Wednesday, June 20, 2012

France - Liability of Parent Companies

Liability of Parent Companies for the Actions of their French Subsidiaries

By Roselyn Sands & Corinne Bourdelot – Ernst & Young Société d’Avocats, Paris, France

When there is a “confusion of interests, activities and management” between a parent company and its subsidiary, resulting in the parent company interfering directly with the running of the subsidiary, the parent company is deemed to be a co-employer of the employees of this subsidiary, so ruled the French High Court in a decision dated November 30, 2011[1].
The case brought before the French High Court was the following: in 2004, the French company MIC, which was indirectly controlled by the German company Jungheinrich AG (“grand-mother” company), closed down its activities in France and made all its employees redundant. The employees challenged the redundancies and claimed for the payment of damages against the companies MIC and Jungheinrich AG.
The French High Court considered that there was a “confusion of interests, activities and management” between both companies, for the following reasons:
  • There was a common management between both companies, under the supervision of Jungheinrich AG,
  • The decisions taken by Jungheinrich AG had deprived MIC of any industrial, commercial and administrative autonomy,
  • Jungheinrich AG was the owner of all trademarks and patents of MIC,
  • The strategic decisions were taken by Jungheinrich AG, which also dealt with human resources management and had decided the closing down of activities of MIC,
  • The managing director of MIC had no real power and was entirely submitted to the instructions of Jungheinrich AG.
Consequently, Jungheinrich AG was deemed to be co-employer of the employees of its subsidiary and could be held directly responsible for the damages claimed by these employees.
What is the importance of this decision?
In multinational companies involving complex decisional structure, it may be difficult to determine who is the “employer” and who should take responsibility for the obligations arising from labor & employment laws.
Generally, an employee has only one employer, the company with whom he/she signed the employment contracts. However the facts may show a loss of autonomy of the employer, the French subsidiary. In this case, the French courts are pragmatic: they judge that an employee may sue the subsidiary and the parent company as co-employers.
The decision of the French High Court of November 2011 highlights that parent companies, foreign and non-foreign, in multinational groups could be held liable for the actions of their French subsidiaries towards the employees of these subsidiaries. This may be the case, for example, in the context of restructuring and economic redundancies if it can be prove that the parent company closely interferes with the management and decisions of its French subsidiary.
The financial consequences may be heavy for the parent company, especially if the French subsidiary is winding up its operations in the context of an insolvency. In a decision dated December 13, 2011[2], a Court of Appeal ordered the parent company of a French group to pay EUR 12 million towards the financing of the collective redundancy implemented as part of the winding up of its French subsidiary because the court considered that the parent company had directly interfered with the management of its subsidiary and “confused its interests” with the interests of the subsidiary company.
More recently, a Court of Appeal[3] went even further in its reasoning, judging that the employees dismissed by a French company that is winding up its operations are entitled to sue the parent company controlling the French company on the basis of the general rules of civil responsibility, even though the parent company is not considered as a co-employer of the employees.
These decisions show a trend of the French courts to make parent companies bear the consequences of the actions of their subsidiaries.
This trend now seems to extend to criminal law too: in April 10, 2012, the airline company Air France as well as its chairman, Jean-Cyril Spinetta, were sentenced by the criminal court of Bobigny (first instance court) to pay fines for complicity of undeclared work (which is a French criminal offense) by its Irish subsidiary, Cityjet, as well as damages to each of the 21 employees concerned.
A warning for all multinational companies closely involved in the running and human resources management of their subsidiaries…

[1] Cass. soc. November 30, 2011, n°10-22964, n°10-22965, n°10-22994

[2] Court of appeal of Nîmes, December 13, 2011, SAS Fayat
[3] Court of appeal of Pau, April 30, 2012, n° 1862/12, SAS Financière GMS Investissements et autres