not be presented to clients as settled law: the Supreme Court has not yet issued a ruling establishing this position, and the judgment concerned a unilateral employer decision rather than a consensual termination, which is how most of these exits are concluded.
4.3. The €180,000 cap. Regardless of the applicable minimum, the exemption under Article 7(e) is subject to a general limit of €180,000 for terminations occurring from 1 August 2014 onwards. For executive remuneration, this threshold can be reached sooner than expected: with cash remuneration of €400,000 per year, six months’ salary amounts to €200,000, meaning that the exemption is capped at €180,000.
4.4. Amounts exceeding the exempt amount. These are taxed as employment income. The 30% reduction under Article 18.2 of the Personal Income Tax Law is not automatic: it requires a generation period of more than two years — linked to years of service in the case of termination — and attribution to a single tax year, and applies to a maximum taxable base of €300,000. In addition, where the income arising from the termination is between €700,000.01 and €1,000,000, that base is reduced by the amount exceeding €700,000; above €1 million, the reduction base is zero. In high-level executive exit packages, this scale can have a decisive impact on negotiations.
4.5. Compensation for a post-contractual non-compete agreement. This constitutes employment income and, according to the criteria of the Spanish Directorate-General for Taxation (binding ruling V2171-20 of 29 June 2020), does not qualify for the 30% reduction because the economic entitlement arises upon termination, which activates the restriction, rather than being generated over a prior period.
The practical recommendation is therefore very specific for any exit agreement: break down the different concepts — mandatory minimum severance, agreed excess, non-compete compensation, payment in lieu of notice and accrued variable remuneration — rather than setting a single undifferentiated amount. A global payment without a breakdown may be interpreted against the taxpayer in a tax audit, leaving the company disputing a withholding position that could have been avoided when drafting the agreement.
Executive and Board Member at the Same Time: The “Link Theory” Remains Relevant
This is the most costly and most misunderstood risk. When the same individual combines senior management functions with membership of the company’s governing body, the so-called “link theory” may apply: the commercial relationship absorbs the employment relationship because the position of director or administrator inherently involves the company’s highest management functions. However, it does not operate automatically simply because an individual is a board member: the actual functions performed must be examined to determine whether they overlap with those inherent in the corporate position.
The judgment of the Court of Justice of the European Union of 5 May 2022 (Case C-101/21) recalled, in the specific context of European protection against employer insolvency under Directive 2008/94, that being a member of a company’s governing body does not automatically exclude worker status where the substantive elements of an employment relationship are present. Supreme Court Order 12/2025, issued by the Special Chamber for Jurisdictional Conflicts on 25 November 2025 (ECLI:ES:TS:2025:10797A), has defined the scope of this principle: it confirms the continuing validity of the link theory, assigns jurisdiction to the commercial courts in the case concerned and rejects the argument that European case law displaces the doctrine outside the specific scope of the social directives applied by the Court of Justice.
What is at stake when the doctrine applies:
5.1. There is no dismissal claim before the employment courts, nor any severance payment under Royal Decree 1382/1985. The claim falls within the commercial jurisdiction and is governed by different rules.
5.2. Remuneration must comply with corporate requirements: the statutory reservation under Article 217 of the Spanish Companies Act and, for directors with executive functions, an agreement approved by a two-thirds majority of the board specifying all remuneration components (Article 249). Failure to comply may create challenges regarding validity and deductibility for Corporate Income Tax purposes.
5.3. The Social Security classification changes: the individual may be treated as assimilated to an employee without unemployment or FOGASA protection, or fall under the Special Regime for Self-Employed Workers where effective control of the company exists. A chief executive who becomes a board member may lose unemployment coverage without realising it.
The practical recommendation is straightforward and is almost always overlooked: when a general manager is appointed as a director, the company must document in writing what happens to their senior management employment contract. The Supreme Court Order itself emphasises that suspension of the employment relationship should have been expressly provided for. Without such provision, the contract is deemed absorbed, and the executive may discover at the point of exit that they do not have the protections they believed they had.
Bonus and Variable Remuneration: Where These Disputes Are Lost
In senior management, there is greater freedom to agree variable remuneration than in ordinary employment relationships, but civil law limitations continue to apply, and employment case law is readily transferred because it is based on Articles 1115, 1119 and 1256 of the Civil Code: a condition cannot be left to the discretion of one party, nor can a party benefit from non-compliance that it has itself caused.
6.1. The decisive issue is not whether there is a retention clause, but whether the incentive has already accrued under the rules of the relevant plan. A retention condition imposed after accrual cannot deprive the executive of remuneration already earned: the Supreme Court declared the requirement to remain employed on the payment date unlawful in its judgment of 2 December 2015 (appeal 326/2014), a position reaffirmed by Supreme Court Judgment 197/2025 of 13 March (appeal 2128/2023).
6.2. Requiring continued employment until the end of the accrual period is different. Such a condition may be effective if clearly agreed, particularly where the departure is voluntary resignation: this was accepted by Supreme Court Judgment 934/2020 of 22 October (appeal 285/2018). The same judgment notes that the analysis changes where the failure to remain employed results from circumstances beyond the employee’s control.
6.3. Where the company decides to terminate the relationship, it cannot rely on the failure to satisfy a condition that it has itself prevented from being fulfilled: Articles 1115, 1119 and 1256 of the Civil Code apply. Supreme Court Judgment 125/2020 of 11 February (appeal 3624/2017) awarded variable remuneration to an executive dismissed before the end of the financial year where the objectives had already been met. This does not establish a universal rule of pro-rating: the outcome depends on the calculation formula, accrual period, objectives and reason for termination.
6.4. A bonus constitutes salary and is included in the calculation base for dismissal compensation (Supreme Court Judgment 640/2018 of 14 June, appeal 414/2017), provided that it is of a salary-related nature, has accrued or can reasonably be quantified and forms part of ordinary remuneration. A genuinely exceptional and non-recurring incentive may be assessed differently.
When drafting, four issues make the difference: defining accrual precisely and distinguishing it from the payment date; regulating pro-rating according to the reason for departure; identifying who sets the objectives, according to which criteria and within what timeframe; and determining what happens if the company fails to set them. This last scenario is more common than it may appear and is often resolved in favour of the executive.
Non-Compete, Exclusivity and Retention: The Three Agreements Under Article 8
7.1. Post-contractual non-compete agreement (Article 8.3). Maximum duration of two years. It is only valid if two cumulative requirements are met: the employer has a genuine industrial or commercial interest and appropriate financial compensation is provided. “Appropriate” does not mean symbolic: courts may invalidate nominal compensation that is disproportionate to the professional restriction imposed.
7.2. The company cannot reserve the right to unilaterally release itself from the agreement at the time of termination, even if the clause expressly provides for it. Supreme Court Judgment 144/2024 of 25 January (appeal 3361/2022) declared such a clause invalid: the agreement is bilateral and creates not only an expectation of payment for the executive, but also the need to organise their future professional career, which would make little sense if compliance were left to one party’s discretion. The judgment leaves open a possible alternative: the issue would be more complex if the right to terminate the agreement had been made bilateral, meaning that the executive also had the same right. Companies seeking flexibility could explore this option, although it would still involve risk.
7.3. Exclusivity (Article 8.1). Senior executives may not enter into other employment contracts without authorisation or a written agreement. There is an important nuance: authorisation is presumed where the relationship with another entity was public and was not excluded in the contract. If the executive holds board positions or undertakes teaching activities, it is advisable to address this expressly in the contract.
7.4. Retention agreement (Article 8.2). This is only possible where the executive has received specialised professional training at the company’s expense for a specific period, and it gives rise to compensation for damages rather than an automatic penalty. The company must be able to demonstrate the actual cost of the training.
Internal Promotion: The Contract That Comes Back to Life
When an employee is promoted to senior management — either within the same company or another company in the group — Article 9 requires a written contract specifying whether the new special employment relationship replaces the previous ordinary one or whether the latter is suspended. Two supplementary rules are often overlooked:
8.1. If the contract says nothing, the ordinary employment relationship is suspended, not terminated.
8.2. If replacement is agreed, the novation only takes effect once two years have elapsed from the agreement. During those two years, the previous ordinary employment relationship remains in force despite the agreement.
Article 9.3 completes the picture: once the special relationship ends, the employee may choose to resume the original employment relationship with their accumulated seniority, unless the disciplinary dismissal has been declared fair.
Translated into cost: where an internal promotion has been poorly documented, the exit does not necessarily cost what the senior management contract says. It may also involve reinstatement to the previous position or compensation based on an ordinary employment relationship with all accumulated seniority. It is one of the most costly and frequent mistakes in corporate reorganisations.
Change of Control: The Exit Right Under Article 10.3(d)
Royal Decree 1382/1985 establishes a right to terminate with compensation that is rarely quantified in corporate transactions. Article 10.3(d) allows a senior executive to terminate the contract with the agreed compensation — or, in the absence of an agreement, the compensation applicable to employer termination without cause — where a transfer of business or significant change in ownership results in a renewal of the governing bodies or a change in the content and approach of the company’s principal activity, provided that the right is exercised within the following three months.
In an acquisition, this is a contingent liability with a name and a value. It should be quantified during employment due diligence and, if the buyer wishes to retain the executive team, addressed through paid retention arrangements negotiated before closing. After closing, the executive knows what their signature is worth.
Deadlines and Details That Are Often Overlooked
10.1. A probationary period of up to nine months in indefinite contracts (Article 5), significantly longer than the ordinary regime. It is an underused tool when recruiting senior executives.
10.2. Three months’ notice in both directions, extendable to six months in writing. Failure to comply results in compensation equivalent to the salary corresponding to the notice period not observed, including where the executive is the party failing to comply.
10.3. Disciplinary offences are subject to a limitation period of twelve months from their commission or from the date on which the company became aware of them (Article 13), compared with sixty days under the ordinary regime. This provides genuine scope for investigation before deciding on disciplinary dismissal.
10.4. Expiry of the time limit to bring a dismissal claim: twenty working days (Article 15.3, in conjunction with Article 59 of the Workers’ Statute).
10.5. In the absence of a written agreement on duration, the contract is presumed to be indefinite (Article 6).
10.6. Senior executives are neither entitled to vote nor stand for election in employee representative bodies (Article 16) and fall outside the scope of collective bargaining agreements.
What We Review Before Signing
11.1. Whether the actual functions support the classification as senior management, regardless of the title given to the position.
11.2. Whether the executive is or will become a board member, and what has been documented regarding the status of the employment contract.
11.3. Which references to the Workers’ Statute or collective bargaining agreement are included in the contract and whether they are deliberate.
11.4. What severance is agreed for employer termination without cause and unfair dismissal, ensuring that it does not fall below any mandatory minimum.
11.5. How variable remuneration accrual is defined and what happens under each exit scenario.
11.6. Whether the non-compete agreement is supported by a demonstrable business interest and proportionate compensation, and whether its duration complies with the two-year limit.
11.7. In the case of an internal promotion, what has been agreed regarding the previous employment relationship and when the two-year novation period expires.
11.8. How the different financial components will be broken down for tax purposes at the time of termination, as already contemplated when the contract is signed.
At Suárez de Vivero, we advise national and international companies on the negotiation and drafting of senior management contracts, variable remuneration schemes, senior executive exits, non-compete agreements and senior management litigation. If you would like us to review a specific contract or an ongoing exit, you can contact us.
Frequently Asked Questions About Senior Management Employment Contracts
What legislation regulates senior management contracts in Spain?
Royal Decree 1382/1985 of 1 August. The Workers’ Statute only applies where that Royal Decree expressly refers to it or where the parties agree to apply it in the contract (Article 3.2).
Can any director be considered a senior executive?
No. The individual must exercise powers relating to the company’s general objectives as a whole, report directly to the governing body and have genuine decision-making autonomy. The job title is irrelevant if the actual functions do not support the classification.
How much severance is payable when the employer terminates the contract without cause?
The amount agreed in the contract and, in the absence of an agreement, seven days of cash salary per year of service, capped at six months’ salary, in addition to three months’ notice.
Can a senior executive agree to receive no severance at all?
No. The Supreme Court, in its judgment of 22 April 2014, declared such a clause invalid: seven days per year, capped at six months’ salary, constitute a mandatory minimum. A different amount may be agreed.
Is senior executive severance taxable?
The mandatory minimum of seven days per year, capped at six months’ salary, has been exempt from Personal Income Tax since Supreme Court Judgment 1528/2019 of 5 November, a position reaffirmed in 2025. The exemption is subject to a general limit of €180,000, while any agreed excess is taxed as employment income.
What happens if the senior executive is also a company director?
The commercial relationship may absorb the employment relationship. Supreme Court Order 12/2025 of 25 November confirmed the continuing validity of this doctrine and assigned jurisdiction to the commercial courts, with the resulting loss of employment-law severance rights.
How long can a non-compete agreement with a senior executive last?
A maximum of two years, and only where there is a genuine industrial or commercial interest and appropriate financial compensation is provided.
What happens when an employee is promoted to senior management?
The contract must state whether the ordinary employment relationship is replaced or suspended. If nothing is stated, it is suspended; if replacement is agreed, it only takes effect after two years.
