The issue as to which jurisdiction is competent to hear claims regarding the appropriateness and amount of personal income tax withholdings made by an employer from an employee has been the subject of settled case law. Indeed, the Supreme Court has repeatedly held that the determination of whether or not personal income tax withholdings should be made and, if so, at what amount, is a matter that is subject to tax, rather than labor, law and, accordingly, its interpretation should fall to the courts of the judicial review jurisdiction.

However, in its recent judgment of January 11, 2018, the Supreme Court has qualified this position, at least partially.

In the judgment, the Supreme Court resolved a case in which, in June 2009, a company had paid certain employees a severance package for the termination of their contracts as agreed to in a collective layoff procedure. A particular feature of the agreement reached in the collective layoff procedure was that it guaranteed a net minimum amount of severance (“42 days’ pay per year worked, net”). Consequently, to make the relevant calculation, the employer set the gross amount needed to achieve the net amount agreed upon. In other words, the employer paid the employees gross severance consisting of the 42 days’ pay per year worked plus the amount of the withholding.

After the payment, specifically, in December 2009, the Spanish parliament published Law 27/2009, on Urgent Measures to Maintain and Foster Employment and to Protect Unemployed Persons, which increased the amount exempt from personal income tax in severance derived from collective layoff procedures (giving it the same treatment as the statutory severance for unjustified dismissals) with retroactive effect, that is, it applied to collective layoffs subsequent to March 8, 2009.

As a result, the employer asked the tax authorities for a refund of the over-withheld amounts. However, the request was rejected because the employees had reported the correct exemption (higher than the one considered in the calculation of the withholdings) but had computed the entire withholding borne in their returns. Faced with this situation, the employer asked the employees to return to it the amount of the withholding unlawfully recovered from the tax authorities.

Against this backdrop, although at first blush the issue was clearly tax-related, the Labor Chamber of the Supreme Court concluded, in the judgment at hand, that the labor jurisdiction was competent to resolve the dispute because the issue did not concern the appropriateness or quantification of personal income tax but rather, purely and simply, the manner in which the employer sought to rectify the errors it had made in managing the tax or, in other words, to recover from the employees the amounts they had received incorrectly and it had borne

Ignacio Esteban Ros

Labor and Employment Department

Abigail Blanco

Departamento Tax Department de Garrigues