In Société Orange (decision QPC 28-4-2017 n°2017-627/628), the French Constitutional Council has ruled that the refusal of the tax authorities to reimburse an employer company’s compulsory social security contributions, made in respect of the grant of conditional bonus (or free) shares where the conditions are not subsequently met (such that the shares never vest), was contrary to the principle of equality as enshrined in Article 13 of the Déclaration des droits de l’homme et du citoyen of 1789.
At the time, the relevant regulations (Article L 137-13 of the French Social Security Code (CSS)) required an employer to make social security contributions on the allocation of ‘free shares’. The contribution was fixed at 10% and due the month following the date of the decision to award the shares. The second chamber of the Cour de Cassation had previously ruled that the employer could not be reimbursed for that contribution, even if the ‘free shares’ never vested.
The company appealed on the basis that linking the employer’s liability to the decision to award the shares (subject to future conditions) infringed the principle of equality when compared to contributions made in respect of remuneration in the form of unconditional bonus shares. The Constitutional Council rejected that argument, confirming that the provisions in the CSS requiring payment of the employer’s contributions before the assignment of the free shares were constitutional. In essence, the CSS did not establish any difference in treatment between the issue of unconditional free shares and conditional shares, merely by reference to the different taxable event dates.
However, the Constitutional Council did identify that the CSS did not prevent the reimbursement of an employer’s contributions in respect of conditional bonus shares where the conditions were subsequently not met and the shares did not therefore vest. In such cases, there was a clear inequality in treatment between, on the one hand, employer contributions made in respect of employees being remunerated by the allocation of bonus shares and, on the other, employer contributions made in respect of employee remuneration that does not ultimately get paid (where the shares do not vest) because certain conditions are not met. In the second scenario, the Council has ruled that the the contributions should be reimbursed to the employer company.
It should be noted, however, that the decision only affects ‘free shares’ granted after 16 October 2007 but before 8 August 2015. This is because the CSS was amended in August 2015 by the so-called ‘Macron law’ which fixed the problem at the heart of the dispute in this case. From that date, employers’ contributions are only due if the employees actually acquire the free shares and are assessed by reference to their market value at vesting. If, therefore, vesting is conditional, the contributions will not be due if the conditions are not met.
The case will be of keen interest to any French employer company that granted, during the relevant period, conditional bonus (or free) shares to incentivise their employees where the conditions were not subsequently met and the shares did not actually vest. Such companies may, if they act quickly enough, be eligible to claim reimbursement of the social security contributions they have made in respect of such grants.