New rules take aim at landmark 2012 reform Spanish unemployment is highest in Europe Spain needs EU recovery funds, Commission watching closely MADRID, Nov 25 (Reuters) - Spain’s left-leaning government is close to a major shake-up of landmark pro-business labour reforms put in place after the sovereign debt crisis but which critics say eroded employee rights and stunted wage growth. The new rules taking shape from months of negotiations with unions and employers would give more wage bargaining power to workers and revamp the temporary contracts that are widely used in the country"s services and construction-dominated economy. They form part of a package of reforms Spain must provide to the European Commission by the end of 2021 for the release of EU pandemic recovery funds. A European political source said Brussels was watching the provisions to ensure they did not make Spain"s labour market, whose 14.6% unemployment rate in September was EU"s highest, too rigid. The 2012 reform by the centre-right government of Mariano Rajoy was imposed by Spain"s EU creditors and the International Monetary Fund in the wake of the debt crisis. It favoured employers in the collective bargaining process, allowing companies to pay below industry-standard wages - something the tourism sector has taken advantage of. It also enabled the agreement of in-house wage and conditions deals that Spain"s car assembly plants were quick to adopt. Reforming the reform was a key condition of socialist Prime Minister Pedro Sanchez"s radical left junior coalition partner Unidas Podemos, which joined government last year. But the negotiation has generated some of the most tense exchanges so far between the social democratic and communist strands of the government which respectively control the economy and labour ministries. "The (new) reform aims to avoid company agreements having primacy in wages setting," Joaquin Perez Rey, deputy labour minister, told Reuters. At present companies are able to set salaries lower than those agreed by collective bargaining at sector level where trade unions are strong, the method traditionally used in Spain. They are also able to change working schedules if there is an economic justification. "We want to recover the balance in labour relations that deteriorated under the previous reform," Unai Sordo, head of CCOO, Spain"s biggest union, told Reuters. But Sordo said that the reform will respect other aspects of company-centred collective bargaining and the possibility of opting-out in the event a business is in crisis will be kept. MISUSE OF TEMPORARY CONTRACTS Rosa Santos, the lead negotiator for Spain"s CEOE employers" association, told Reuters an agreement on the labour reform was still a long way off because some key issues being discussed could impact the internal flexibility of companies. But she said employers accept a new formula for wage setting is needed to eradicate "unfair competition," adding: "collective bargaining cannot be aimed at making wages more precarious." Other measures on the table are aimed at bolstering job security and ending the precarity which critics say means millions of people in Spain lose their jobs every time there is an economic downturn. Spain has the highest share of temporary workers in Europe, which at 20% is double the EU average. Such workers have lower severance pay and are invariably the first to be let go in the event of cuts. The government wants to abolish the temporary contracts often misused in the construction and services sectors and create a new version that can only be used as a one-off under very specific circumstances. According to the latest government proposal, those new contracts would be for as long as three months and cover peak periods such as the year-end holiday season and the busiest periods of Spain"s highly seasonal, tourism-dependent and agriculture-heavy economy. "We have to make a distinction between seasonal and temporary," explained Perez Rey. For seasonal workers the government wants to promote the use of an existing form of permanent contract that allows workers to collect unemployment benefits during inactive months without leaving their companies, something already widely used in Spain"s Balearic Islands, where the hospitality industry closes for around five off-season months. A second possible provision would create a permanent mechanism similar to the furlough schemes implemented around the world during pandemic lockdowns. The purpose would be to pre-empt anticipated ecological or digital transitions within companies. Employers want the scheme to be "flexible and simple", CEOE"s Santos said. Together with unions, they have rejected the government"s initial proposal. "We would like a more flexible model like the German one," said union leader Sordo, referring to the “Kurzarbeit” system under which workers are put on reduced hours in job protection schemes. Some labour market analysts say the plans are insufficient to cure Spain"s aversion to permanently contracting workers. "Temporary and permanent contracts are communicating vessels, if you tighten one you have to make the other more flexible. Otherwise companies lose flexibility to compete in an increasingly globalised world," said Ignacio Conde-Ruiz, Economics Professor at Madrid"s Complutense University. A source with knowledge of the matter said the European Commission would more readily accept a deal - and release the 2022 recovery funds - if employers are on board, even if it sacrifices more market flexibility that it would like. Reporting by Belén Carreño, Editing by Mark John, Aislinn Laing and Toby Chopra