Since assuming office in May, French President Emanuel Macron has already followed through on his promise to reform France’s cumbersome labor laws, signing some measures into law last month as part of a package of executive orders. In addition, France’s draft 2018 budget focuses on cutting taxes to boost economic activity.

The reforms are intended to tackle unemployment, which, at 9.5%, is double that of the other major European economies, and stimulate France’s economy by providing a simpler set of rules for employers and investors. At some 3,000 pages long, the French Labour Code is seen by many as a straitjacket for business; it and national collective bargaining agreements often impose strict rules that prevail over the terms of an employment agreement.

For example, any uncertainty regarding a termination or disciplinary action will be judged to the employee’s advantage. More than 95% of employees in France are covered by collective bargaining agreements, regardless of whether the employer operates in a unionised environment.

The Reforms

The most significant changes to the Labour Code relate to rules on termination of employment, employee representation and collective negotiation. However, the reforms also provide for greater flexibility in the use of fixed-term and temporary contracts.

Dismissals and negotiation. Currently, the minimum severance for an employee with at least two years’ service is six months’ pay, and the amount of damages that a labor court can award for unfair dismissal is unlimited.

With the reforms, the minimum for an employee with at least two years’ service will be reduced to three months — lower at companies with fewer than 11 employees. And the maximum damages that can be awarded under the reformed law will range from one to 20 months’ gross pay, depending upon length of service.

Unlimited damages may still be awarded in certain circumstances, including where the dismissal amounts to discrimination, or as a result of whistleblowing (with respect to criminal activity), sexual harassment or bullying.

At present, whether a dismissal on economic grounds is determined to be fair is made by reference to the economic situation of the group, or the relevant division of the group to which the employer belongs, on a worldwide basis. This means that if a French subsidiary makes consistent losses but belongs to a group that is profitable worldwide, dismissals from within that subsidiary that are challenged in court are likely to be judged unfair, resulting in awards of damages.

With the reforms, the economic grounds for determining the fairness of dismissals will be assessed by reference solely to group companies that are established in France and operate in the same business sector.

Contingent Flexibility. Under the reforms, certain statutory rules on the use of fixed-term employment contracts (e.g., maximum duration, maximum number of renewals, minimum waiting period between two successive contracts relating to the same role) will only apply where there is no sector-wide collective bargaining agreement determining the applicable rules.

In the construction sector, it has been possible to hire staff under project-based employment contracts (contrats de chantier). These are indefinite-term contracts expressly linked to the completion of an identified building project, which can fairly be terminated without carrying out redundancy consultation procedures, when work on the relevant site/project is completed. The reforms provide that sector-wide collective agreements will be able to authorise the use of such contracts in any business sector. Such agreements would need to define the circumstances in which project-based contracts can be used, and would have to be “extended” to mandatory sector-wide application by administrative decree.

The corporate tax burden. The French government also unveiled its draft budget bill for 2018 in the National Assembly, which includes tax measures aimed at increasing the competitiveness of French businesses and reducing the tax burden for individuals and companies. They include a progressive reduction of the corporate tax rate from 33% to 25% by 2022.

They also include a reduction in the Competitiveness and Employment Tax Credit (crédit d’impôt pour la compétitivité et l’emploi, or CICE).

CICE is a tax credit that is available on salaries below a certain threshold amount which aims to decrease the overall social security contributions paid by employers. Currently, the rate of the CICE is 7% of paid qualifying salaries. Under the draft budget, the rate of the CICE would be reduced to 6% for salaries paid during calendar year 2018.

Beginning from 2019, the CICE would be replaced by a permanent reduction of social security levies due from employers, under a mechanism to be provided for in the Social Security Financing Law for 2018. Such a reduction would amount to 6% for salaries paid up to 2.5 times the amount of “minimum salaries” (SMIC) and to 9.9% of salaries equal to the SMIC.

The CICE tax credit was former President Francois Hollande’s flagship pro-business tax measure, and was intended to reduce the cost of employing workers. While the reduction in the tax credit will be a disappointment, it should be set off by the corporate tax reduction.

As a result of these reforms, Macron has suffered the greatest slump in approval ratings of any new French president. This is unlikely, however, to discourage the government from pursuing reforms which are badly needed to enable France to compete with its European partners, the UK and Germany.