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Collective redundancies: importance of parent company decisions - International Law Office

International Law Office

Employment & Benefits - France

Collective redundancies: importance of parent company decisions

May 04 2011

Introduction
Decision
Comment


Introduction

Since January 16 2001,(1) the Supreme Court has held that the total and definitive closure of a business activity in France constitutes fair grounds for redundancy of the employees working in that activity, provided that the closure is not a result of the employer's negligence or fault.(2) On this basis, the Supreme Court previously considered it unnecessary to assess the economic stability or competitiveness of the business, as the decision to close the entity was, in itself, economic justification for the termination.

However, in a decision of January 18 2011 the Supreme Court imposed restrictions on this general principle, such that the closure of a French entity could no longer constitute independent economic grounds where the group entities acted in such a way as to constitute joint employers.

Decision

The Supreme Court held that:

  • the subsidiary of a holding company had no autonomy in relation to the group; and
  • this group should be considered as a whole in relation to economic grounds.

Company autonomy
The employees claimed that the French entity and the holding company were joint employers. Case law sets down a number of conditions that must be satisfied in order to qualify an entity as part of a larger group, including common interests, activities and management(3) and a reporting/management line between the employees and each entity.(4)

Here the claim was based not on a direct management link between the employees of the subsidiary and those of the parent company, but rather on the basis that the parent company controlled the subsidiary's strategy, was involved in the management of finances and employees and decided on the redundancies.

As the Supreme Court held, almost all of the subsidiary's activity and management, particularly in terms of strategy, was dictated by the holding company.

Justification for redundancies
Given the assumed joint employment, the closure of one entity could not constitute an economic justification for redundancies, unless it could be shown that the closure was based on economic grounds.

The Labour Code(5) sets down two economic grounds for redundancies: economic difficulties (eg, financial losses) and technological changes. In addition, case law(6) has held that reorganisation may be a valid reason for terminating employees, provided that the company can bring evidence of concrete and objective signs of a threat to the company's future (eg, the loss of a significant market share or the arrival of a competitor), such that if the organisation remained unchanged, the competitive situation would result in higher numbers of redundancies in the future.

As a general rule, a significant body of case law has held that economic grounds must be assessed at the level of the business activity or line of business of the group, not just at the level of the company in question. This also extends internationally.

In the case at hand the redundancies resulted from strategic choices made at group level, without being justified by economic difficulties in the line of business at group level. The Supreme Court held that due to the assumed joint employment and without evidence of valid grounds, the redundancies were unfair.

Comment

This decision does not prevent companies from making employees redundant as a result of the closure of a French entity, even in groups of companies. However, it does restrict this possibility where the group of companies is tightly managed from the top down, such that the subsidiaries have little or no scope for autonomy in terms of strategy, management, finances and human resources. In situations where employees could legitimately claim that both the subsidiary and its parent are joint employers, it is now all the more necessary to demonstrate genuine economic grounds for the decision.

For further information on this topic please contact Nathalie Devernay at Bird & Bird AARPI's Lyon office by telephone (+33 4 78 65 60 00), fax (+33 4 78 65 60 11) or email (nathalie.devernay@twobirds.com). Alternatively, contact Chris Ivey at Bird & Bird AARPI's Paris office by telephone (+33 1 42 68 60 00), fax (+33 1 42 68 60 11) or email (christopher.ivey@twobirds.com).

Endnotes

(1) Cass Soc January 16 2001 No 98-44.647.

(2) Cass Soc February 1 2011, No 10-30.045: The courts can review the economic situation of the company in order to analyse whether the company's decision was reasonable in the circumstances. As such, in this case, the closure of an entity to improve the profitability of the rest of the group was not sufficient and constituted negligence, thus rendering the terminations unfair.

(3) Cass Soc January 25 2006, No 04-45.341.

(4) Cass Soc April 26 2007, No 05-42.256.

(5) Article L1233.3 of the Labour Code.

(6) Cass Soc April 5 1995, No 93-42.690; Cass Soc January 11 2006, Nos 04-46201 and 05-40977.


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