France: The Risks Of Co-Employment Liability In France

Against a background of financial crisis and corporate restructurings, French workers have taken to the ramparts. Employees dismissed "for economic reasons" have, in increasing numbers, been filing complaints under the Labor Code, collective bargaining agreements and case law of the French Supreme Court aimed at extending liability for wrongful terminations to shareholders and especially investment funds, particularly in the context of collective economic dismissals. Employees have been using two theories—co-employment and group—to go beyond the operating company and tap into the financial resources of their former employer's deep-pocketed backers.

Evolution of the French Supreme Court's position on the notion of co-employment

Co-employment has been defined as a relationship between two or more employers in which each has actual or potential legal rights and duties with respect to the same employee. Unlike a single employer-employee relationship, in which the employer bears certain responsibilities to employees, including with respect to termination of employment, in a co-employment situation, these responsibilities may be shared.

The terms of leveraged buyout (LBO) transactions usually specify that, along with the managers' takeover of the company, the investment fund or, technically speaking, its management company, may, in certain cases, direct the company's strategy (often to an extent greater than could a simple shareholder), as well as actively participate, de facto or de jure, in the company's management (through positions held by its representatives in the holding company's management bodies).

It is in this context that there has been an increase in actions by dismissed employees seeking judicial recognition of the "co-employer" status of a parent company, an ultimate controlling company or even a management company. Plaintiffs have been encouraged by court rulings finding that the question of whether a defendant is a co-employer is a factual one that looks to the nature of the relationship, not simply to a corporate organizational chart. "Confusion of interests, activity, management and operating methods" can be sufficient, the court has held. (Cass. soc. June 9, 2004, No. 01-43802; June 26, 2008 No. 07-41294). Through this type of action, employees are trying to obtain additional damages—and even reinstatement in the company recognized as co-employer.

After several decisions on the merits accepting such claims, and thus recognizing the existence of co-employment outside of a formal -subordinate relationship, the French Supreme Court, in its Molex decision (Cass. Soc. July 2, 2014, No. 12-15.208), sent the pendulum swinging in the other direction, stating that:

It is interesting to note that since this fundamental ruling in which the French Supreme Court clearly attempted to put a stop to actions on the grounds of co-employment, lower court judges have resisted (see, e.g., Paris CA March 20, 2015, No. 09-09794) by continuing to recognize situations of co-employment.

Meanwhile, the French Supreme Court, for its part, is staying the course and, until now, has quashed every decision recognizing co-employment referred to it.

Accordingly, the following can be noted:

• The fact that a subsidiary is treated in practice as a simple establishment without administrative or accounting structure and without real financial and management autonomy does not establish a confusion of interests, activities and management between the two companies;
• The domination of one company over another does not mean that there is interference in the dominated company's economic and social management; thus, co-employment was not established when the dominating company "suddenly [withdrew] its clientele from the production company without any economic alternative being presented and a fortiori implemented";
• Having the same president for both companies in issue and the intervention of the parent company's general manager in the subsidiary do not constitute circumstances sufficient to establish the confusion of interests and management;
• The granting of credit by a supplier demonstrates a community of interests and activity, not economic domination;
• The fact that a subsidiary does not have autonomy in administering orders, sales, invoicing, personnel and payroll due to its integration in a global system managed by the parent company does not constitute interference by the parent company in the subsidiary's economic and social management.

Redeployment obligation in groups

Prior to any economic dismissal, an employer that is part of a "group" is required to search within that group for positions available to redeploy the employee whose dismissal is being contemplated. Failure to comply with this obligation will result in the dismissal being considered as having no real and serious cause, and the employee can then claim damages (minimum six months' salary, provided the employee has at least two years' seniority and the company employs at least 11 employees).

It is therefore particularly tempting for an employee dismissed for economic reasons by a group controlled by an investment fund (which is itself managed by a management company) to want to extend the notion of group to all the other companies in the fund's portfolio (and even to all the companies in the portfolios of other funds managed by the same management company) in order to invoke a claim of breach of the redeployment obligation.

In the absence of a legal definition of the notion of group in the French Labor Code, reference should be made to (i) the definition given by the French Supreme Court (decisions of April 5, 1995, Nos. 93-43866 and 93-42690) on the redeployment obligation, in which it said that the redeployment possibilities must be "searched for in the group among the companies whose activities, organization or place where business is carried on permit them to permute all or part of the personnel" and (ii) the various definitions given by the French Commercial Code (Articles L 233-1 and L 233-16), which notably refer to the capital links existing between the companies within a group but, also notably, to the notion of dominant influence (which is not necessarily subordinated to capital ownership). For example, although the management company is not a shareholder in the companies of the portfolio of the investment fund which it manages (only the fund is a shareholder thereof), it very often exercises a significant influence in these companies, particularly when the funds' investment is a majority investment.

It was on the basis of the notion of control as defined by the French Commercial Code (notably control by the exercise of voting rights and by dominant influence) that employees claimed recognition of a group that included their company (Sublistatic) and the management company of the shareholding fund.

In dismissing their claim, the Douai Court of Appeal (November 27, 2009, No. 08/03825) found that the management company did not hold any Sublistatic shares and was only the manager of the open-end investment fund.

This decision has been found objectionable by certain legal scholars insofar as it does not take into account the particularism of the shareholding structure of funds and, notably, the fact that an open-end investment fund, which quite often holds the majority of the capital and does not have legal personality, is represented vis-à-vis third parties by the management company that acts in its name and on its behalf and exercises its voting rights in the companies belonging to its portfolio.

However, even if a group within the meaning of the French Commercial Code is recognized as existing between an LBO company, a management company and an open-end investment fund, does this group constitute a "group" within the meaning of the redeployment obligation set forth in the French Labor Code?

The Versailles and Douai Courts of Appeal answered "no" to this question. The grounds of the Versailles Court of Appeal's decision in the SGD case (Versailles Court of Appeal, February 3, 2010, Nos. 09-09068 and 09-09154, SA SGD v/SAS Cognetas) are interesting in that the court concluded that the elements provided by the claimant did not allow it to "find a directional convergence, a continuity of interest between [the management companies and the target company] giving rise, in view of the place where business is carried on, to a possibility of permutation of all or part of the personnel."

The Grenoble Court of Appeal (Grenoble CA September 12, 2011, No. 10/00926) more recently took into account the specificity of open-end investment funds and the specific mission of a portfolio management company, recalling that "the companies managing open-end investment funds and companies in which these funds have been invested do not constitute a group in the sense where a group includes companies whose activity, organization or place where business is carried on permit the permutation of all or part of the personnel."

Therefore, the courts have confirmed that—as between a management company and the companies in which the funds it manages have shareholdings—there is no "group," as appreciated by the labor law, for purposes of imposing redeployment obligations.

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