In the event of a dispute between an employer and an employee, the latter can take the matter to the labor court/conseil des prud’hommes. However, resorting to a settlement agreement can allow them to avoid the unpleasantness and uncertain outcome of a trial by reaching an agreement.
Thus, a settlement agreement is an act by which the parties end an existing dispute or prevent a future one.
Settlement agreements offer several advantages, for both the employee and the employer.
A settlement agreement allows the employer to limit the risk of substantial or uncertain compensation awards that the labor court might grant the employee.
For the employee, a settlement agreement has the advantage of providing a negotiable sum of money from their employer, available as soon as possible, all without automatically incurring social security contributions. The settlement payment may, however, be much less than the amount the employee could obtain before the Labor Court.
– The system of statutory severance pay:
Notice pay is subject to social security contributions representing 63% of the employee’s net salary.
The statutory or contractual severance pay is paid by the employer at the same time as the notice period, upon delivery of the final pay statement. This severance pay, if it is paid after dismissal, is generally:
fully exempt from income tax and social security contributions, including CSG and CRDS, up to a limit of €78,456;
– Above €78,456, it is subject to social security contributions of 63%, 8% CSG and CRDS, and income tax.
– From €392,280: it is subject to social security contributions and income tax from the first euro (Reformed since Law of 23/12/2016).
– The settlement payment:
The settlement payment is added to the severance pay by calculating the thresholds.
It is exempt for the portion representing compensation that would otherwise be exempt. In other words, it is not taxable or subject to social security contributions (excluding CSG and CRDS) up to the following limits:
– The amount of the statutory or contractual severance pay,
– 24 months of salary received during the previous year, or up to 50% of the total amount, i.e., the severance pay paid (exemption limit of €235,368 in 2017).
It is subject to social security contributions from the first euro if it exceeds €392,280.
To optimize the tax treatment of the settlement payment and reduce the cost of social security contributions, please contact the Petroussenko Law Firm: