a. Factors that Determine Who is an Employee and Who is an Independent Contractor
The notion of “employee” is not defined by French law. French case law defines it by defining the employment contract. An employment contract is defined as an agreement by which an individual works for another person (natural or legal), under the latter’s subordination, for which s/he receives remuneration.”
Therefore, three factors typify an employment contract: (1) discharge of tasks (2) remuneration and (3) relationship of subordination. As the first two factors are found in almost every agreement, a subordination relationship is the only factor, which allows to differentiate employees from other service providers, including independent contractors.
Article L.8221-6-1 of the French labour Code defines independent contractors as follows: “is presumed to be an independent contractor, any individual whose working conditions are defined exclusively by himself or in a contract, in conjunction with his customer”. The French labour Code also provides that individuals who are registered as self-employed service providers are presumed not to be linked to their customer with an employment contract in the execution of their activities. However, this is a refutable presumption, as the same article provides that the existence of an employment contract may however be established when the same registered individual provides services under conditions which place him in a permanent relationship of subordination with respect to his customer.
Therefore, the predominant factor, which differentiates employees from independent contractors, is the subordination relationship.
The French Supreme Court has ruled that a “subordination relationship is characterized by performance of duties under the authority of an employer who has the power to give orders, monitor execution of assigned duties and punish his subordinates’ breaches of duties” (Cass. Soc. 13 November 1996, n° 94-13187). Therefore, independent contractors should be “independent” when it comes to carrying out their duties. They carry out their work assignment autonomously, without receiving permanent instructions and/or orders from the company. Therefore, the key factors taken into account by the courts consist of the frequency of the instructions, the monitoring of performance and possible sanctions.
Other criteria, some of which are listed below, allow the courts to ascertain the existence of a subordination relationship. In their assessment, the courts use a set of factors. A single factor is not sufficient or decisive.
Working Hours: employees should comply with company working hours or time under penalty of disciplinary measures. On the contrary, independent contractors are not subject to company working hours, but have the latitude to arrange their working time as they wish.
Duties & Remuneration: employees have a permanent task for which they receive a regular monthly salary. Whereas, when a company calls upon an independent contractor, it is for his specific skills and a work assignment that the company cannot accomplish with its own staff. As for the remuneration, independent contractors are usually paid lump sum remunerations upon task accomplishment.
Place of Work & Work Equipment: employees usually work on company premises. The company should provide them with all necessary work equipment and materials. To the contrary, independent contractors should have their own work equipment. They could occasionally use company facilities but they mainly carry out their work by their own means. Independent contractors also have their own office, business card.
Exclusivity or Portfolio of clients: employees usually work for one employer while the independent contractor has a portfolio of clients.
Registration: employees are declared and registered with various institutions, notably the social security agency, by their employer who pays the relevant social security contributions on their behalf. To the contrary, independent contractors have to personally register as self-employed independent contractors and pay their own tax and social security contributions.
b. General Differences in Tax Treatment
Independent contractors are also subject to the income tax on their profits and can deduct their professional expenses from their professional income. They also have a different social security scheme. Independent contractors should pay their own contribution, which is slightly more costly than if they were employees. The main difference is that unlike employees, who are eligible for the Unemployment Fund which allows them to receive unemployment allowances paid by this fund in case of dismissal, independent contractors are not protected against this risk and do not contribute to this fund.
c. Differences in Benefit Entitlement
As for social security contributions, a company directly pays its own share and deducts the employee’s share from his salary. As for benefit entitlements, a company has the obligation to affiliate its employees with relevant pension and healthcare institutions and pay its dues. Employees are subject to the income tax on their salaries.
d. Differences in Protection from Termination
French employment law is protective of employees. There is no concept of “employment at will” under French law, which means that any termination should be justified with valid grounds. In other words, termination of the employment contract is only possible if there is “serious and real cause” for termination. Termination of employment could be for personal reasons (e.g. poor performance, misconduct, etc.) or for economic reasons (e.g. redundancy as a result of the company’s leading to the job’s elimination or a significant change in the employment contract). The termination procedure is also heavily regulated with obligatory timelines that must be followed. Once terminated (except in case of termination for serious/gross misconduct), the employee is entitled to a legal “severance package” which consists of dismissal indemnity, paid notice period and paid holidays indemnity. If the termination is on economic grounds, depending on the size of the redundancy plan, the employee also benefits from accompanying measures. Any unjustified termination would be deemed unfair, allowing the employee to sue the company and seek damages.
There are also specific protection periods for certain employees (e.g. pregnant employees, employees on occupational sick/accident leave, employees with a staff representative mandate). Termination of employment during the protection period is either impossible or only allowed under specific circumstances, under penalty of being null and void.
As for independent contractors, unlike employees, they do not benefit from any specific protection against termination, as it is not employment law, but rather commercial law, which applies to the services agreement. French case law stresses that termination of services agreements should not be abusive and the contractual notice period should be respected. Most services agreements are concluded for a definite period of time and contain a termination clause, which allows each party to terminate the services agreement, provided that a certain notice period is respected.
In a decision dated 22 January 2013, the French Supreme Court brought a certain level of protection to independent contractors. In this decision, the Court held that in case of non-compliance by the customer with the contractual notice period, the independent contractor is entitled to an indemnity amounting to the compensation he would have received until the term of the services contract. In this case, a services agreement for cleaning company premises was concluded for a period of one year, renewable tacitly. The services agreement provided that each party could terminate it by giving three months’ notice before the renewal date of the agreement (i.e. by June 30th at the latest). The customer gave notice of termination by a letter dated July 4th (with 4 days of delay). The Court held that since the contractual termination notice was not fully respected, the customer had to pay to the independent contractor the sum of 216,463 euros, equivalent to one year of services.
e. Local Limitations on Use of Independent Contractors
Recourse to an independent contractor should be justified by the latter’s specific know-how and skills, in order to carry out specific work that the company cannot accomplish with its own staff.
f. Leased or Seconded Employees
Companies could use different mechanisms to get a specific task done. However, in each case, the user company must remain vigilant not to put the employee in a subordination relationship so that a co-employment situation with the user company could not be claimed by the employee.
Recourse to temporary employees (“intérimaires”) is only possible to carry out a specific temporary task, called a “mission” and in cases exclusively specified by law (e.g. to replace an absent employee, temporary increase in business activity, seasonal work, etc.). The temporary employee is employed by the temporary work agency, which puts him at the user company’s disposal for a specific period of time. The main advantage of this mechanism is that as the user company is not the direct employer, it does not have to deal with related employment issues with respect to the temporary employee. The temporary employee is paid directly by the temporary work agency, which then invoices the user company for the rendered services.
The lending company puts its employee at another company’s disposal to perform a specific task or mission. The lending company and the user company must sign an agreement which stipulates the duration of the labour leasing, the identity and qualifications of the employee, the method of determining wages, payroll taxes and professional fees invoiced by the lending company to the user company. Also, a rider to the “lended” employee’s contract shall also be entered into, including some mandatory statements. Labour leasing is only valid if it is not lucrative. It shall be accordingly distinguished from subcontracting, an operation which does not only consist of posting employees (see below). The lending company can only invoice the user company for wages, social security fees and professional expenses incurred by the employee. Lucrative labour leasing is illegal, entailing heavy criminal and civil liabilities for the company. During the leasing period, the employment contract between the employee and the lending company is neither terminated nor suspended. The employee continues to belong to the staff of the lending company and remains paid by the latter. At the end of the labour leasing period, the employee regains his initial position within the lending company or if said position is no longer available, a similar position.
The company calls upon a subcontractor to perform a clearly defined task that it cannot perform with its own staff, due to either economic or technical reasons. The subcontractor remains the sole employer of its staff. The subcontractor supervises and remunerates its staff and assumes all responsibility for carrying out the work assignment. The subcontractor is afforded a lump-sum remuneration for the accomplishment of the task, regardless of the number of working hours and employees involved. The subcontractor has its own work equipment, tools, facilities and clientele portfolio. This mechanism is very close to how independent contractors function.
g. Regulations of the Different Categories of Contracts
French employment law has regulated each category of employment contract (even though common roots could be found in some of them). Failure to comply with the legal requirements for each contract can result in civil and criminal liability for the company. Independent contractors are governed by civil or commercial law.