In a decision dated May 9, 2019 (1), for the first time, the French Cour de Cassation upheld a mutual termination agreement (rupture conventionnelle) involving an employee declared unfit for his position by the occupational physician (médecin du travail).
The mutual termination agreement of an employment contract is provided for in Articles L. 1237-11 to L. 1237-16 of the French Labor Code.
The law does not provide for any exceptions to establishing a mutual termination agreement between an employer and an employee; nevertheless, the requirements for approval are as follows:
– For unprotected employees by an employee representative mandate, the termination agreement must be approved by the Administration;
– For employees protected by an employee representative mandate (2), approval from the labor inspection authority is required.
However, there have been some serious doubts about whether employment contracts can be mutually terminated in certain specific situations.
As an example, before mutual termination agreements were first introduced into the Labor Code (3), the French Cour de Cassation ruled that any mutually termination of an employment contract is not allowed during the period of suspension of an employment contract due to a work-related accident (4).
More importantly, the French administration clearly excluded the possibility of signing a mutual termination agreement in cases where the employee benefited from specific protection against dismissal (during maternity leave, an absence following an occupational accident or due to an occupational disease) (5).
In recent years, the French Cour de Cassation has given several judgments approving mutual termination agreements in the following situations:
– Between an employer and an employee with whom there is a dispute (6);
– Between an employer and an employee declared fit pending certain conditions after an occupational accident (7);
– Between an employer and an employee with a diagnosed occupational disease or who has suffered an occupational accident (8 and 9). The judgment stated that the termination occurred “during the period of suspension due to an occupational accident or disease“.
– Between an employer and an employee, during the periods of suspension of the employment contract to which the employee is entitled during maternity leave (10);
Nevertheless, the French Cour de Cassation recalled, in each of these judgments, that the mutual termination agreement must be devoid of any defect of consent (error, violence, misrepresentation) or fraud on the part of the employer.
In this respect, the French Cour de Cassation recently ruled (11) that the existence of acts of psychological harassment does not in itself impact the validity of the termination agreement, unless consent has not been properly obtained. In other words, acts of psychological harassment are not grounds on their own to annul the mutual termination agreement. However, the line between psychological harassment and psychological violence is quite thin, so that in practice, in the event of psychological harassment, the employer takes the risk that the lack of consent may be retained by the judges and the mutual termination agreement may be cancelled.
In the decision of May 9, 2019, the French Cour de Cassation clarified that it is possible to mutually terminate an employment contract with an employee declared unfit for his/her job by the occupational physician and as such, the contract is no longer suspended.
This means that it is now possible to bypass certain protective requirements for employees declared unfit, including:
– the employer’s duty to reassign the employee to a new position, which may be burdensome if the company is part of a group;
– the re-instatement of salary payments in the absence of a reassignment or termination of the employment contract within one month;
– the possibility of initiating a dismissal procedure only if it can be demonstrated that it is impossible to reassign the employee to another position;
– the payment of a specific severance amount in the event of professional incapacity, which is equal to twice the amount of the dismissal indemnity and compensatory payment in lieu of notice period.
However, unless the employee negotiates compensation for termination in excess of the minimum compensation (12) to encourage him to renounce its protective status, it is not in the employee’s interest to consent to a mutual termination agreement of his/her employment contract.
In the judgment of May 9, the judges ruled against the defect of consent since the employee did not allege it and considered that proof of the employer’s fraud was not established, since the employee had 15 days to withdraw before the termination agreement was duly approved and in order.
The French Cour de Cassation also recalled that fraud must be proven by the person who invokes it and cannot be presumed.
Nonetheless, as a precautionary measure and in order to avoid the risk of judges retaining the grounds of fraud or lack of consent, we advise to inform the unfit employee, for whom a mutual termination by agreement is being considered, of the consequences of such a mutually agreed termination.
(1) Cass. Soc., May 9, 2019, o.°17-28767
(2) Mandates specified in articles L. 2411-1 et L. 2411-2 of the French Labor Code
(3) The Mutual termination agreement was first introduced into the French Labor Code through Law no. 2008-596 of June 25, 2008, although prior to that it was used in practice without a specific legal framework.
(4) Cass. Soc., June 29, 1999, no. 97-40426; Cass. Soc., January 4, 2000 no. 97-44566
(5) Circ. DGT no. 2009-04 of March 17, 2009, no.1.2.
(6) Cass. Soc., May 23, 2013, no. 12-13865
(7) Cass. Soc., May 28, 2014, no.12-28082
(8) Cass. Soc., September 30, 2014, no.13-16297
(9) Cass. Soc., December 16, 2015, no.13-27212
(10) Cass. Soc., March 25, 2015, no. 14-10149
(11) Cass. Soc., January 23, 2019, no. 17-21.550
(12) In the event of a mutual termination agreement, the compensation is at least equal to the legal severance pay or, in companies whose industries are represented by the MEDEF, the CGPME or the UPA (French inter-professional employers’ organizations) , to the relevant contractual severance pay if it is higher.
Since January 1, 2016, individuals whose employment income falls within certain brackets are required to pay the “universal healthcare contribution”, also known as the “PUMA tax”.
Prior to January 2019, those required to pay this tax included individuals:
– Whose employment income was less than 10% of the annual French social security cap (or “PASS”) (i.e., €3,973 in 2018, the amount of the PASS in 2018 being €39,372), and
– Who did not receive any replacement income, and
– Whose capital earnings were greater than 25% of the PASS (i.e., €9,843 in 2018).
The PUMA tax was based on capital earnings, and in some cases increased with respect to livelihood and standard of living factors. The tax rate was set at 8%.
The Tax was amended by the 2019 French Social Security Financing Act.
Since January 1, 2019, individuals required to pay the PUMA tax include those whose employment income is less than 20% of the PASS (i.e. €8,104.80 in 2019, the amount of the annual PASS 2019 being €40,524). As such, the threshold for tax liability has doubled.
The PUMA tax base, however, has been reduced by a rebate equal to 50% of the PASS (€20,262 in 2019) and will now be capped at eight times the PASS (€324,192 in 2019).
The new PUMA tax rate has been set at 6.5%.
A linear reduction mechanism for this rate has also been put in place. The rate decreases in proportion to earned income and becomes zero when the liability threshold is reached.
To date, although the number of taxpayers subject to the PUMA tax has increased, both the base and the tax rate of this contribution have been reduced.
A new episode of protecting the famous red sole in China prompted us to consider this subject.
In China and for the first time in this country, it could be conceded that a color affixed to a specific area could constitute a trademark.
On February 3, 2010, the luxury shoe brand Christian Louboutin filed an international trademark application to protect, particularly in China, “the red color (Pantone No. 18.1663TP) applicable to the sole of the shoe”.
After several rejections of Louboutin’s application by the Chinese courts, on the grounds that the trademark in question was devoid of any distinctive character, the case was brought before the Second Instance. It was then recognized that such a sign could constitute a trademark. However, this decision, which demonstrates a certain flexibility on the part of the Chinese trademark courts, remains provisional. The case must again be brought before the Chinese Trademark Review and Arbitration Committee, and the validity of Louboutin’s design trademark could still be called into question.
But what does French law provide in this regard? While in theory it is not excluded to file a color as a trademark, cases of granting registration are rare.
Article L711-1 of the Intellectual Property Code defines “a trademark or service mark” as “a sign capable of being represented graphically to distinguish the goods or services of a natural or legal person. Such signs […] can be established through the layout, combinations or shades of color“.
Like any trademark, such a sign must be distinctive, i.e., allow a consumer to identify the commercial origin of the designated products/services in relation to their competitors’ products/services. However, a color is rarely perceived as a distinctive element, and it generally acquires its distinctiveness through use. In other words, because of its widespread use, a consumer will immediately associate the color with the entity behind the trademark. This is the case for Milka‘s lilac color, Hermes‘ orange or Tiffany‘s aqua blue, which are now registered, known and recognized trademarks.
In addition, such a sign should be identifiable through a clear and precise graphic design. This condition cannot be met by simply reproducing the color on paper; the color shade must be clearly identified and specific using an internationally recognized color code, such as Pantone.
Recent case law points out that trademarks consisting of a color do not easily meet these two conditions. However, this does not mean that they will be totally unprotected.
Some colors are part of the visual identity of companies but do not benefit from brand status. However, in the event that a competitor adopts the same colors in order to mislead the public, the company may benefit from protection claimed on the basis of unfair competition.
On April 11, 2019, the Law “for the growth and transformation of enterprises” (PACTE Law) was adopted by the French Parliament.
With regard to commercial companies’ requirement to appoint a statutory auditor, three major considerations deserve attention:
1/ The thresholds that trigger the requirement for commercial companies to appoint a statutory auditor have changed
The PACTE Law specifies and standardizes the thresholds beyond which the appointment of a tatutory uditor is mandatory for all commercial companies.
Article 20 of the PACTE Law provides that commercial companies (which include SA, SCA, SAS, SAS, SARL, SNC, SCS) are required to appoint a statutory auditor if they exceed two out of three thresholds which will be defined in a forthcoming French decree and are expected to be modelled on the European thresholds for statutory audits, i.e.:
4 million Euro in gross assets (at the close of the financial year)
8 million Euro in turnover (at the close of the financial year)
50 employees (average number of employees during the financial year)
2/ The adoption of thresholds that trigger the requirement to appoint a statutory auditor for commercial companies that control or are controlled by other companies
For any parent company, within the meaning of Article L. 233-3 of the French Commercial Code, the obligation to appoint a statutory auditor is stipulated when the group it forms with the company or companies it controls exceeds the thresholds set forth in the reform applicable to all commercial companies (see 1, above).
For subsidiaries held directly or indirectly by one of the companies mentioned above, the obligation to appoint a statutory auditor is required for any “significant” subsidiary, i.e., one that exceeds thresholds that will be set by decree on the basis of three criteria: gross assets, turnover excluding tax or average number of employees employed during the financial year.
3/ The reform comes into effect beginning in 2019
The National Assembly rejected the three-year transitional period put forward by the Senate and stipulated that the measure would become effective as from the first financial year following the publication of the forthcoming decree on increased audit thresholds and by September 1, 2019 at the latest.
With regard to the statutory auditors’ terms of office which expire after the Annual Shareholders’ Meeting or the relevant body approving the financial statements for the sixth financial year, for financial years ending on or after 31 December 2018, companies will be exempt from the obligation to appoint a statutory auditor provided that:
– the sixth financial year closed no more than six months before the decree on thresholds became effective;
– at the time of the current financial year-end, the company has not exceeded two of the three future thresholds;
– the Shareholder Meeting and appointment of a statutory auditor will not have taken place before Article 20 comes into effect (on or before 1 September 2019).
An exception has been granted to overseas departments where the effective date of the reform has been postponed until 2021.
If the current terms of office of the statutory auditors are not immediately affected by the reform and continue until they expire – with the exception of early resignations – companies that approve the term of office of their statutory auditors after the entry into force of Article 20 of the PACTE Law and the decree on thresholds may apply the new thresholds in order to determine whether or not they should renew or appoint a statutory auditor.
Failure to take care of one’s physical fitness, to comply with the Club’s physical training program and adopt a lifestyle in accordance with one’s profession constitutes serious ” unsporting ” misconduct that justifies the termination of the fixed-term contract.
Article L. 1221-1 of the French Labor Code is explicit in that “the employment contract is executed in good faith“. Derived from good faith, loyalty is a reciprocal duty which neither the employer nor the employee can deviate from, even if the employment contract makes no reference to it.
In a decision of 20 February 2019 (1), the French High Court of Appeal (Cour de cassation) ruled on a dispute between a professional basketball player and his employer. Victim of an injury that occurred in the course of his professional activity, the player on leave has continuously refused to follow the medical care protocol set by the team’s doctor to attend physiotherapy sessions, even though the player is required to do so by virtue of his contract and of the collective agreement.
In these circumstances, the employer terminated the fixed-term employment contract early on the grounds of serious misconduct. However, the professional player considered that his employer could not legitimately require him to perform any activity related to his employment during the suspension of the employment contract due to his sick leave.
This decision is noteworthy for three reasons.
First, while the legislator has never taken a stance on the definition itself of the duty of loyalty, the High Court of Appeal has constantly defined its scope. This decision confirms that loyalty is required for all contracts, regardless of the sector of professional activity.
As such, the sports sector is no exception to the traditional rule according to which an employee is required to be loyal in his professional relationship with his employer; the professional sports player must also not commit acts contrary to the interests of the company, which are likely to damage its reputation or performance (2).
Consequently, loyalty is as much a part of the game on a basketball court as it is in the changing rooms.
Second, and even more importantly, the duty of loyalty extends beyond unexpected changes in an employment contract (3). Even when the performance of the employment contract is suspended by an occupational accident or disease, the duty of loyalty remains, unlike the duty to provide work in return for compensation.
Underlying this, the High Court of Appeal reaffirms the spirit of Article L. 1226-18 of the Labor Code, which stipulates: “when an employee who has suffered an occupational accident or disease holds a fixed-term employment contract, the employer may not terminate the contract during the periods of suspension of the contract unless he can justify either a serious misconduct on his part or a case of force majeure“.
To justify the dismissal of the basketball player on the grounds of violating the duty of loyalty, the High Court of Appeal agrees with the reasoning of the judges that serious misconduct results from the only fact that he did not “lend himself to the care necessary to restore his physical potential in relation to the injury“, whereas he was contractually and conventionally bound even during his work absence following an occupational accident.
It should be noted that the High Court of Appeal strictly applies the principle according to which a reason based on the employee’s personal life may justify disciplinary dismissal if it constitutes a breach of a duty pursuant to the employee’s employment contract.
Finally, reciprocity in the employment relationship can be also demonstrated by the employer’s and employee’s obligation to ensure health and safety.
While an employer is required to ensure that its employees can adapt to changes in their jobs throughout the duration of their contract (4), the fact remains that the Labor Code also requires each worker to take good care, based on the worker’s training and abilities, of his or her health and safety, as well as that of the other persons who are affected by the worker’s actions or failures to perform at work (5).
However, we would have been surprised if the High Court of Appeal had reasoned differently and acknowledged that, for the sake of privacy, the employee should be completely exempted from his or her duty of loyalty. After as, the athlete employee was advised of the health measures after his accident, specifically to ensure his physical recovery.
This being said, from now on, one might expect that serious misconduct will also be whistled at on the benches of the labor courts…
(1) Cass. Soc. 20/02/2019, n°17-18.912, M/ c/Sté JDA Dijon basket: by noting that “during the period of work absence following his work-related accident, the employee had not attended an appointment to organize the physiotherapy sessions prescribed by the team’s attending physician and that he had not made himself available for the physiotherapist for the purposes of following the medical care protocol”, the Court of Appeal “highlighted the existence of a breach by the employee of his duty of loyalty, making it impossible to maintain the employment contract”;
(2) Cass. Soc. 12/10/2011, n°10-16.649 ; Cass. Soc. 21/11/2018, n°16-28.513 F-D ;
(3) Cass. Soc. 18/03/2003, n°01-41.343 ; Cass. Soc. 30/03/2005, n°03-16.167, FS-PB ;
(4) Art. L. 6321-1 C. trav;
(5) Art. L. 4122-1 C. trav.
After examining a taxpayer’s personal tax situation, the tax administration considered that the transfer of securities at a derisory price, made between members of the same family, constituted a disguised gift.
For that purpose, the Court implemented proceedings for abuse of process in order for the transfers disguised as gifts to be reclassified and to apply the transfer tax on gifts and the corresponding penalties.
For the Committee on tax law abuse, called on for the case, the operation revealed, contrary to what the tax administration claimed, an indirect gift and not a disguised gift.
In a March 18, 2019 decision, the Paris Court of Appeal ended up following the reasoning of the tax administration by qualifying the operation at issue as a disguised gift.
First of all, the Court indicated that “a disguised gift is one that is done under the guise of a contract in return for payment. Although from a legal point of view, the operation is legitimate, the administration has the right to establish the genuine nature of the deed. Among the circumstances making it possible to characterize a disguised gift is the stipulation of a derisory price.”
The Court then considered that “evaluating the securities at a symbolic value, unrelated to the real value of the property, which actually corresponds to a sale at an unusually low price, establishes the gratuitous nature of the agreements and the absence of any counterpart to the deed.”
Although, in this instance, it was an exaggerated case of abuse of process, given the fictional nature of the deed, this legal precedent and the creation of a “mini abuse of tax law” by the most recent Finance law remind taxpayers of the special attention paid by the tax administration to operations of asset restructuring, as well as the necessity for those taxpayers to seek tax advice prior to any restructuring, allowing them to structure their operations as best as possible.
There’s been a victory for Laguiole, the village in Aveyron famous for its knives bearing a bee insignia on the handle, which since March 5, 2019 has benefited from the Paris Court of Appeal ruling that cancelled twenty brands using the “Laguiole” name.
The municipality had been fighting for over twenty years against a Val-de-Marne businessman who in 1993 registered the Laguiole name as a trademark in France to designate not only knives, but linen, clothing and fertilizers as well. The range of products sold under that name did not come from the Laguiole municipality at all, and most of them were even imported products. The patent applicants were not citizens from the municipality either.
As such, the Laguiole village craftsmen were deprived of the possibility of manufacturing or selling products under the “Laguiole” brand without being sued for counterfeiting. “Even with a locally made product, I would’ve been declared a counterfeiter, sometimes even up against Chinese products,” explained Thierry Moysset, manager of La Forge de Laguiole, a company manufacturing the ‘authentic’ Laguiole knife.
In 2010, the municipality brought the case before the Tribunal de Grande Instance of Paris (district court), in hopes of obtaining the cancellation of the “Laguiole” brands. The case was dismissed and the ruling confirmed on appeal in 2014. However, in late 2016, the Court of Cassation introduced a new episode in the legal proceedings by partially annulling the Court of Appeal ruling; it noted that the Municipality had proven that the brands being sued had been registered maliciously.
The case was finally judged on March 5, 2019 by the Paris Court of Appeal (Court of referrals), which ruled in favour of the Aveyron village, considering that the contentious brands had been registered “fraudulently” within the framework of a “strategy aimed at depriving the Laguiole municipality and its citizens of using the name”. In addition to the invalidity of the 20 brands registered, the municipality of Laguiole received $50,000 in compensation for the non-pecuniary damage suffered. The Court assessed that the Municipality had been deprived of its name and its reputation harmed.
It is worth noting that to fight against such practices, the Hamon Law dated March 17, 2014 had already given territorial authorities new means of defence by allowing them to be informed by France’s National Institute of Intellectual Property (INPI) of any application for registering a trademark incorporating the name of the municipality or a similar name and by giving them the right to oppose its registration.
This legal saga clearly sums up just how hard it is to protect the name of a regional authority in the face of a competing brand. A ruling that could therefore reveal the judges’ determination to protect local and “Made in France” interests.
Caution: the ruling should nevertheless be taken with a grain of salt. Some Laguiole brands are still on the market and the businessman can still file another appeal.
To prevent potential conflicts of interest, the regulated agreements procedure currently provided for in the French Commercial Code for public limited companies (sociétés anonymes) subjects agreements entered into between the company and one of its directors or main shareholders to prior authorisation from the Board of Directors, then to approval by the shareholders. The agreements for which one of those parties is indirectly concerned are subject to the same procedure (Article L. 225-38 of the French Commercial Code).
Article L. 225-40 of the French Commercial Code provides that the “person interested” by the agreement cannot participate in the vote, without however indicating whether that interest can be indirect.
Whereas the aim of this procedure is to comprehend agreements that do not reveal organic links between the contracting parties but that are nevertheless representatives of a conflict of interest hidden by contractual or company arrangements.
Article 66 of the PACTE law intends to remove the ambiguity, by explicitly targeting both the person directly concerned and the one indirectly concerned. No definition of indirect interest is provided although the concept remains difficult to grasp.
The article also proposes that the shares held by the person concerned, directly or indirectly, be taken into account for calculating the quorum when the general assembly’s decision is made dealing with the approval of the agreement in order to, in particular, facilitate making that decision.
The same article plans to re-establish the right (eliminated in 2011) for any shareholder to request a list of current agreements concluded by the company under normal conditions (Article L. 225-39 of the French Commercial Code).
Lastly, certain provisions are foreseen solely for listed companies:
– The company governance report must mention the agreements concluded between the company representatives of the public limited company (SA) or limited partnership with shares (SCA) and any controlled company within the meaning of Article L. 233-3 of the French Commercial Code (modification of Article L. 225-37-4 of the French Commercial Code).
– The company website must include the publication of certain information (list to be determined by order in French Council of State) concerning the regulated agreements at the latest at the time the said agreements are entered into (creation of Article L. 225-40-2 of the French Commercial Code).
Although the changes foreseen have commendable objectives aimed at reinforcing control and transparency within companies and meeting the need of transposing Directive 2017/828/EU “Shareholders Rights II”, care should be taken not to overly complicate interactions used in the business world, where legal security and rapidity are essential.
The Pacte law is currently under examination. We will inform you of the conditions for the effective implementation of these new provisions with a direct impact on the regulated agreements procedure currently provided for in the French Commercial Code.
Decree n°2017-1387 dated September 22, 2017, on the predictability and security of labour relations, introduced a scale for compensations which allows employers and employees to have prior knowledge of the financial stakes for dismissals lacking any real and serious cause brought before the Labour Court (Conseil de Prud’hommes).
As such, if the employee or employer refuses reinstatement into the company, the judge grants the employee compensation whose minimum and maximum amounts are already determined by the scale, based on the employee’s seniority and the size of the company (Article L.1235-3 of the French Labour Law).
However, the scale is not applied in the event of dismissal deemed null and void due to the violation of a fundamental freedom, harassment or discrimination (Article L.1235-3-1 of the French Labour Law) .
When the scale was set, it was the subject of much controversy and led to extensive press coverage.
In a decision dated December 7, 2017, the Council of State (Conseil d’Etat) rejected the appeal by the French trade union CGT (Confédération Générale du Travail) which raised objections to the conformity of the scale.
Likewise, in decision n°2018-761 DC dated March 21, 2018, the French Constitutional Council ruled the scale to be in compliance with the French Constitution.
The scale should therefore be binding on the judge.
Nevertheless, late 2018 and early 2019 were marked by several decisions by Labour Courts which refused to apply the scale. To our knowledge, five Labour Courts (1) nullified the compensation scale for dismissals lacking any real and serious cause.
On the contrary, the CAEN Labour Court, in a decision by its settlement (départage) division dated December 18, 2018 (n°17/00193), applied it.
The judicial battle is essentially about two legal points:
– The direct applicability of the provisions of the Convention n°158 of the ILO and the European Social Charter by French judges.
– The conformity of the scale with the principles of adequate compensation for the prejudice suffered within the context of the unfair breach of the work contract provided for in Article 10 of Convention n°158 of the ILO and Article 24 of the European Social Charter dated May 3, 1996.
According to the Labour Court councillors who refused to apply the scale implemented by the September 22, 2017 decree, the scale is in violation of the European Social Charter and Convention n°158 of the ILO.
We will now have to wait several months to see how the Court of Appeals and the Court of Cassation rule on the matter.
Employers and employees are therefore once again in a state of uncertainty: the former can no longer precisely understand their judicial risk and the latter do not know the real financial stakes of legal proceedings they might initiate.
(1) TROYES Labour Court via a decision on December 13, 2018, “Miscellaneous activities” division
AMIENS Labour Court via a decision on December 18, 2018, “Trade” division
LYON Labour Court via a decision on December 21, 2018, “Miscellaneous activities” section
GRENOBLE Labour Court via a decision on January 18, 2019, “Manufacturing” division
AGEN Labour Court via a decision on February 5, 2019, “Manufacturing” division