by Bertrand Delafaye and Benoit Zagdoun

The French legal system provides a variety of ways to secure the involvement of employees in the growth and profits of their company, including compulsory deferred profit-sharing plans (accords de participation), optional voluntary cash-based profit-sharing plans (intéressement), and other similar mechanisms.

The Amended Social Security Financing Law of 2011 provided for a new legal framework entitled “profit-sharing” premium (prime de partage des profits), which set forth rules to allocate premiums to the benefit of employees in the event their company decides to increase dividend distributions to its equityholder(s) (the “Premium Allocation Rules”). These Premium Allocation Rules are in force but have not yet been codified.  According to recent government declarations, however, the Premium Allocation Rules could be abrogated by the end of 2013.

Overview

Generally, the Premium Allocation Rules apply to privately held companies with at least 50 employees as well as to public corporations under certain specific conditions.  If a company subject to the Premium Allocation Rules decides to distribute dividends in excess of the average amount of dividends distributed during the two previous fiscal years (an “Increased Dividend Distribution”), then the company must grant a premium (typically a cash payment) to its employees (the “Employee Premium”).   Importantly, the determination of whether an Increased Dividend Distribution has occurred does not include any amounts, whether in cash or in kind, distributed to the equity-holders of the company as a result of other non-dividend corporate actions, such as share buy-backs.

If the parent company of a “group” (as defined by the French Code of Commerce) engages in an Increased Dividend Distribution, then each company within the consolidated group that employs at least 50 people must grant the Employee Premium to its employees.

The Employee Premium must be determined by an agreement executed between the company and a representative of the employees within three months of the date on which the company decided to engage in an Increased Dividend Distribution.  Similar to collective bargaining agreements, the Employee Premium agreements may also be negotiated and executed at the industry level, as opposed to the company level.  If such an agreement is not reached, then the company must issue a statement setting out the premium amount that the company unilaterally agrees to pay, which the employee representative cannot block.  In order to avoid repeating the agreement negotiation process each time a company makes an Increased Dividend Distribution, it is possible for a company or a consolidated group to negotiate a long term agreement with the relevant employee representatives that provides the framework for, among other things, calculating and paying the Employee Premium.

An employer (whether the board of directors and its chairman, the manager(s) or the president, depending on the corporate form) that defaults on the obligation to implement the profit-sharing premium process, will risk the following penalties: up to one year of imprisonment and/or a fine of €3,750.

Practical examples

1.  Foreign companies

A foreign company incorporated outside of France and its direct French [...]

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