Economic Difficulties as Basis for Termination (Cass., Soc., June 1, 2022, n° 20-19.957)

The French Supreme Court has just provided very useful guidance for employers on how to secure a valid termination: when justifying a termination on grounds of economic difficulties, the employer can only consider the period immediately preceding the termination. Additionally, if the employer experiences even a small increase in revenues during this period, it is enough to thwart the economic basis for the termination.

French employment law requires a justification before an employee can be terminated; this justification can be either personal or economic. Since 2016, one of the potential economic justifications is that the company has encountered economic difficulties such as a drop in orders or a drop in revenue. In order to be considered as economic difficulties, the required duration of the drop depends on the total number of employees in France:

• One quarter for a company with fewer than 11 employees;
• Two consecutive quarters for a company with at least 11 employees and fewer than 50 employees;
• Three consecutive quarters for a company with at least 50 employees and fewer than 300 employees;
• Four consecutive quarters for a company with 300 or more employees.

The French Supreme Court had examined the issue of economic difficulties before, but the decision of June 1, 2022 is the first time that it analyzed a dispute about their duration. The Court considered a case where an employee had been terminated on July 2, 2017 and challenged the validity of her termination on the grounds that, among others, her employer did not meet the legal requirements because it had experienced an increase in revenues during the first quarter of 2017.

The court of appeals had ruled in favor of the employer. It held that the requirement for a significant decrease in revenues was met, since there was a decrease for four consecutive quarters in 2016 compared to 2015. The court of appeals further ruled that the modest 0.5% increase in revenues in the first quarter of 2017 compared to 2016 was not sufficient to signify a tangible improvement.

The French Supreme Court disagreed with this reasoning, and upheld previous caselaw whereby reasons for termination must be assessed on the date of the service of the termination letter. Applying this principle to the present case, it held that, when evaluating the period of economic difficulties, employers may look neither further back nor further forward, but must assess the relevant difficulties at the time of the termination. Thus, ignoring information about the company's performance in 2015, the court held that even the small increase in revenue of 0.5% in the first quarter of 2017 was sufficient to break the streak of revenue declines and that therefore the statutory requirement for termination due to economic difficulties was not met.