France: Redundancy for economic reasons: definition of economic difficulties
Article L. 1233-3 of the French Labour Code defines what constitutes valid economic grounds for dismissal.
Amongst these grounds are “economic difficulties”, the existence of which may be characterised in one of two ways:
- either by a significant change in at least one economic indicator. This may be a drop in orders or turnover, operating losses or a deterioration in cash flow or gross operating surplus.
- or by any other element likely to justify the existence of these difficulties.
Accounting indicators are defined to assess the extent of the decline in orders or turnover. The duration of these indicators’ downturn is also set out, a distinction being made depending on the size of the company. For instance, where a company with a workforce of 300 or more employees is concerned, the duration of the downturn must be of at least four consecutive quarters compared to the same period of the previous year.
Last June, the French judicial Supreme Court ruled that the duration of the downturn is assessed by comparing order or turnover levels at the date the dismissal is notified with those of the previous year over the same period.
For example, if the redundancy is notified in July 2022, the 4 previous quarters from June 2021 to June 2022 must be compared to the 4 quarters from June 2020 to June 2021. Therefore, a slight increase in turnover in January 2022, for instance, will cause the economic rationale to topple.
In this case, only the criterion of a decline in turnover was invoked.
However, in a September 21st, 2022, ruling, the French judicial Supreme Court held that if the reality of the economic indicator relating to the decline in turnover is not established, the judge must investigate whether the existence of economic difficulties is not characterised by another element. In the case that gave rise to this ruling, the employer had invoked a drop in turnover, but also equity capital of less than half the share capital and a very high level of debt.
Key Action Points for Human Resources and In-house Counsel
It is therefore necessary to be vigilant when motivating the economic rationale for dismissal.
