Global EOR Services in Portugal

The Employment Contract: What Form It Takes and What It Must Say

The starting principle of Portuguese employment law is that employment contracts should be for an indefinite period. This is not aspirational — the Labour Code sets it as the presumed form, and any departure from it requires justification. Fixed-term contracts are permitted only when there is a genuine temporary need on the employer’s side: a specific project with a defined endpoint, replacement of an absent employee, or an unusual surge in activity that does not represent the employer’s permanent workload. Using fixed-term contracts as a routine mechanism for flexibility is precisely the kind of practice the 2023 amendments were designed to address.

Fixed-term contracts have a maximum initial duration of two years and can be renewed up to twice, with total duration capped at two years for uncertain-term contracts and three years for certain-term contracts. Once those limits are reached, the contract automatically converts to indefinite. This is an automatic legal consequence — the employer does not need to take any action for the conversion to occur, which means HR teams need to track contract expiry dates with genuine diligence.

Employment contracts in Portugal must be in writing. They must specify the identity and details of both parties, the role and its content, the place of work, the agreed remuneration including all components, and the duration if fixed-term. Contracts can be in Portuguese or in a bilingual format, but Portuguese must be present and legally definitive. For foreign executives or international hires who prefer to work in English, a bilingual contract is legitimate, but the Portuguese version governs.

The test for whether someone is an employee rather than a self-employed contractor is applied with increasing rigour. Following the 2023 reforms, there is a legal presumption of employment where at least two of a set of criteria are met — including exclusive or near-exclusive work for one entity, work performed at the client’s premises, using the client’s equipment, under the client’s supervision, at times determined by the client, or for a fixed monthly fee. For digital platform workers, specific presumption criteria now apply. Companies engaging workers on “green receipt” arrangements — the informal Portuguese term for self-employment invoicing — carry real reclassification risk if the substance of the relationship looks like employment. The ACT is targeting false self-employment explicitly, and the penalties for reclassification include retroactive social security contributions plus fines.

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Wages: The Numbers, the Structure, and the Hidden Obligations

The national minimum wage in Portugal for 2025 is €870 per month on the mainland. In the Autonomous Region of Madeira it is €915, and in the Azores €913.50. These figures apply to all full-time employees regardless of age or experience. However, the minimum wage is not the floor that most professional hiring takes place at — it represents the legal bottom for the lowest-paid categories of work.

The government has committed to a multi-year wage growth trajectory under an agreement signed with social partners in October 2024, targeting annual average salary increases of 4.5% to 5% through 2028, with the stated aim of reaching an average salary of €1,890 by 2028. For CFOs building three and five-year employment cost models for Portugal, this trajectory matters. Modelling on current wages and ignoring the policy direction creates a planning gap.

There is a structural feature of Portuguese payroll that catches international employers off guard every time: the 14-month salary system. Portuguese employees are legally entitled to fourteen monthly salary payments per year — twelve regular monthly payments, plus a holiday allowance paid in June or July, and a Christmas allowance paid in December. These two additional payments are not discretionary bonuses — they are statutory rights under the Labour Code. Each is equal to one full month’s base salary. The holiday allowance is paid when the employee takes their annual vacation; the Christmas allowance is paid in December. Both must be accrued throughout the year and paid at the required times. Any payroll model for Portugal that operates on a twelve-payment-per-year assumption is budgetarily wrong by approximately 14%.

Salaries must be paid in full and on time — the Labour Code specifies regular and permanent payment, and the obligation to pay by the last working day of the month is treated seriously by the ACT. Detailed payslips are mandatory, showing gross pay, all deductions, and net pay. Wage discrimination based on gender is expressly prohibited and actively monitored; companies with fifty or more employees are required to submit reports showing gender pay gap data.

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Working Hours, Overtime, and Flexible Arrangements

The standard working week in Portugal is 40 hours across five working days, with a maximum of eight hours per day. These limits are not averages to be smoothed over longer periods under most individual contracts — they apply unless specific alternative arrangements are formally agreed.

The Labour Code introduces several approved variations from the standard schedule. The adaptability regime allows employers and employees to agree that working time is defined as an average over a reference period of up to four months under individual contracts, or up to twelve months under a collective bargaining agreement. Under this regime, daily hours can be extended by up to two hours without triggering overtime pay, provided the average does not exceed the legal maximum. The time bank arrangement allows employers to request additional work hours, compensated through rest or pay at agreed rates. The exemption from normal working hours regime applies to senior management, employees in positions of trust, and certain supervisory roles — these employees are not bound by a fixed schedule, though the Labour Code specifies three distinct categories of exemption with different rules on compensation.

Overtime beyond the standard schedule is subject to strict limits: two hours per day and 150 hours per year for most employees. Overtime compensation rates under the Labour Code are: 25% extra for the first hour of overtime on a regular working day, 37.5% for each subsequent hour on a regular working day, and 50% for each hour on a rest day or public holiday. Where overtime exceeds 100 hours annually, the rates increase significantly. Crucially, employers who fail to keep proper records of working hours are presumed to owe employees remuneration equivalent to two hours of overtime per day — this is not a regulatory curiosity, it is a live enforcement risk.

Teleworking rules were substantially updated in the 2023 reforms. Employers with employees working remotely have an explicit duty not to contact those employees during rest periods, except in genuine force majeure situations. Violations are classified as a serious administrative offence. Employers must also conduct health assessments before implementing teleworking arrangements and conduct annual reviews of employees’ physical and mental fitness for remote work. The employer bears the costs of equipment and connectivity for teleworking employees unless otherwise agreed.

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Social Security and Income Tax

Social security contributions in Portugal are shared between employer and employee. The employer contributes 23.75% of the employee’s gross salary to the Social Security system. The employee contributes 11%. These rates apply across most employment categories, though variations exist for certain groups including management positions, workers under multi-risk schemes, and employees in specific sectors. There is no annual contribution cap — contributions apply to full gross salary regardless of level.

The social security system funds retirement pensions, sickness benefits, maternity and parental benefits, unemployment insurance, and occupational accident coverage. Employers must register their employees with Social Security before they begin work and must deregister them upon departure. Contributions are due monthly.

Income tax in Portugal — the Imposto sobre o Rendimento das Pessoas Singulares (IRS) — is progressive with multiple brackets. Employers withhold IRS on a monthly basis at rates determined by the employee’s annual salary level, marital status, and number of dependents. Portugal operates a withholding table system rather than a flat rate, and the applicable rate changes when an employee’s personal circumstances change. Annual IRS declarations are filed by employees, but the employer’s monthly withholding must be accurate throughout the year to avoid discrepancies.

Portugal’s former Non-Habitual Resident (NHR) tax regime, which offered a flat 20% IRS rate for qualifying foreign professionals and exempt foreign-sourced income for a ten-year period, was replaced from January 1, 2024 by the IFICI+ scheme, targeting researchers, highly qualified professionals, and certain investment activities. For companies hiring expatriate talent or relocating international staff to Portugal, the tax position of those individuals under IFICI+ needs to be properly assessed from the outset — eligibility criteria are specific and registration with the tax authority is required.

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Leave Entitlements: What Employees Are Owed

Annual leave in Portugal is a minimum of 22 working days per year, available in full from the beginning of the second year of employment. During the first year, employees accrue two working days per month of the contract’s duration, up to 20 days, which can generally be taken from the six-month mark of employment. Public holidays add to this picture: Portugal observes thirteen mandatory public holidays, plus Shrove Tuesday and the local municipal holiday of wherever the employer’s establishment is located — meaning the effective number of paid non-working days is fifteen or more depending on location.

The Labour Code allows for additional annual leave days in certain circumstances — most notably, if the employee has no unjustified absences in the prior year, up to three additional days of leave can be granted. This is a detail that many CBAs formalise and expand upon.

Parental leave in Portugal is extensive and structured to encourage shared parenting. Maternity leave is 42 consecutive days immediately before and after birth. Following this initial period, parents together are entitled to shared parental leave. The initial shared parental leave is 120 or 150 days — paid at 100% and 80% of reference salary respectively. If both parents share the leave and the father takes a minimum of 30 consecutive days or two periods of 15 days, the shared period extends to 150 days paid at 83% of reference salary. There is also a specific paternity leave entitlement of 28 days, of which 7 must be taken immediately following the birth — the remaining 21 can be taken more flexibly in the first six weeks. These parental entitlements are funded through Social Security, not directly by the employer, but the administrative management of the leaves and interaction with Social Security falls on the employer or, in an EOR arrangement, on the EOR.

Sick leave is also managed through Social Security for most of its duration. For the first three days of illness, no payment is made from Social Security — this is a waiting period. From day four, Social Security pays sick benefit at 55% of the employee’s reference salary for absences of up to thirty days, rising to 60% for absences of thirty-one to ninety days, 70% for absences beyond ninety days, and 75% for absences longer than 365 days. Some CBAs supplement this with employer top-up payments. Employers must interact with Social Security to process sick leave documentation correctly.

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Termination: The Area That Demands the Most Attention

Portugal’s dismissal framework is one of the most structured in the EU, and misunderstanding it is the most common source of legal exposure for international employers in this market. The foundational rule is straightforward but consequential: employment contracts in Portugal cannot be terminated by the employer without a lawful reason. There is no at-will employment. There are no easy exits. What exists is a set of defined pathways, each with its own procedural requirements, and deviation from those procedures makes the dismissal unlawful regardless of whether the underlying reason was genuine.

Disciplinary Dismissal (Dismissal with Just Cause) is available when an employee commits serious misconduct that makes it immediately and practically impossible to continue the employment relationship. The Labour Code gives examples: unlawful disobedience of legitimate orders, repeated conflict instigation with colleagues, serious harm to the company’s financial interests, unjustified absences reaching five consecutive or ten intermittent days in a calendar year, physical violence or serious insults in the workplace, or theft or criminal conduct. Just cause is a high bar — not every misconduct reaches it, and the Portuguese courts assess proportionality. The procedure for disciplinary dismissal is a formal multi-stage process: the employer must issue a written accusation (nota de culpa) detailing the alleged facts and the intention to dismiss; the employee has ten working days to respond in writing, present evidence, and request witnesses; the employer must consider that response before issuing a final decision. Works councils or union representatives may be involved. Only after completing this procedure can the dismissal be effected. If the procedure is properly followed and just cause is established, no notice period is required, and no severance pay is owed.

Objective Dismissal (Redundancy and Restructuring) covers situations where the termination arises from the employer’s side rather than the employee’s conduct. The Labour Code recognises two categories: dismissal due to extinction of the job position, and dismissal for unsuitability. Extinction of a job position requires that the role genuinely ceases to exist due to market, technological, or structural reasons — not that the employer simply wants to reduce headcount. The employer cannot create a new position doing the same work immediately after termination. Dismissal for unsuitability applies when an employee’s performance renders the continuation of the employment relationship practically impossible, most often following the introduction of new technology or significant changes to the role that the employee cannot meet despite reasonable accommodation.

For objective dismissals, the notice period is tied to the employee’s length of service with the company: fifteen days for employees with up to one year of service; thirty days for one to five years; sixty days for five to ten years; and seventy-five days for ten or more years. These are minimum notice periods — CBAs may require longer. During the notice period, the employee is entitled to five working hours per week of paid time off to seek new employment. Unlike Poland, Portugal does allow employers to provide pay in lieu of notice in some circumstances, though the procedural formalities still apply.

Severance pay for objective dismissals is calculated at fourteen working days of base salary plus seniority allowance per complete year of service for contracts entered into on or after October 1, 2013. For contracts entered into before that date, transitional rules apply that result in higher severance for earlier service periods. The total salary used for the severance calculation cannot exceed twenty times the national minimum wage. A meaningful portion of severance is covered by a compensation fund (the FCT or equivalent mechanism) to which employers make ongoing contributions — this partially offsets the direct cost at the point of termination, but it does not eliminate it.

Collective Dismissal is triggered when an employer intends to terminate multiple contracts for objective reasons within a ninety-day window: two or more employees in companies with fewer than fifty workers, or five or more in larger companies. Collective dismissal carries additional procedural obligations — formal consultation with employee representatives over a prescribed period, notification to and intervention by the Ministry responsible for Labour, and the involvement of a Labour Authority representative in the consultation meetings. Failure to follow the collective dismissal procedure renders every individual termination within the process unlawful, with all the associated remedies available to the employees.

Mutual Agreement (Rescisão por Mútuo Acordo) is the most commonly used mechanism for terminating employment in Portugal when the relationship needs to end and the employer wants to avoid litigation risk. Employer and employee agree in writing to end the contract, the terms of departure (including any compensation package), and the effective date. The agreement must be in writing, signed by both parties, and must state the deadline within which the employee can revoke it — the employee has seven days from signing to change their mind, unless the agreement was signed before a notary. Enhanced payments above the statutory minimums are commonly negotiated in mutual agreement departures. Since the 2023 reforms, waivers of employment claims included in such agreements can be challenged more readily, which means the drafting of mutual agreement documentation requires legal care.

If a court finds a dismissal unlawful, the employee is entitled to receive all wages they would have earned from the date of dismissal to the date of the court decision, plus compensation of between fifteen and forty-five days of base salary per year of service, with a minimum of three months’ total compensation. Alternatively, the employee may elect reinstatement. Employers who refuse to reinstate an employee following a court order face additional financial penalties.