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Termination of Employment Contracts in Portugal – The New Employment Reform

As part of our international series of alerts by guest lawyers, Cláudia Póvoa of Neville de Rougemont & Associados, looks at terminating employment contracts in Portugal.


Portuguese Employment Law is influenced directly by the Portuguese Constitution and the principle of Employment Security which determines that every dismissal needs to be fair, unless it is justified by an objective reason.

In generic terms there are two main groups of dismissal legally set which can be listed as disciplinary dismissals, and the ones justified by objective reasons in which individual redundancies, collective dismissals, and inadaptability dismissals are included.  Recently a few changes have been approved in terms of the compensation amounts awarded for objective reason funded dismissals, reducing quite drastically the compensation calculation amounts from 30 days’ to the current 12 days’ basic salary per service year also establishing ceiling amounts for maximum compensation awards.

1. Disciplinary Dismissals

In case the employee is found to have committed an infraction to his employment duties the employer can issue disciplinary proceedings, which depending on the seriousness of the infraction can lead to dismissal.
There are several procedural rules which must be complied with, including the right to file a defence by the employee within a timeframe of 10 working days after receiving the accusation note.  The accusation note must clearly state the facts which can be considered as an infraction to the employment duties as well as the envisaged penalty to be applied.

Having said that, this doesn’t mean that the employer cannot change his mind and apply a different penalty if during the investigation stage and evidence produced by the employee the facts prove to be different and the infraction proves to be a lighter one.

In case the dismissal is challenged by the employee and a court action is filed in the Employment Tribunals and if in the end the dismissal is considered to be unfair, the compensation awarded can vary from 15 to 45 days’ basic salary per year or fraction of year of service.  This compensation award has not been changed due to the employment reform and on average one may say that compensation for unfair dismissal is equivalent to 30 days’ basic salary per service year or fraction of year.

2. Dismissal due to objective reasons

Both individual redundancies and collective dismissals must be justified by objective market, technological or structural reasons whereas inadaptability dismissals must be reasoned by lack or substantial decrease of productivity whether combined or not with a technological change to the job position.
In all the above mentioned dismissal types, for contracts signed after 1 November 2011 compensation awards have  now been limited to a maximum of either 12 years’ service length as a general rule or irrespective of the number of service years, a ceiling of 240 times the minimum national wage which currently is equivalent to € 116,400.

The notice periods vary from 15 to 75 days depending on the employee’s service length and apply to both individual redundancies and collective dismissals as well as to inadaptability dismissals.

Individual Redundancies – the criteria of selection

In the selection process for individual redundancies the employer must keep in mind that the criteria used for selection are lawful and non discriminatory.

The criteria for selection of a job position used in the past reflected the old rule of “last in first out” in the job. This type of criteria was thought to be unfair if not combined with other more business oriented ones and therefore back in 2011 it changed to “relevant and non discriminatory” criteria.

Recently the allegedly overly  broad concepts of relevant and non discriminatory criteria were judged by the Portuguese Constitutional Court as failing to comply with the principle of employment security set in article 53 of Portuguese Constitution and as such our government took the initiative to change the law in order to determine the criteria to be followed in the selection for individual redundancies.

A list of new criteria has now been set in a sliding scale according to its relevance from performance, degree of qualifications, cost of the job position, experience in the job position, and finally the service length in the company.  This change to the Employment Code has been published in the official journal and is due to enter into force on 1 June 2014.

3. The Balance of the Employment Reform

The balance is that the new employment law is now more favourable to the employer due to the reduced compensation awards on dismissals due to objective reasons which will also make it easier for employers to terminate employment contracts by settlement agreement taking the legal compensation awards as basis  for negotiation.

The selected new set of criteria for individual redundancies now based on business reasons as opposed to the sole principle of “last in first out” is likely to provide  the employer a better range  of solutions for the companies’ personnel structure and for the human resources management.  When compared to the previous “relevant and non discriminatory” criterion, the new criteria will provide both employers and employees with a bit more certainty in the selection process for an individual redundancy
For more information on employment law issues in Portugal, Cláudia Póvoa can be contacted at cpovoa@ndr.pt