By Fadi Sfeir
Following the entry into force of the PACTE law reforming many aspects of French business practice including profit-share and employee saving schemes, this article sets out how these schemes operate.
On 22 May 2019, a new law, entitled ‘PACTE’ was enacted by President Macron after a legislative process that took nearly one year. This law includes numerous provisions relating to labour and employment, including an ambitious reform of profit sharing and employee saving schemes.
This is an opportunity to provide background information regarding French profit-sharing schemes. There are two types of scheme:
- ‘Participation’ which is a mandatory scheme for all companies of at least 50 employees (the mandatory profit-sharing scheme).
- ‘Intéressement’ which is optional (the optional profit-sharing scheme).
These are collective schemes and allow employers to give an incentive to employees, with reduced social security withholdings. They also encourage employee savings, as earnings can be placed on a company savings plan.
All companies subject to French law fall within the scope of the legislation regarding mandatory profit-sharing schemes, even subsidiaries of foreign companies. Implementing a scheme is mandatory when the headcount is at least 50 employees on average during the last five consecutive years. This new five-year rule was implemented by the PACTE law and allows employers to considerably delay the implementation of the mandatory profit-sharing scheme, in comparison with the provisions that were previously enforceable. Indeed, if in any given year during this five-year timeframe, the average headcount falls below 50 employees, the scheme will only have to be implemented if the average headcount is at least 50 employees on average during the next five years, and only for the sixth year.
The mandatory profit-sharing scheme should be implemented through an agreement. It is calculated according to a legal formula that takes into consideration various financial variables, pertaining to the company at hand, including taxable profits, net equity, wages and added value. If the taxable result is nil, there will be no profit sharing. The agreement can provide a different calculation formula, but if so, the formula has to be more favourable than the legal one.
Once the amount of the pot is determined, it is split between the workforce. As a general rule, all employees benefit from the mandatory profit-sharing scheme. That includes employees on fixed-term contracts or indefinite-term contracts, but not interim workers, or interns. A three-month length of service condition can be included.
The pool can then be split:
- in proportion to wages; or
- equally between employees; or
- in proportion to working time; or
- using a mix of these criteria.
No other criteria may be imposed. Then, once the pool is split, employees can either request immediate payment of their profit share or request the sum to be put on a savings account. The latter will be the default choice.
The purpose of an optional profit-sharing scheme is to provide an award to employees for collective achievements. An agreement determines collective targets to be reached and an award is provided to employees when this target is reached. The award is split according to the same rules as for the mandatory profit-sharing scheme. An optional profit-sharing scheme is a valued and efficient tool for businesses’ compensation and benefits policies, due to its favourable social security treatment.