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THE LBO STRUCTURE

Posted on : June 14, 2016

Have you foreseen to take over a company which is chargeable to corporate tax? Have you thought about another transaction more interesting than a simple corporate buyout: to create a takeover holding? Which benefits?

  1. LBO : a common transaction
  1. The buy-out by the holding company

Today, the usual way to buy-out a company, more precisely a SMEs (“PME” or “Petites et Moyennes Entreprises”) is to adopt a plan that involves a holding, especially when the purchaser partly finances this acquisition.

In this plan, the purchaser doesn’t buy directly the target company (“société cible”) but the buy-out is made by the intermediary of a holding, specially created for the acquisition.

  1. The functioning

In order to buyout a company, a holding takes a bank loan.

The dividends shared out by the target company, allow the holding to be able to honor the loan due date.

This operation is known as LBO, “leverage buy out” which refers to the funding of the operation by the acquired company itself.

  1. LBO into practice

It is common that the buyer bring into the acquired company business an asset of 25% to 30%.

Thus, thanks to this particular operation, a contribution of 250 000 to 300 000 euros will be enough to acquire a company whose value corresponds to 1M euros.

The remaining amount will be borrowed by the holding.

This kind of operation gives some obvious financing facilities but also significant tax breaks.

  1. The tax benefits derived from the LBO
  1. Interests exempted from tax levy

The classic buyout operation refers to the situation that the buyer as a natural person gains directly company issued equity.

The interests derived from the acquired company are taxed relatively heavily.

A progressive tax schedule based on 60% of the revenues distributed is applied.

Also, these dividends are subject to 15, 5% of social contributions.

By creating a holding for the buyout, the dividends shared out aren’t subject to social contributions.

The dividends can be almost totally exempted from taxation (equivalent to 95%).

This tax benefit will not be applied if the holding keeps for two years the dividends and a parent subsidiary tax system is chosen.

Be aware that this option can be exercised in the cases where the holding (parent company or “société mère”) holds at least 5% of the share capital of the acquired company and those two companies are subject to corporation tax.

  1. Another tax optimization

At the moment of the holding incorporation, it’s important to provide for the option concerning the tax consolidation for the target company and the holding.

Indeed, about this tax consolidation, the taxation is made at the standard of algebraic sum of the tax results of the integrated group of companies.

The incorporation of a holding made in order to buyout the target company generates usually a deficit because of the annual carrying charges which will reduce the target company’s tax result.

A corporate tax economy is reached but consequently it will increase the existing financial resources of the incorporated group.

  1. Advices

The success of this transaction depends of the acquired company’s power to share out adequately the dividends in order to guarantee the refund of the loan taken out by the holding.

Incorporated a takeover holding will fund the acquisition by the company that you want to buyout. By combining this transaction, the parent subsidiary tax system and the tax consolidation, you will be exempt 95% of the dividends collected by the holding. You will reduce the tax corporation of the acquired company.

Nicolas BRAHIN, Avocat

Master’s Degree in Banking and Financial Law

Université Panthéon-Sorbonne

Email : nicolas.brahin@brahin-avocats.com

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The contractual termination of the employment agreement

Posted on : June 14, 2016

It results from the combination of articles L1231-11 and L1237-112 of the French Employment Code (“Code du Travail français”) that the contractual termination of the employment agreement can only intervene as required by the legal rules which regulate this way of termination.

Those rules are intended to guarantee the freedom of consent of the parties.

This is what the French Highest Court or “Cour de Cassation” sums up in its ruling of 15th October 20143.

Does this ruling mark the end of the amicable termination of the agreement?

From a legal point of view, do the parties still have recourse to terminate the relationship by mutual agreement based on article 1134 al.24 of the French Civil Code (“Code civil français”) and the previous jurisprudence?

This issue is not new and both legal doctrine and magistrate are concerned about it.

Since the entry into force of the contractual termination’s measure5, the doctrine soon understood that both employer and employee can no longer have recourse to the amicable termination.

The French jurisdictions and the French High Court keep up with the pace6.

The contractual termination “ordinary law” of the negotiated termination of the employment agreement

The Cour de Cassation made it clear in a legal ground principle which will be explained in the following words.

An employment agreement can be terminate by mutual agreement or on the initiative of the employer or employee.

If the contract is terminated by mutual agreement, an agreement between the parties concerning this kind of termination will be required.

Thus, the contractual termination’s validity can be checked.

That means that the consent of the two parties can be considered.

This is the result of the combination of articles L1231-17 and L1237-118 of the French Employment Code (“Code du Travail français”).

If the contractual termination is accepted as a negotiated way to terminate the agreement, the provisions of article L1231-49 of French Employment Code (“should not be ignored.

This article provides that the parties cannot foresee to renounce in advance to invoke the rules about termination of permanent employment agreement contained in the French Employment Code.

Those rules are made for both employee and employer in order to protect them.

Those arguments mean that any termination, amicable or negotiated, which doesn’t come within the scope of specific provisions of contractual termination and legal exceptions, constitutes de facto a redundancy without actual and serious basis.

Nicolas BRAHIN, Avocat

Master’s Degree in Banking and Financial Law

Université Panthéon-Sorbonne

Email : nicolas.brahin@brahin-avocats.com

1 Art. L1231 – 1 Code du Travail « Le contrat de travail à durée indéterminée peut être rompu à l’initiative de l’employeur ou du salarié, ou d’un commun accord, dans les conditions prévues par les dispositions du présent titre. Ces dispositions ne sont pas applicables pendant la période d’essai ».

2  Art. L1237-11 Code du Travail « L’employeur et le salarié peuvent convenir en commun des conditions de la rupture du contrat de travail qui les lie. La rupture conventionnelle, exclusive du licenciement ou de la démission, ne peut être imposée par l’une ou l’autre des parties. Elle résulte d’une convention signée par les parties au contrat. Elle est soumise aux dispositions de la présente section destinées à garantir la liberté du consentement des parties. »

3 Cass. Soc. 15-10-2014 n°11-22.251 : FRS 22/14 p.7 ou FR 46/14 p.15

4 Art. 1134 al.1 C. Civ. « Les conventions légalement formées tiennent lieu de loi à ceux qui les ont faites.»

5 Note G. Couturier, SSL 2008 n°1356

6 CA Riom 12-6-2012 n°11-992 : RJS 11/12 n°866 ; CA Dijon 5-5-2011 n°10-160 ; CA Toulouse 24-1-2013 n°11/3522)

7 Note 1

8 Note 2

9 Art. L1231-4 Code du Travail « L’employeur et le salarié ne peuvent renoncer par avance au droit de se prévaloir des règles prévues par le présent titre. »

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VAT in regards to the transfer of an immovable affected by a rental activity

Posted on : May 20, 2016

A fiscal mechanism foresees an exemption for the VAT to which the transfer of an immovable affected by a rental activity is subjected to.

I.CASES WHERE THE EXEMPTION IS POSSIBLE:

Article 257 bis of the French tax code (“Code general des impôts”) provides a specific mechanism of VAT exemption for an operation undertaken between taxable persons (“redevables de la taxe”) leading to a transmission of the total or partial sum of assets (“universalité totale ou partielle de biens”) (in return for payment or freely, or by assets to a company).

In certain cases, either the transfer benefits from an exemption of taxation, or the transferor (“cédant”) is exempted to proceed to the regularization of the VAT previously deducted.

If the conditions of application of the exemption are fulfilled, the tax authority fully applies this mechanism.

The tax authority has allowed this mechanism to apply under conditions to the sale (isolated) of an immovable affected by a rental activity subjected to VAT.

This implies that the property is sold to a purchaser that intends to pursue the transferor’s rental activity (with leases subjected to VAT, ipso jure or by option).

This mechanism does not apply in the event of an isolated sale of an immovable if it is (only) partially affected to a rental activity.

II. THE APPLICATION OF THE EXEMPTION TO A VACANCY:

An immovable temporarily vacant during the transfer can benefit from this mechanism.

A vacancy can indeed be justified by the market situation of the immovable, a change of tenancy, by works or after any damage without the intention of renting the immovable subjected to VAT being questioned.

Consequently, the duration of the vacancy is not taken into account for “article 257 bis”, it is only the demonstration of an intention to rent during the vacancy that needs to be proved.

The circumstances that have motivated the departure of the (last) tenant of the immovable are not alone capable of questioning the application of the mechanism.

III. THE CONDITIONS FOR THIS EXEMPTION IN THE EVENT OF A VACANCY:

It must be kept in mind that the mechanism of “article 257 bis” will only be applicable if the transferor can prove he is actively searching for a tenant.

In practice, the proof can easily be given if the transferor has handed a research mandate for a tenant (or a management mandate).

However, the rent must be adjusted to the market.

In the event of a resale of immovable activity, if a person liable to VAT proceeds to the isolated sale of an immovable in inventory (current assets), the tax authority considers that the exemption is not applicable even if while waiting for the resale, the immovable is affected by a lease subjected to VAT.

fichier à telecharger:
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Decennial certification

Posted on : March 24, 2016

For construction or major works, the concerned professionals must have an insurance that covers their decennial liability.

All construction professionals, whose decennial liability could be sought according to articles 1792 and following of the French civil code (“Code civil”) for major works, after their receipt, must have a mandatory specific insurance that covers their civil decennial liability.

A building and construction contractor must justify of a decennial liability insurance that he encloses with his estimates and invoices.

The Macron law of August 6, 2015 provides for examples of insurances certificates.

In the decree published on January 13, 2016, there is a certificate example for a contract subscribed to personally with specific mentions if it concerns a construction site.

A specific example is set for large construction sites necessitating a collective agreement for decennial liability (“Contrat collectif de responsabilité décennale CCRD”).

In all cases, an insurer will not be able to insert a mention in the certificate that could limit or set aside the meaning of the minimal mentions.

If he wants to refer to contractual clauses, he will have to reproduce them in the certificate.

Aside from this, the certificate can contain mentions referring to other guarantees or extensions of his contract.

This new legislation will be applicable to the certificates drafted after the July 1, 2016 and concerning construction operations, which date of opening of the construction site is after July 1, 2016.

The opening date is understood in light of the meaning given by the French insurance code (“Code des assurances”).

All concerned professionals will be advised in due time of when they need to claim this from their insurer and then, when they will have to provide the proper certificates.

Operators, owners (“maître d’ouvrage”), co-owner’s property manager (“syndic de copropriété”) must ensure they have a certificate in conformity with the necessary works.

Notaries must enlist these certificates to acts of sale.

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Article 1843-4 of the French civil code (« Code civil »): the new role of the super-expert (“tiers-expert”)

Posted on : March 24, 2016

After the French Court of cassation (“Cour de cassation”) case of the 11th of March 2014, the legislator’s decision, in his legislation of the 31st of July 2014, is to limit the powers of the super-expert (“tiers-expert”) and to return its substance to agreements concluded between the parties (statutory or not).

Although this legislation gives back to the super-expert his role and forces him to apply the agreements concluded between the parties, more precisely, the application of the formula defined in statutes or any other agreement, it also raises new questions concerning the meaning to give to the application of incomplete formulas or those that have become null and void with time.

In the event of the absence of formula in the statutes and/or in the agreement, it could be natural for the super-expert to research the most adapted approaches according to him.

It must be reminded that in that case the multi-criteria approach is recommended such as the intrinsic approaches (Business Leaders of France “DCF dirigeants commerciaux de France”, reevaluated net assets) and analog approaches (price reference on the basis of listed companies and/or recent comparable transactions).

The situation has become delicate in cases where the strict result of the application of the formula leads to a negative or undetermined result.  Should the formula be preserved?

In the presence of the result of a negative price, case-law has accepted the conversion of a negative price to the price of one euro as long as the price is serious (French Court of cassation case of the 7th of June 2011, n°10-17584).

In the presence of an undetermined price due to a vague formula based on absent or out of date aggregate, different interpretations can appear:

  • The literal interpretation: the expert declares himself incompetent to correctly fulfill his mission and refers it to the President of the Court.
  • The practical interpretation: in order to maintain the formula, the super-expert could interpret the formula and modify it by researching to preserve the spirit of the formula originally contracted.

Another interpretation would be to consider that a wrong formula is equivalent to the absence of a formula, thus, the expert would regain his freedom. However, in this situation, it could be questioned if the expert is exceeding his powers in regards to the new legislation. Only future case-law will settle this issue.

It is worth noting that the spirit of the new text is to preserve a maximum of price clauses contained in statutes or any other agreement.

In order to avoid these situations, it is recommended in the drafting of agreements to use the formulas that foresee the application of the closest principles to those agreed by the parties.

It is also important to foresee in the drafting of price formulas, a combination between a determined price and a price determinable in the circumstances of a forced sale. It is equally important to maintain aggregates concerning the activity and context of the company.

It is recommended to avoid using aggregates that would be too low in the income operating statement (“compte de résultat”) (net profit, current profits before tax), that could significantly be impacted by accounting restatements (depreciation, non-recurring items…) and that could lead to interpretation.

Finally, in the case of reference to net debt, it is worth taking into account the existing bank debt (especially for companies under LBO) with the risk of obtaining a systematic negative price during a certain period.

Overall, the changes brought to article 1843-4 of the French civil code (“Code civil”) strengthens the agreements concluded during parties’ disagreements and also questions the limits of the expert’s role in the application of the agreement’s formula.

fichier à telecharger:
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Breach of contract

Posted on : March 24, 2016

Breach of contract is provided by articles L. 1237 to L 1237-16 of the French Labor code (“code du travail”) from the legislation n°2008-596 of the 25th of June 2008 on the modernization of labor market.

It allows a breach of a contract of employment by an agreement between the employer and the employee. It is not imposed and gives possibility to reparations.

This agreement is made in a legal framework and in respect of the parties’ consent.

CHAPTER 1. THE SCOPE:

Possible remedies:

The breach of contract concerns French workers’ permanent contracts (“CDI”) and French employees working in a foreign company as long as they have signed a French law permanent contract. It is possible to sign it with a protected employee, a lawyer employee, an employee whose working contract is suspended.

Forbidden remedies :

The subsequent remedies are forbidden: those of public officers placed in private schools, public officers (“fonctionnaires”) under a contractual statute, employees under fixed term contracts (« Contrat à durée déterminée CDD ») and during a trial period.

Possibilities of employees benefiting from a specific protection against dismissal:

In the event of an incompetence of professional origin, the employee on sick leave due to a work incident or a professional sickness who after a period of absence takes on his position and is declared twice unfit by a doctor possesses a definite incompetence. The case-law has considered that the protective rules of the employee exclude breach of contract.

This also applies to the employee in the process of being incompetent, first visit only.

The French Court of cassation, on the other hand, has indicated that breach of contract was accepted for a sick employee in a case on the 30th of November 2013.

In 2014, the French Court of cassation decided and declared that except in the case of fraud or defective consent (“vices de consentement”) the breach of contract could be concluded in the event of a work accident or professional accident.

In the event of a sick employee declared fit but under conditions, the French Court of cassation considered on the 28th of May 2014 that it is possible to sign a breach of contract except in case of fraud of defective consent (“vices de consentement”).

Breach of contract concluded in contentious circumstances:

The principle is the parties’ agreement. If a conflict exists and that one of the parties proves that the breach was imposed on him then the breach is void. The importance is to check if there was defect of consent (“vices de consentement”).

CHAPTER 2. PROCEDURE:

One or several interviews :

Article L1237-12 of the French labor code (“Code du travail”): breach of contract is subject to one or several interviews with or without representation. There is no obligation of notification to the employee for a formal interview, the problem will be probationary.

It has to be proved that the employee was informed that he could be represented.

Three interviews are necessary: one for negotiations (“pourparlers”), a second one where the breach is genuinely negotiated and a third one to sign the breach of contract. The more there is interviews, the more possible claims for defect of consent (“vices de consentement”) are excluded.

The amount of compensation has to be informed as well as the date of breach, the upholding or not of the competition clause. It is possible to negotiate whatever is wanted.

Assistance of the parties :

Article L1237-12 of the French labor code: “The parties to a contract agree to a principle of breach of contract during one or several interviews during which the employee can be assisted:

1° Either by a person of his choice belonging to the company’s staff, being an employee holder of a trade union mandate (“mandate syndical”) or an employee member of a representative institution of staff or any other employee;

2° Either, in the absence of a representative institution of the company’s staff, by a councilor of the chosen employee on a list drafted by the administrative authority.”

Possibility for an employee to gather information and opinions necessary to his decision:

The parties can agree by mutual consent on the assistance of a lawyer. If the employee decides to be assisted, he can inform his employer and vice versa. There is no formality or time-limit. The employer must be informed during the interviews of the possibility to contact employment services.

The lack of time-limit between the interview and the signature of the agreement :

There is no time-limit to respect therefore it is possible to conduct an interview where the parties speak, negotiate and sign the agreement.

CHAPTER 3. BREACH OF CONTRACT FORM AND DEMAND FOR OFFICIAL APPROVAL (“HOMOLOGATION”):

Official form :

A breach of contract has to be completed with the possibility of inserting enclosures with the official form to be sent to the Regional department of companies’ competition, consumption, labor and employment (« Direction régionale des entreprises de la concurrence, de la consommation, du travail et de l’emploi DIRECCTE »). This form can also be completed on internet.

Signature of the form:

The parties have to personally sign the breach of contract that has to be dated under penalty. An original copy has to be signed by the employee: one for the regional department of companies’ competition, consumption, labor and employment (« DIRECCTE ») and one for the employer.

Content of the agreement :

The agreement must indicate the amount of the compensation due to breach of contract.

Date of the breach :

According to the date of breach, article L1237-13 mentions that it can intervene only the day after the official approval (“homologation”).

CHAPTER 4. WITHDRAWAL:

There is no specific formality for withdrawal, it has to be a letter addressed by any means that has to however attest of the date of receipt. It could be by email as long as it is possible to attest the date of receipt.

Articles 641 and 642 of the French civil procedure code (“Code de procedure civile”) and R1231-1 of the French labor code (“Code du travail”) establish that as soon as the planned time-limit expires on a bank holiday or a holiday it is extended to the subsequent first working day.

The time-limit starts from the receipt of the withdrawal however this receipt must intervene before the end of the 15 day time-limit.

The consequences of this withdrawal involve that the employment contract continues as if nothing happened.

CHAPTER 5. OFFICIAL APPROVAL (« HOMOLOGATION ») OF THE BREACH OF CONTRACT:

At the expiration of the withdrawal limit, the most diligent party must send a demand for official approval (“homologation”) to the administrative authority with a copy of the breach of contract ( article L1237-13 of the French labor code).

The consignment must be done the next day if not it is void. It does not necessitate any specific formality.

The regional department of companies’ competition, consumption, labor and employment (« DIRECCTE ») has 15 working days upon receipt to officially approve (“homologuer”) the breach of contract. On receipt of the breach of contract, the regional department of companies’ competition, consumption, labor and employment (« DIRECCTE ») must send a proof of receipt (however that is not done in practice).

It has to check that the considered date of breach of contract intervenes the next day after the end of the official approval time-limit, it checks the date of signature and end of the withdrawal limit. The regional department of companies’ competition, consumption, labor and employment («DIRECCTE ») has to check for all the formalities of the breach of contract validity. It can also investigate and call the parties.

The work inspector has two choices, he either accepts or refuses.

The lack of reply in the 15 day time-limit for official approval (“homologation”) shall be understood as the acceptation of official approval (“homologation”).

The refusal has to mandatorily be explicit but does not have to be motivated.

The refusal of official approval (“homologation”) can lead to two situations: the employee continues to work or a second breach of contract can be filed and redone correctly.

The employee can be dismissed if there is a dismissal motive. The refusal to official approve (“homologation”) cannot constitute negligence of the employer.

The employment contract is terminated if the official approval (“homologation”) is accepted. The contract is breached minimum the next day after the withdrawal time-limit, “envisaged date of the breach of the employment contract” section to be completed in the form. If the official approval (“homologation”) demand is not completed, the instruction time-limit does not run.

The instruction time-limit is of 15 working days, if not subject to a return to the regional department of companies’ competition, consumption, labor and employment (« DIRECCTE ») during this 15 working days time-limit, tacit acceptation of the breach of contract is considered.

CHAPTER 6. LITIGATION:

Competence of the Labor Court (« Conseil Prud’hommaux CPH») :

Although the regional department of companies’ competition, consumption, labor and employment (« DIRECCTE ») is an administrative authority, it is not of the administrative order that is competent.

The litigations of official approval (« homologation ») and breach of contract are not separate.

All litigation that refers to the agreement, official approval (“homologation”) or refusal is exclusively of the competence of the Labor Court (“CPH”) excluding all other administrative or remedies of litigation.

If the Labor Court (“CPH”) cancels the refusal of official approval (“homologation”), the regional department of companies’ competition, consumption, labor and employment («DIRECCTE ») is obligated to official approve (“homologuer”). This department has circumscribed power (“competence liée”) and can only approve the breach of contract.

On the other hand, the Labor Court (“CPH”) is not competent to give the agreement official approval (“homologation”), it can only cancel or confirm the refusal to officially approve (“homologuer”) (circular of the 17th of March 2009).

However, Courts are not necessarily in line with this and certain labor courts (“CPH”) have usurped this right. The French Court of Cassation has still not settled this question.

Time-limit to act :

The prescription is of two years, however there are derogations as it has to be 12 months from the official approval (« homologation ») to reconsider the validity of the breach of contract.

The starting point is appreciated on the next day of the instruction time-limit termination.

Defect of consent (« vice du consentement ») in breach of contract:

The French Court of Cassation in a case on the 23rd of May 2013 has indicated that in litigious circumstances a defect of consent (“défaut de consentement”) is not necessarily constituted except in the case of recognized moral harassment.

When there is a defect of consent (“vice du consentement”), the breach of contract is necessarily reconsidered. In that event, the breach of contract is void and will lead to a dismissal with no real and serious cause.

Breach of contract and previous demand of judicial cancellation of the contract:

The employer cannot make a judicial cancellation demand except in a contract of apprenticeship.

The demand of judicial cancellation is at the initiative of the employee, if it is lagging behind, the employee can ask for breach of contract once the official approval (“homologation”) has passed and 12 months have passed, the French Court of cassation establishes that if the time-limit is expired, the demand of judicial cancellation has no scope, thus, the demands are rejected.

CHAPTER 7: COMPENSATION FOR THE EMPLOYEE:

Amount of the specific compensation for breach : at least the legal dismissal compensation:

The specific compensation cannot be inferior to the legal compensation for dismissal, more precisely, 1/5th of a month’s salary by year of seniority, to which is added 2/15th of a month’s salary by year over 10 years of experience.

For companies in the scope of the 11th of January 2008 professional national agreement (“Accord national interprofessionnel ANI”) (MEDEF, CGPME, UPA ect.), the agreement compensation will have to be paid if it is more beneficial than the dismissal compensation.

Calculation basis of specific breach of contract compensation :

The basis of calculation is identical to the one of dismissal compensation, hereby:

  1. Either 1/12th of the salary of the last 12 months preceding the dismissal
  2. Either 1/3rd of the last three months, in this event, any bonus or annual or exceptional gratuity incentive paid to the employee during this period is only taken into account in the limit of an amount calculated in equivalent proportions.

It is always the most favorable one that is maintained.

Compensation for employees having at least one year experience :

In the scope of breach of contract, there is only little case-law. The Montpellier French Court of appeal on the 1st of June 2011 establishes that even if the employee has less than one year experience, he is allowed to have a dismissal compensation that will be calculated pro rata. The dismissal compensation is derogatory.

Other compensations :

In addition to the center for the registration and revisions (“CERFA”) form, an agreement can be made, that allows to foresee everything.

The agreement can foresee the payment of all compensations that the parties have agreed on.

The employee also has a right to all the elements of salary that are owed by the employer at the date of the breach of contract. For example: compensatory allowances correspond to the balance of the reduction in working hours (“RTT”).

CHAPTER 8: CONSEQUENCES OF THE BREACH:

Documents to be given to the employee :

In a classic breach of an employment contract, the employer is obligated to return all the documents that are imposed by law such as employment certificates, national employment agency (“Pôle emploi”) certificates, last pay-slip and the receipt for the balance of all accounts.

New declaratory obligations concerning breach of contracts:

The obligation to declare a breach of contract has been introduced in 2009 and provided for in article L1221-18 of the French labor code (“Code du travail”). Every staff employer salaried or assimilated must send a declaration to the social security contribution collection office (“URSAFF”) at latest on the 31st of January indicating the number of salaried aged of 55 years or over that have benefited of a breach of contract during the previous year.

An absence of declaration is criminally punished by an amount equal to 600 times the hourly rate of the minimum growth wage in France (“SMIC”).

There is a fear that these type of breach of contracts are done on senior employees.

Right to insurance-unemployment benefits :

The employees whose breach of employment contract resulted from an officially approved (“homologué”) breach of contract benefit from the payment of insurance-unemployment benefits in the conditions settled by the law.

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