By Sarah White

MADRID (Reuters) - An EU court ruling defending the right of temporary workers in Spain to receive severance pay is fuelling calls from Spanish unions and politicians for one of Europe's most uneven labor markets to be fixed.

Spain has the European Union's second-highest unemployment rate after Greece and its labor market is more reliant on temporary contracts than any other in the bloc bar Poland.

The high jobless rate -- 20 percent of the workforce at the last count and affecting close to half of young people -- has been a blot on what has otherwise been a three-year economic recovery, nine months of which has been without a full-functioning government.

Short-term workers are cheaper to fire than permanent ones and have borne the brunt of job losses in bad times, but previous Spanish reforms have struggled to eradicate the two-tier labor system.

The European Court of Justice blew open the issue after it argued in a Sept. 14 ruling that a Spanish woman who was employed as a temporary substitute for a civil servant over seven years was entitled to the same severance pay as a permanent employee when she was let go.

Worker unions have welcomed the ruling, demanding measures to give all temporary workers equal severance rights and encouraging them to seek compensation through the courts until a reform is put forward.

"This could really blow up, you could see an avalanche of law suits," said Fabian Valero, a labor lawyer at Galicia-based firm Zeres.

Valero most recently defended nine hospital workers who successfully argued they were fraudulently hired as temporary staff on contracts that were rolled over for several years, when they should have been treated as permanent staff - another common gripe which politicians have vowed to deal with.

Legally, temporary workers have to be considered permanent after a period of two years in Spain and should only be hired for short-term projects or seasonal jobs.

But loopholes in Spain's complex labor framework, which comprises dozens of different contract types, mean many people are employed on short-term contracts when they shouldn't be, while substitute workers are governed by different rules.

Under Spanish law, temporary workers get 12 days pay for every year worked when they are laid off, versus the 20 days for permanent employees and nothing for those on temporary substitute contracts.


Acting Economy Minister Luis de Guindos -- holding the fort in the absence of a formal government -- said last week that the labor market could be improved, though possibly by making the hiring of permanent staff more attractive.

"In Spain the number of temporary jobs ... is excessive and that somehow needs to be corrected," de Guindos told local radio. Spain's labor ministry was studying the implications of the EU ruling, he added.

It is unclear how far-reaching the fallout will be, though the ruling cannot be appealed.

Temporary workers make up about a quarter of salaried employees in Spain, or 3.9 million people.

But any top-to-bottom labor reform likely will have to wait, as Spain has been without a new government since inconclusive elections last December and in June.

Spain's People Party (PP), which has been governing in an acting capacity, said last week it would put forward a parliamentary motion to abolish temporary substitute contracts only, of which there are some 300,000.

Other political parties have called for greater changes, including liberal Ciudadanos ("Citizens"), which advocates a one-size-fits-all contract system.

Hiring on temporary contracts has helped propel Spain's job market recovery, with unemployment falling from a peak of nearly 27 percent in 2013. But critics argue this leaves workers exposed to further crises and is fuelling an abundance of low-paid, low-skilled jobs.

(Reporting by Sarah White; Editing by Angus Berwick/Jeremy Gaunt)