Introduction
Who is affected?
Implementation
Tax treatment
Groups


Introduction

On July 28 2011 France passed a new law giving employees of French companies new rights to a bonus payment. The new legislation comes amid increasing consensus, both in France and elsewhere, in favour of greater social responsibility in the way in which businesses are run and a more equitable share for employees in the fruits of their company's success.

This novel piece of legislation presents plenty of pitfalls for the unwary. French companies are facing the challenge of interpreting and achieving compliance with this untested and, in some respects complex, piece of law.

A recent impact study undertaken by the government shows that around 17% of employees in France are expected to benefit from the new rules, while over half of companies on the CAC40, the benchmark French stock market index, will be affected by the new measures.

Who is affected?

The new law provides that a French company must pay a bonus to its employees if it declares a dividend based on the results of the previous financial year (Y1) and that dividend is greater than the average of the dividends declared on the basis of the results of the two preceding financial years (Y2 and Y3). There is an exemption for companies that give all of their employees non-mandatory, financial benefits (eg, profit-sharing schemes, free shares or private pension schemes) under a company-wide agreement.

The relevant distributions to be taken into account are those approved at the annual general meeting approving the company's annual accounts, including distributable profits and reserves, no matter whether such dividends are paid in cash or in kind. Interim dividends are also caught by the new legislation. On the other hand, share buybacks and distributions of share premium are not treated as dividends for these purposes.

The new rules apply to 'commercial' companies incorporated in France, which include the most popular forms of companies, such as the société anonyme, the société par actions simplifiée and the société à responsabilité limitée.

The company must have at least 50 employees on its payroll for at least six months during the relevant financial year (ie, Y1, the financial year that gave rise to the results being distributed by the dividend that triggered the bonus payment). Eligible employees must have a French law employment contract with the company and must have been on the company's payroll during the relevant financial year. Therefore, an employee would be entitled to a bonus in 2011 if he or she was on the payroll in 2010, regardless of whether he or she was still employed by the company in 2011.

Implementation

The new law leaves it to the company to negotiate the implementation of the bonus with its employees. This can be done through a collective bargaining agreement, a group agreement, an agreement with trade union representatives, a works council agreement or an agreement ratified by at least two-thirds of the personnel. Such negotiations will cover details such as the method of calculation of the bonus and payment terms. The bonus can be a fixed sum or dependent on remuneration, and can be paid in one or several instalments. Failure by the company to negotiate is a criminal offence punishable by a fine and/or imprisonment.

If collective negotiations fail to settle the terms and conditions of the bonus, the bonus must be implemented unilaterally by the company's management after consulting the works council or employee delegates. The failure of collective negotiations, as well as the details of the bonus that the company will implement unilaterally, must be recorded in writing. The company's corporate officers could be personally liable to the employees for damages if they fail to implement a bonus unilaterally.

There is no legal minimum for the amount of the bonus, but it must be more than a purely symbolic amount. There is no legal time limit for the payment of the bonus. However, as the cap on the exemption from social charges (see below) is annual, companies are incentivised to pay the bonus before the end of the financial year during which the annual general meeting approving the dividend is held.

Tax treatment

Employers are liable to a 6% social tax (forfait social) on the bonus and employees are liable to social charges (ie, the contribution sociale généralisée and the contribution au remboursement de la dette sociale). The bonus is exempt from other social charges, subject to a limit of €1,200 per employee per annum. There is no relief from income tax for the employee.

Groups

While the main features of the law are relatively coherent, the same cannot always be said for the way in which the new rules deal with groups of companies.

If a French subsidiary employing at least 50 people belongs to a group of companies, headed by a French company, and that group is required to form a group committee (comité de groupe) under the provisions of the Labour Code, the subsidiary is required to pay a bonus only if the (French) parent distributes a dividend whose amount exceeds the average over the two previous years.

This basic rule leads to some surprising results. A subsidiary company is not required to pay a bonus if its parent has not distributed a dividend or has not distributed an increased dividend, even if the subsidiary itself has distributed an increased dividend. Conversely, the distribution of an increased dividend by the parent company triggers the obligation for the subsidiary company to pay a bonus (assuming it has at least 50 employees), regardless of any dividend that the subsidiary has itself declared. Therefore, a subsidiary may be obliged to pay a bonus, even if its own financial situation does not warrant or indeed even allow the payment of the bonus. Therefore, it seems that there will be cases in the context of groups of companies where the requirement for a company to pay a bonus will be out of step with that company's own economic performance or dividend policy.

If the head of the group of companies is not French, the situation of each French subsidiary within the group is appreciated independently, such that a bonus payment is triggered if a French subsidiary company employs at least 50 people and the dividend that it has paid out is on the increase.

The new law is intended to apply until December 31 2013 at the latest, by which time it is envisaged that a new regime on profit-sharing within companies may come into effect, further to forthcoming national inter-professional negotiations.

For further information on this topic please contact Rhidian David or Cyrille Gaucher at SNR Denton by telephone (+33 1 53 05 16 00), fax (+33 1 53 05 97 27) or email (rhidian.david@snrdenton.com or cyrille.gaucher@snrdenton.com).