The decision was taken after unions and business groups reached an agreement with the government on the issue.
Spain’s temporary unemployment scheme known as ERTE was launched in April in a bid to avoid massive layoffs at firms hit by the lockdown introduced in an attempt to curb coronavirus infections as the pandemic took hold in Spain.
It provides furloughed workers with 70 percent of their base salary for the first six months, before dropping to 50 percent for the following months.
Those companies that take part in the scheme are banned from making layoffs in the six months after it ends.
“We will maintain all measures to safeguard employment,” Labour Minister Yolanda Diaz told journalists.
At its peak, 3.4 million workers benefited from furlough conditions and as businesses reopened many returned to work.
However, According to the latest data from Spain’s Employment ministry, 755,000 workers were still being funded under the scheme, which was due to expire at the end of January.
Spain's average unemployment rate during 2020 came in just below 16 percent after the number of people registered as jobless rose to 3.89 million in 2020, the first increase since 2013.
The International Monetary Fund predicts the Spanish economy will post a 12.8 percent economic slump in 2020, which would make it the hardest-hit country of the world's advanced economies.