Madrid Court Rules on AI as Grounds for Collective Layoffs

The High Court of Justice of Madrid (TSJM) has issued what is described as the first Spanish ruling to address whether introducing artificial intelligence can justify a collective dismissal, known as an ERE. Its answer is nuanced: it depends on why the company adopts AI.

Ruling 864/2026, dated 8 October, resolved an appeal by a screenwriter at a video game studio who argued her dismissal under the ERE should be declared void. A lower court had already found it unfair, not void, and she sought nullity and compensation for moral damages. Her dismissal letter did not mention AI.

The 3D modeller's case

A 3D graphics modeller at the same studio, covered by the same ERE, received a letter that did cite AI. It said AI improves visual quality and makes the company more agile and efficient, so two senior 3D artists would suffice and her position would disappear. The lower court had deemed that dismissal justified, it was not appealed, and the TSJM did not review it.

The company invoked economic, technical, productive and organizational causes, but the letter relied mainly on the economic and productive ones. Article 51 of the Workers' Statute distinguishes them: technical causes concern means of production, organizational ones working methods, and productive ones demand for products. Fitting AI as a technical cause is debatable, and the labor inspectorate accepted the economic, organizational and productive grounds.

Crisis first, AI second

The studio's finances were poor. It went from a profit of 646,297 euros in 2023 to a loss of 3,546,027 euros in 2024, while revenue fell from 7.99 to 4.60 million euros. In October 2024 it told a Madrid court it was insolvent and filed an ERE affecting 13 of its 83 employees.

The company did not present AI as a direct cause but as a change in production processes needed for viability, in line with what its clients demanded. In other words, AI itself did not cause the dismissal; the shift in the production model did.

The distinction matters. A court in Bilbao previously declared unfair the dismissal of an employee simply replaced by AI, with no economic or organizational reasons involved. Replacing staff with AI outright can therefore be costly for employers, unless the dismissal rests on a broader change of production model or on economic difficulties that force one.