Wednesday, June 15, 2011

France: Recent Developments

By Roselyn Sands and Giani Michalon

Restructuring a French Company May Have Unexpected Financial Consequences for Other Entities of the Group

In a well published decision, in January 2011, the French Supreme Court recognized the liability of a French parent company as co-employer of the employees of one of its French subsidiaries.

In that case, the activities of French subsidiary A were transferred to French subsidiary B. Those employees refusing the transfer from A to B were terminated.

Some of these employees challenged their redundancy and claimed damages from both Company A, their employer, and also, Company C, the French parent company.

Based on the “intermingling of interests, activity and management” between Company A and C, which was key in the decision, the French Supreme Court held that both companies were co-employers of the employees and therefore co-liable for any financial consequences. Such intermingling of interests, activity and management were notably shown by:

- the fact that the subsidiary was economically dependent on the parent company which owned the majority of the share capital;
- the joint management of the staff of both companies and also of another subsidiary;
- the fact that the parent company was taking, from a practical standpoint, all strategic decisions for its subsidiary and notably the decision to transfer the activity of the subsidiary which led to the redundancies of employees;
- the fact that the subsidiary was not autonomous, the parent company being the one which had the operational management.

Several earlier decisions of French labor court suggested co-liability of companies belonging to the same group when these companies could be considered as co-employers under the “intermingling of interests, activity and management” test.

The French Supreme Court thus confirmed the tendency of the lower Courts to extend the liability relating to financial consequences of redundancies to other companies of the same group in the context of a restructuring.

Moreover, the French Supreme Court considered that, when an employee is co-employed by entities of the same group, the suspension of activity of one of these entities can only justify redundancies if a valid business justification exists not only at the level of the company but at the level of the group activities.

This decision is in line with long-standing case law in France considering that, in order to assess whether a company has valid grounds to proceed with redundancies, such grounds must be examine not only with reference to the company concerned but with respect to the group in a all.

A Slice of Flexibility for the Employer Regarding the Modification of the Variable Part of an Employee’s Remuneration

It has been established for a long time, in France, that the modification of an employee’s remuneration requires his/her prior consent, even if the change is considered as more favorable to the employee!

Many considered that, given that the modification of an employee’s objectives would impact his/her remuneration, the employer would thus need the employee prior consent for such modification.

In March 2011, the French Supreme Court adopted a solution much more favorable to the employer considering that, under certain conditions, an employer may unilaterally modify the objectives determining an employee’s variable remuneration.

In that case, an amendment to the employee’s employment contract provided that the determination of the goals relating to his variable remuneration was a prerogative of the employer which had the possibility to modify them unilaterally.

The employee challenged the possibility for the employer to modify unilaterally his goals considering that such modification should require his prior approval.

However, the French Supreme Court held that, when the objectives are unilaterally determined by the employer, it can unilaterally modify such objectives under certain limits.

An employer may therefore modify unilaterally the goals to be reached by an employee in order to obtain his variable remuneration unless the employment contract provides otherwise.

The French Supreme Court recalled that the new goals must be achievable and that the employee must have full knowledge of them at the beginning of the year.

Employer should therefore review the existing employee documentation and consider gaining flexibility on these matters of goal setting and variable remuneration.

Due to changes in the Social Security Tax laws, the cost of termination of an employee in 2011 has significantly increased

As a consequence of the global economic crisis, the government has decided to limit the potential exemption of social security contributions related to termination indemnities.

Indeed, the Finance Act on Social Security for 2011 lowers the ceiling of the social security exemption applicable to any termination indemnities, severance and/or settlement indemnities relating to the termination of an employment contract.

As from 2012, any payments related to termination of employment above EUR 106,000 will be subject to full social security contributions both for the employer and the employee.

This will also concerns social plan payments, which have been tax free.

This new reform also includes the damages granted by a judge for wrongful dismissal.

Before the Finance Act of 2011, amounts granted as damages by a court were fully exempted from social security contributions no matters the amount; now, these payments are treated as any other type of remuneration and, thus, will also be subject to social security contributions when total termination indemnities granted to an employees are above the EUR 106,000 ceiling.

Given the high level of social security contributions paid by the employer (40% - 45%), this new reform will significantly impact termination costs and should be taken into account when estimating termination and litigation risk.

The Reinforced Role of the Health and Safety Committee in France

It is well-known that in France, the Works Council is a key player when implementing any project in a company. The information and consultation process of the Works Council may significantly impact the timing of a restructuring, reorganization project, and, of course, the cost.

The role of the Health and Safety committee was, for a long time limited to hygiene, working conditions and security. However, more and more, this committee participates not only for the protection of the physical security of the employees but, also, for the protection of their mental health.

In this respect, recent case law shows that employers should also engage the Health and Safety committee given the increasing attention with respect to mental conditions/ stress of employees.
Even if there is no decision of higher courts yet, several lower courts show a tendency for a reinforced role of the Health and Safety committee.

In two recent decisions of February and April 2011, the reorganization of a sales department or the restructuring of an HR department and the creation of a shared-service center were suspended by the courts because the employer had not consulted the Health and Safety committee.

The tendency of an increased role of the Health and Safety committee in any project impacting employees should be anticipated by employers.

By Roselyn Sands and Giani Michalon, Ernst & Young, EMEIA & France Human Resources, Labor and Employment Law