It is common knowledge, even outside Europe, that French employees enjoy outstanding benefits under labour law, including in terms of protection against dismissal, work time and retirement.  France just went one step further by creating an obligation for companies to share dividends with employees.  However, this new obligation is more a symbol than a real financial constraint for companies and their shareholders.

Why?

Despite the fact that profit sharing schemes, both compulsory (for certain companies) and optional, but in each case with a preferential social security charges regime, already exist under French labour law, unions and workers have kept fighting over salaries and "purchasing power", especially since the onset of the financial crisis.  They claimed, amongst others, that shareholders were getting a disproportionate part of the wealth – or added value – created by workers.

Under the current political situation and in light of promises made by President Sarkozy when he last campaigned for election, a new law providing for a "dividend premium" for employees came into force on July 29, 2011 (New Law).  Here are the highlights of such premium which is subject to flexible conditions enabling companies to keep control over their new obligations.

Who?

The obligation to pay the "dividend premium" applies to French commercial companies which have, on a regular basis, at least 50 employees (Qualifying Companies).  Employee count is made according to the same rules as for the existing compulsory profit sharing scheme as defined in the Labour Code.

Commercial companies controlled by the State are also under such obligations, under specific conditions.

When?

The obligation is triggered by the declaration of a dividend when the dividend per share so declared is higher than the average dividend declared over the last two financial years (Qualifying Dividend).  Other payments to shareholders are not taken into account. For instance,  the payment made as a result of share redemption or purchase by a company does not qualify as a dividend.

However, a different rule applies when the Qualifying Company forms part of a group which, pursuant to the Labour Code, must create a Group Work Council.  In a nutshell, such Council is compulsory when a business unit (entreprise) with its head office in France controls or otherwise has a major influence on other businesses (a Controlling Company).

In such a case, the triggering event is the declaration of a Qualifying Dividend by the Controlling Company.  Hence, the French subsidiary of a Controlling Company may have to pay a dividend premium even though it has not declared any dividend for years.  Although the New Law is not crystal clear on this issue, the reverse appears to be true: such subsidiary is under no obligation to pay a premium if it declares a "Qualifying Dividend" while the Controlling Company does not.  This interpretation is comforted by the relevant administrative authorities.  With respect to groups controlled by a foreign company, the general rule applies: the premium is linked to the declaration of a Qualifying Dividend by the French subsidiary which is a Qualifying Company.

Although the New Law only came into force at the end of July, it applies to dividend declared since January 1, 2011.

As evidence of the flexibility of the new measures, a company may escape the payment of the dividend premium if it has granted an additional and non-compulsory financial benefit to all of its employees connected in whole or in part with the increase of dividends.

How and How Much?

No amount or rule to determine the amount of the premium is set out by the law.  An agreement must be entered into between the Qualifying Company and the employees or their representatives, including the Work Council, within three months from the decision of the shareholders meeting declaring the dividends.  The premium need not be a cash payment but must be in addition to the salary and other compulsory components of the remuneration of the employees.

If no agreement is reached within three months, the amount and other details of the premium are determined by the employer, once it has obtained the opinion of the Work Council or employees representatives, if any.  An information letter issued by the relevant French authorities warns that the amount of the premium may not be a token.  At the same time, the tax benefit granted under the new law with respect to the premium – that is, the exemption of social security charges (except for specific exceptions) for both the employee and the employer, only applies up to a maximum premium amount of €1200 by employee and by year.

Considering the rules which apply to dividends for French commercial companies, the latest date to reach an agreement will generally be September 30.  However, an extension until October 31, 2011 has been granted for the 2011 Qualifying Dividends, given the date of coming into force of the New Law.

The agreement on the premium or minutes reflecting the lack of agreement on the premium set by the employer must be filed with the appropriate administrative authority, failing which the exemption for social security charges is denied.

To Whom?

As a matter of principle, all of the employees of a Qualifying Company during the relevant financial year are entitled to the dividend premium, though entitlement may be conditional to a minimum employment period not to exceed three months to the extent provided in the agreement reached in connection with the premium.  This is not to say that all employees are entitled to receive the same premium: it may thus vary based on seniority or in proportion to their salary.

For How Long?

The current dividend premium is a temporary measure, pending the adoption, on December 31, 2013 at the latest, of a new law with respect to the sharing of "added value", as a result of national industry wide (inteprofessionnel) negotiations.  In the meantime, the Government must, by December 31, 2012, file a report with the Parliament assessing the agreements and measures taken in connection with the dividend premium and suggesting, if need be, amendments to the New Law.