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Social security treatment of termination payments in 2019

Latest News Social security treatment of termination payments in 2019

The treatment of termination payments examined in the present article are those linked to the termination of an employment contract such as severance pay, compensation under a compromise agreement and damages for a dismissal without justifiable grounds.

Compensation for notice, compensation for paid holiday, non-competition indemnities and severance payments at the end of fixed-term contracts are expressly left aside as they are treated as if they were salary and thus entirely subject to ordinary social contributions.

A first limit to the exemption from social security contributions: income tax exemption

Termination payments can only be exempted from social security contributions for the fraction that does not exceed the tax exemption thresholds pursuant to art 80 duodecies of the Code Général des Impôts (General tax code), it being specified that the article applies to a non-exhaustive of non-taxable forms of remuneration and payments (as we shall see below).

Thus, for individual or small scale redundancies, payments are exempted from income tax which do not exceed:

> Either twice the amount of the annual gross pay received by the employee over the calendar year preceding the termination of his contract of employment, or 50 % of the amount of the payment if this threshold is higher, within the limit of six times the annual social security ceiling (PASS) (being 243 144€ in 2019).

> Or the amount of the severance payment provided by the collective bargaining agreement in the sector or by other collective agreements, or, by default, by the law.

A second limit: the annual social security ceiling (PASS)

The amount of the termination payments is exempted from social security contributions up to twice the PASS that is to say 81 048 € in 2019, it being specified that the ceiling has to be calculated in accordance with the applicable rules as at the time of the payments.

It results from the above that the amount received as a termination payment can only be exempted in 2019 within the limits of the tax thresholds set out hereinabove and within the limit of 81 048 €.

CSG/CRDS

Moreover, the severance payment is excluded from the specific social tax contributions (CSG and CRDS) separately from its liability to income tax, within the limit of the lower of the following amounts :

> The amount provided by the collective bargaining agreement in the sector, or other collective agreement or by default by the law.

> The amount excluded from social security contributions.

The severance payment under a collective bargaining agreement and the compensation under a compromise agreement.

The above rules can be illustrated with some practical examples.

1) An employee who has 6 years’ service receives a gross monthly salary of 2 500 € over 12 months.

His annual gross pay thus amounts to 30 000 €.

The collective bargaining agreement provides for a severance payment of a third of a month’s salary per year of service.

The double annual gross salary received by the employee during the calendar year before the termination of his contract of employment corresponds to 60 000 €.

His severance payment under the collective bargaining agreement amounts to 5 000 €.

Compensation under a compromise agreement is agreed in the amount of 30 000 € on top of the severance payment under the collective bargaining agreement.

50% of the payment granted = 17 500 € (i.e. {30 000 € + 5 000€}/2). The higher of these amounts being 60 000 €, the entire payment received would be exempted from income tax and exempted from social security contributions as it is lower than 2 x PASS.

However, the amount exceeding the severance payment under the collective bargaining agreement (which corresponds to 30 000 €) remains subject to CSG/CRDS at a rate of 9.7%.

2) An employee with twelve years’ service receives a gross annual salary of 120 000 €, which corresponds to 10 000 € per month.

The collective bargaining agreement provides for severance payment of a third of a month’s salary per year of service.

The double of the annual gross salary received by the employee during the calendar year before the termination of his contract of employment corresponds to 240 000 €.

His severance payment under the collective bargaining agreement amounts to 40 000 €.

Compensation under a compromise agreement is agreed amounting to 60 000 € on top of the severance payment under the collective bargaining agreement.

50 % of the payment granted = 50 000 € (i.e. {40 000 € + 60 000 €}/2).

The higher of these amounts being 240 000€, the amount of the severance payment would be exempted from income tax.

Nevertheless, the ceiling of twice the PASS (that is to say 81 048 €) has to be taken into account.

Thus, the amount of 18 952 € (that means 100 000 – 81 048 €) would be subject to social security contributions.

Indeed, the compensation received would be exempt from social security contributions in the amount of 81 048 € but subject thereto in the amount of 18 952 €.

Moreover, the amount exceeding the severance payment under the collective bargaining agreement, which amounts to 40 000 €, remains subject to CSG/CRDS of 9.7%.

The damages for dismissal without to justifiable grounds

The damages for unfair dismissal awarded by a court are excluded from the basis of social security contributions within the limit of twice the annual social security ceiling, that is to say 81 048 € in 2019, it being specified that such compensation has to be added to the total amount of the severance payments already received.

Clarification by case law about the damages which are not expressly included in article 80 duodecies CGI.

With a series of decisions in 2018, the Supreme Court (Cour de Cassation) decided that if the employer is able to prove that the damages paid on termination of the contract which are not expressly mentioned in article 80 duodecies CGI, have a purpose of indemnifying a loss, they are exempted from social security contributions (Cass.2e civ.21-6-2018 n°17-19.432, n°17-19.773, n°17.19.671).

The aforesaid decisions were delivered in regard to compensation under compromise agreements following a redundancy and a dismissal for serious misconduct.

This case law results in avoiding the systematic adjustment by the social security authorities of the compensation under compromise agreements paid to the employees who have been dismissed for serious misconduct. If the employer can prove the compensatory nature of the settlement amount, it can avoid the adjustment.

This applies to a compromise agreement which, according its obvious, specific and unambiguous terms, provides that:

> The employer did not intend to waive the claim that there had been serious misconduct by the employee,

> The serious misconduct was indeed the cause of the dismissal

> No notice had been performed and the compensation under the compromise agreement did not include either pay in lieu of notice or other components subject to social security contributions.

Nonetheless, in one of the three cases, the trial judges whose decision has been approved by the supreme court, have validated the adjustment by the social security authorities of a compromise agreement following a dismissal for serious misconduct.

It results from the above that care should be taken as much in the negotiation as in the drafting of a compromise agreement to avoid on the one hand exceeding the tax and social security thresholds, which risk to be expensive and on the other hand to avoid the risk of an adjustment by the social security authorities.