Due to a combination of political and economic factors such as an overall fragile economic situation, a significant level of unemployment, protective legislation and a high level of scrutiny by politically active labor departments, headcount reductions in France are a complicated issue.
Mindful of these factors, General Counsels, Country Managers and HR professionals have increasingly turned to a less aggressive approach than straight redundancies — the voluntary departure. There were a number of voluntary departures in 2010, and this trend is expected to carry on through the remainder of 2011. Official statistics show that mutual termination procedures were up by more than 30 percent during the last year, while the number of redundancy plans (so called “social plans” or, by the exact terms of the law, “employment safeguard plans”) was down by almost 50 percent during the same time period.
Despite its increasing popularity, a voluntary departure under French law is significantly more complex than an employer and an employee simply signing an agreement to part ways. Legal rules and recent case law (i.e., from the end of 2010 through the first quarter of 2011) detail a strict and formal framework that illustrates the genuine legal risks to an employer who agrees to, or implements, voluntary departure.
French law provides for two ways to implement voluntary termination of an employment contract: the mutual termination procedure and voluntary departure plans.
Mutual Termination Procedure
The mutual termination procedure is a strictly regulated option for terminating an employment contract, a “third way” alternative to either resignation or dismissal. French law provides for a specific procedure to be followed to ensure that the employee’s consent to the termination of the employment contract is a product of free will, exempt from undue pressure and well informed. In addition, employees whose employment contracts are terminated through the mutual termination procedure are eligible for public unemployment insurance, which adds a degree of financial safety to this option.
To begin a mutual termination, the employer and the employee must agree on one or more formal meetings. The employee can be assisted during these meetings by a fellow employee or, if the company does not have employee representatives, by an accredited external advisor (not a lawyer, but generally a volunteer union member). When both parties agree on the terms of the mutual termination, which despite its mutual character, must include a severance payment to the employee in an amount not lower than the severance payment that would have been mandatory in case of a dismissal, the parties sign a state-provided form agreement. If required, the parties may add additional agreed-upon terms and conditions in an annex to the agreement. From the date of signature, each party has two-week period to cancel the agreement on a purely discretionary basis. Assuming the parties do not cancel the agreement, the local labor department must be notified of the agreement during a precisely defined time period (in practice, about three weeks) in order to question or even object to it. If the labor department objects to the agreement (for example due to apparent discrimination or a breach of the mandatory redundancy rules — see below), it is null and void. If the labor department does not object, the agreement is deemed approved and the employment contract effectively terminates. In addition to these procedures, specific additional requirements apply to “protected employees” (primarily employee representatives).
New Case Law on Mutual Terminations
Having been established mid-2008, the mutual termination procedure is a fairly new method of terminating employee contracts. Given that lawsuits may take years to reach a court of appeal or the supreme court, it is not surprising that the first batch of significant cases in this area has only recently emerged. These court decisions provide some insight into the two major legal risks associated with mutual terminations.
The first risk is related to the employee’s consent: several plaintiffs alleged that they were placed under undue pressure to accept a mutual termination. Courts have accepted this argument in cases where the employee was able to provide evidence that at the time the mutual termination agreement was signed, the employer and the employee were involved in a dispute, therefore diminishing the employee’s ability to freely enter into the agreement. These disputes generally revolved around an employer subjecting the employee to disciplinary action. While the courts of appeal acknowledged that an employer-employee dispute impairs an employee’s ability to freely enter into a mutual termination agreement, they will only accept this argument if the employee can prove that the dispute “was still present at the time of the formal meeting or at the time the mutual termination agreement [was] signed.” In two notable decisions, the Court of Appeal of Rouen (Western France) rejected several employees’ claims, stating that while a dispute likely existed, perhaps even as close as one month before the formal meeting, the employee failed to prove that the dispute was ongoing. Consequently, the validity and effectiveness of the mutual termination agreement was upheld.
The second risk is related to the tension between mutual terminations and French economic redundancy legislation. Can an employer sign five, 10 or even 100 mutual termination agreements as a way of reducing its headcount? The answer is: mutual termination procedures may validly occur in the context of headcount reductions. However, they are designed essentially as an individual and not as a collective approach. If numerous mutual terminations actually translate into a covert employer project to reduce its headcount, then the prior consultation of the works council (if present) on a headcount reduction project may be required. Further, if more than nine headcount reductions occur over certain legally defined periods of time, then a formal social plan may become mandatory as well. Mutual terminations are not a valid way of circumventing the protective legislation of social plans (Supreme Court, March 9, 2011).
The Collective Approach: Voluntary Departure Plans
Voluntary departure plans are the collective counterpart to individual mutual terminations. These plans can offer interested employees attractive payments and support for the pursuit of a career outside the company. Major French multinational firms have shown interest in this option: a recent publicly announced voluntary departure plan for one such firm is open to 600 employees, another firm implemented a plan for 4,000 employees to leave and there are many others. Voluntary departure plans generally meet with considerably less resistance from works councils and unions than straight redundancy plans and from time to time, employers have faced more employees interested in leaving than there were positions open for a voluntary departure! As such, with plans that are tailored to a collective headcount reduction, their implementation requires prior works council information and consultation. Additionally, some, but not all, provisions that apply to economic redundancy procedures will apply to voluntary departure plans. Voluntary departure plans, other than mutual termination agreements, do not have a clearly established legal basis. They were created in practice, tested in court and have over time reached a certain level of legal reliability which, however, is still not perfect.
New Developments on Voluntary Departure Plans
A November 2010 French Supreme Court decision approved one major French multinational firm’s voluntary departure plan, bringing such plans closer to a more satisfactory level of legal certainty. It is now also clear that equal treatment principles apply: employers must provide for objective and non-discriminatory reasons when refusing the “benefit” of a voluntary departure to an interested employee.
While such plans have met approval by employers and employees alike, the December 20, 2010 law fixing social security funding for 2011, significantly cut the ability to exempt termination payments from social security contributions. The result of this law is that either employers will need to significantly increase their budget to keep voluntary termination payments at a sufficiently attractive level, or employees will need to think twice about whether they are willing to leave their employment with considerably less in-the-pocket value than in the past.