The Contrat Nouvelles Embauches or "New Hiring Contract" (the "CNE") represents a revolution in the world of French employment contracts.

Indeed, the U.S. law rule of "at will-employment"1, which allows employee discharge for no reason, was not a familiar notion in French law until an ordinance of August 2, 2005 (the "Ordinance"2) created the CNE, which is a type of indefinite-term employment contract under which the employee is more or less "employed at will" for the first two years.

The general rule under French employment law remains that anyone is entitled to be hired under an indefinite-term employment contract, which, after a fairly short trial period (no more than six months), cannot be terminated by the employer without "real and serious" cause and due process.

As for fixed-term employment contracts, which terminate automatically upon their term, they are only authorized in specific cases. If they fail to comply with strict requirements, they are then deemed to be entered into for an indefinite term.

As an exception to these general rules, the Ordinance now provides that any company employing up to 20 employees in France can hire anyone under a CNE, which allows the employer to terminate the contract without cause, provided it (i) sends a termination letter to the employee by registered mail with return receipt requested, (ii) complies with a short notice period – except in certain circumstances –, (iii) pays the employee an indemnity equal to 8% of all remuneration due to him or her up to the termination date, and (iv) pays an indemnity equal to 2% of same to the unemployment fund.

Recently, the flexibility and reliability thus offered to small or medium-sized businesses for the first two years seemed to be jeopardized owing to a series of Labour tribunal decisions in favour of the employee in disputes dealing with the CNE’s termination within said two-year period. However, these lower courts’ decisions can be easily explained by the specific circumstances of these cases (3).

More alarming for the future of the CNE are pending procedures on the issue of the Ordinance’s compliance with international rules (1). Given these procedures and within the context of the coming presidential elections, the future of the CNE seems uncertain (2).

Yet, for employers, the CNE remains a useful tool, whose legal requirements need to be highlighted (3).

1. Compliance With International Rules

Although the Conseil d’État3 held that the Ordinance complies with international rules (1.1), procedures on this issue are pending both before the Paris Court of Appeal and before the World Labour Bureau (1.2).

1.1 Current compliance

The international rules at issue are contained in the World Labour Organization treaty #158 of June 22, 1982 concerning termination of the employment contract by the employer, which France ratified by a law of December 30, 1989 (the "Treaty").

Pursuant to the Treaty, an employee cannot be validly dismissed without cause4 and due process. However, Article 2.2 (b) of the Treaty provides that any member state can exclude from the scope of all or part of the provisions of the Treaty employees under a trial period or who do not have sufficient length of service, "provided that such minimum length of service is set in advance and reasonable".

It seems that it was the intention of the signatories of the Treaty to leave it up to each member state to decide what is meant by "reasonable length of service".

On the basis of these provisions as well as other international rules, constitutional rules and general law principles, several trade unions filed an action before the Conseil d’État requesting that the Ordinance5 be declared null and void.

The issue was whether a two-year time period during which the CNE can be terminated without cause is "reasonable" within the meaning of the Treaty, considering the purpose of the Ordinance, which is to encourage employers of 20 employees or less, in a context of a chronically high unemployment rate, to hire individuals having little to no professional references by facilitating termination during the first two years of employment.

In its decision of October 19, 2005, the Conseil d’État held that "given the goal of the exception [set forth in Article 2.2 (b) of the Treaty] and given the fact that the CNE is an indefinite-term employment contract, the two-year time period during which standard substantial and procedural dismissal rules are set aside can be considered reasonable within the meaning of these provisions."

1.2 Pending compliance procedures

Notwithstanding the decision of the Conseil d’État, other procedures were initiated against the Ordinance on the basis of its alleged non-compliance with the Treaty, both before other French courts (1.2.1) and before the World Labour Bureau (1.2.2).

1.2.1 The pending "Longjumeau" case

In the midst of the national debate on the Contrat Première Embauche (please see point 4 below), a Labour tribunal in a small town called Longjumeau became famous after ruling against the validity of a CNE on the grounds that the Ordinance does not comply with the provisions of the Treaty. Consequently, the tribunal held that the CNE at hand had to be construed as an indefinite-term employment contract.

This lower court decision, in contradiction with that of the prestigious Conseil d’État, was warmly praised by some and highly criticized by others.

This case is now pending on appeal. After the employer filed an appeal before the Paris Court of Appeal, the local Prefect moved to challenge the jurisdiction of said Court of Appeal over the issue of compliance of the Ordinance with the Treaty on the grounds that it deals with administrative law. Since, by decision of October 20, 2006, the Paris Court of Appeal nevertheless contended that it had jurisdiction over this issue, the Tribunal des Conflits6 had to arbitrate whether judicial or administrative courts should decide if the Ordinance complies with the Treaty, and ruled in favour of the judicial courts on March 19, 20077.

The case will therefore go back to the Paris Court of Appeal and, ultimately, will be heard by the Cour de Cassation. Although this would give rise to an awkward situation, the Cour de Cassation could take a different stance than that of the Conseil d’État and decide that the Ordinance does not comply with the Treaty. If so, all CNEs, including those entered into before its decision, would risk being construed as standard indefinite-term employment contracts.

Nevertheless, until the outcome of the current procedures is known, the CNE complies with the Treaty, as ruled by the Conseil d’État, employers only facing a potential risk that it might later on be ruled a standard indefinite-term employment contract.

1.2.2 Pending claim before the World Labour Bureau

In August 2005, a French trade union called FO also filed a claim before the World Labour Bureau on the grounds that the CNE does not comply with the Treaty.

Yet, since each member state can freely decide what the notion of "reasonable length of service" encompasses, this claim will probably be rejected by the World Labour Bureau.

2. Future Of The CNE

Aside from the legal arguments raised –appropriately or not– against it, the future of the CNE is also uncertain from a mere political standpoint.

Each left-wing presidential candidate has indeed declared that he or she would have the Ordinance repealed were he or she to be elected President in May 2007.

A draft law repealing the CNE was already proposed by socialists in February 2007, and rejected by a majority of the members of the Assemblée Nationale (House of Representatives).

Although, according to the current government, statistics8 show that the CNE helped create new jobs, these statistics are challenged by anti-CNEs.

The impact of the CNE on job creation will have to be clarified since the Ordinance itself stressed the importance of the Ordinance’s efficiency for job creation purposes9.

In any event, it must be stressed that any change in the law should not affect CNEs entered into before the new law is enacted.

3. Current Requirements Of A CNE

In order for a CNE to be valid, certain requirements must be met (3.1 and 3.2).

Provided such requirements are met, the CNE can easily be terminated by the employer during the first two years without justification (3.3).

3.1 Formal content of a CNE

A CNE (i) must be entered into in writing, (ii) must specify that it is a "new hiring contract" governed by the ordinance #2005-893 of August 2, 2005 and (iii) as a practical matter, must contain provisions with respect to its termination that comply with the Ordinance.

As regards the "consolidation" period of two years, the Questions & Answers indicate that it is possible to provide for a shorter period since such provision would be more advantageous to the employee than the Ordinance.

If the employee is hired on a part-time basis, the CNE must also contain the required provisions of a part-time employment contract.

3.2 Rules with respect to the entering into of a CNE

Except for specific jobs for which it is forbidden to enter into a CNE (3.2.2), companies with 20 employees or less can freely conclude such type of employment contract (3.2.1)10. In light of existing case law on CNEs, one could wonder if the existence of a "new hiring" is not another prerequisite (3.2.3).

3.2.1 20 employees or less

In order for a company to be entitled to enter into a CNE, the Ordinance requires that its headcount not exceed 20 employees as of the CNE’s execution date.

In the Questions & Answers, the French government confirmed that it is only on the date the CNE is executed that the headcount must meet this maximum of 20 employees.

The number of employees is computed in compliance with the provisions of Article L.620-10 of the Labour Code, i.e.:

  • each employee under an indefinite-term employment contract counts for one employee;
  • any employee replacing another is not taken into account since only the replaced employee is accounted for;
  • as regards employees under a fixed-term employment contract, as well as intermittent and temporary workers, each of these employees are accounted for pro rata based on their presence over the last 12 months;
  • part-time workers are taken into account pro rata based on their amount of working time as compared to a full-time worker.

A company with 20 or less employees is eligible to enter into a CNE even though it is part of a group with more than 20 employees in France, provided there is no "social and economic unity" among several companies, which would compel to add up headcounts in each company.

According to the French administration, a foreign company with more than 20 employees abroad, but directly employing no more than 20 employees in France is eligible to conclude a CNE. Therefore, large foreign companies having no more than 20 employees in France can directly hire employee(s) in France under a CNE and thus enjoy employment flexibility to a certain extent.

3.2.2 Situations where the conclusion of a CNE is forbidden

Whenever it is possible to enter into a "seasonal" employment contract (contrat saisonnier) or a "customary" fixed-term employment contract (contrat d’usage) within the meaning of Article L.122-1-1 (3°) of the Labour Code, it is forbidden to enter into a CNE.

In addition, pursuant to Article 2 (3°) of the Ordinance, following termination of a CNE by the employer within the first two years from its execution date, a new CNE can be entered into between the same employer and the same employee no sooner than three months following termination of the previous CNE.

As a supplement to this provision of the Ordinance, case law describes in which other situations the conclusion of a CNE is inappropriate (see 3.2.3 below).

3.2.3 Notion of "new hiring"

The Ordinance provides that "employers […] that are employing no more than 20 employees can, with respect to any new hiring, enter into an employment contract called "new hiring contract"".

Neither the Ordinance nor case law define the meaning of a "new hiring". The Ordinance only requires that whenever a CNE is terminated by the employer within the first two years, the same employer cannot enter into another CNE with the same employee before the end of a three-month waiting period. The Questions & Answers indicate that it is not possible to sign an amendment with an employee currently under an indefinite-term employment contract in order to have him or her accept a CNE since the stated purpose of hiring a new employee under a CNE would not be fulfilled in that case.

Consequently, it seems that it would be possible to re-hire any former employee under a CNE, provided the aforementioned rules are complied with. For example, entering into a CNE following a lawful fixed-term contract with the same employee is not expressly forbidden. However, in view of existing case law11 and considering the stated objectives of the Ordinance, one should be cautious of the situation where a CNE follows another employment contract with the same employee.

a) Case law

  1. Decision of the Longjumeau Labour tribunal of February 20, 2006

    2. In this case, the employee had been hired under an indefinite-term employment contract by a first company "A". This contract was terminated by company A on the last day of the employee’s trial period. The very same day, he was hired by a second company "B", actually linked to the first company12, to perform the same duties, but under a CNE. Approximately one month later, company B terminated the CNE by hand-delivering a letter to the employee instead of notifying such termination by registered mail with return receipt requested as required by the Ordinance.

    The Labour tribunal found that, given all of the (intricate) circumstances of this case, the employer had abused its rights to enter into and terminate a CNE. As a result, it held that the CNE’s termination had to be construed as an unfair dismissal entitling the employee to receive damages. Companies A and B were thus each sentenced to pay approximately €8,000 to the employee.

    In this case, it seems clear that the termination of the first indefinite-term employment contract during the trial period and the execution of the CNE on the same date were closely connected. Hence, the underlying rationale of this decision could be that since company A had terminated an indefinite-term employment contract in order to re-hire the same employee under a CNE through company B, this CNE had no justification as it did not achieve a "new hiring". Similarly, the Questions & Answers indicate that it would be unlawful to enter into a CNE by amending a standard indefinite-term employment contract with the same employee.

  2. Decision of the Longjumeau Labour tribunal of April 28, 2006

    3. In this case, an employee had been hired under a fixed-term employment contract that, according to the Labour tribunal, did not meet the legal requirements for such a contract to be valid and was therefore construed as a standard indefinite-term employment contract by the tribunal. The day after the first contract’s initial term (before it was construed as an indefinite-term contract by the tribunal), a CNE was concluded by the same employer with the same employee. This CNE was terminated by the employer within the two-year "consolidation" period.

    Although in this case the Longjumeau Labour tribunal mainly held that the Ordinance does not comply with the Treaty, it also argued that in any event, re-hiring under a CNE an individual who had previously been hired under an indefinite-term employment contract breached the Ordinance’s provisions pursuant to which the CNE must achieve a new hiring. The Longjumeau Labour tribunal therefore awarded the employee €1,400 in damages in connection with procedural non-compliance and €10,000 in damages for unfair dismissal.

    In other terms, according to the Longjumeau tribunal, since the initial fixed-term employment contract was unlawful, it was in fact an indefinite-term employment contract; and, as we further understand, since this contract was not properly terminated for cause by the employer, the employee should have remained employed under an indefinite-term employment contract. Hence, there was no justification for a CNE.

  3. Decision of the Grenoble Labour tribunal of May 19, 2006

In this case, the employee had been employed as a temporary worker within company "A" under two successive contracts over a time period of two months. The Grenoble tribunal considered that these contracts were unlawful and therefore had to be construed as a single indefinite-term employment contract. Company "B", with which company A formed a social and economic unity according to the tribunal, thereafter hired the same employee under a CNE whose termination occurred within the first two years, at a time when the labour physician had required an adaptation of the employee’s working conditions in view of his health problems.

The Grenoble Labour tribunal found that this CNE had been concluded by company B in order to circumvent the law and in fact allow company A to keep employing the concerned employee. Both companies were held jointly and severally liable to pay €1,50013 in damages to the employee for unfair dismissal14.

We understand that company A should have kept the employee under an indefinite-term employment contract. Consequently, the tribunal ruled the CNE null and void and held that, due to the existence of an economic and social unity between company A and company B, the employee was in fact dismissed without cause by company A.

b) Guidelines to be followed

Although the rationale behind these decisions is not always clear and is sometimes subject to severe criticisms, said decisions highlight situations where the conclusion of a CNE with an employee would be unlawful (or at least, not recommended) due to a past succession of other employment contracts with the same employee.

The Questions & Answers clearly indicate that it is not possible to sign an amendment with an employee currently under an indefinite-term employment contract so as to have him or her accept a CNE since the stated purpose of hiring a new employee under a CNE would not be fulfilled in that case.

Likewise, if an employee is currently employed under an indefinite-term employment contract (or an unlawful fixed-term or temporary work contract, which amounts to the same), it is not advisable for an employer to terminate such contract (or consider it terminated upon its term when it comes to an unlawful fixed-term or temporary work contract) and then conclude a CNE with the same employee since the courts would likely view such operation either as a fraud to rules applied to indefinite-term employment contracts, or as an abuse of the right to enter into a CNE, or as a breach of the CNE requirement of a "new hiring".

Although in the Questions & Answers, the French administration specified that a CNE can follow a lawful fixed-term employment contract or temporary work contract15, one should also be cautious when contemplating hiring an employee under a CNE after a fixed-term or temporary work contract with the same employee has expired. Although a waiting period of three months is mandatory by law only between two CNEs with the same employee, it should be checked on a case-by-case basis if it is not preferable to also abide by this three-month waiting period when a CNE follows a valid fixed-term or temporary work contract with the same employee or vice versa.

Rules with respect to the termination of a CNE by the employer within the first two years

A CNE can be terminated by the employer for no reason during the first two years. The employer is under no obligation to state the grounds for such termination.

In addition, the dismissal procedure is entirely set aside in the event of the termination of a CNE by the employer. However, the Ordinance prescribes that the employer must comply with a few procedural requirements.

3.3.1 A simplified procedure

Almost all requirements of a dismissal procedure are set aside in the event of the termination of a CNE. The only procedural requirements are the following:

  • The termination letter must be sent to the employee by registered mail with return receipt requested16;
  • provided the employee has a length of service of at least one month and his or her contract is not terminated for gross misconduct, he or she is entitled to a notice period of two weeks if the contract is terminated within six months from its execution date, or one month if the contract is terminated after six months;
  • provided his or her contract is not terminated for gross misconduct, the employee is entitled to an indemnity equal to 8% of the total gross remuneration due to him or her since the CNE’s execution date17. (In addition, 2% of the same total gross remuneration must be paid by the company to the unemployment fund);
  • in the event where the termination is based on the employee’s misconduct, the standard disciplinary procedure must be followed.

If the employee resigns during the consolidation period, he or she is not entitled to an indemnity. Although the Ordinance does not address this issue, it is recommended to provide for a notice period in the event where the employee resigns.

3.3.2 No justification needed

a) No requirement of a "real and serious" cause for termination

The main advantage for the employer of a CNE over an indefinite-term employment contract is that it can be terminated without cause for the first two years as from its execution date. In other terms, if the employer does not state any ground for termination in the termination letter, it does not entitle the employee to obtain damages for wrongful termination.

Although it is quite similar to a trial period, the time period of two years as from the start of the CNE is called a "consolidation" period and is not, technically, a trial period.

Upon expiration of the consolidation period, the CNE becomes a standard indefinite-term employment contract that cannot be lawfully terminated without cause nor without a proper dismissal procedure.

b) The termination must nevertheless be free of abuse and discrimination

Although the consolidation period must, in theory, be distinguished from a trial period, the same limits to the employer’s freedom to terminate the contract should apply both in the event of the termination of a CNE and in the event of the termination of a trial period18.

Therefore, the employer should not abuse its right to terminate the CNE during the consolidation period nor discriminate against the employee when terminating the CNE during this period.

In order to prevent any potential challenge on discrimination grounds, it is usually recommended to state an objective ground for termination in the termination letter. Such ground should also be independent from any fault on the part of the employee so as to also avoid a disciplinary procedure.

c) Protection of staff/union representatives and other specific protections

If an employee under a CNE is for example elected as staff delegate during the consolidation period, his or her CNE cannot be terminated during this period without a prior authorization from the Labour administration.

Other protections (e.g. in the event of pregnancy or a work-related accident or illness) also apply during the consolidation period.

4. Conclusion

Although this is open to debate, it seems that the CNE has a positive effect on the small or medium-sized companies’ fear of employing new people.

In January 2006, the French government therefore tried to extend this type of contract to situations where the employer has more than 20 employees and the employee is less than 26 years old (in such situation, the contract was called "CPE" for Contrat Première Embauche or "First Hiring Contract"). This raised great criticism among French youth who organized nation-wide demonstrations and university strikes for months contending that they were being discriminated against, whereas the government claimed that the CPE was aimed at giving unqualified young people more chances of entering the working world.

The government nevertheless enacted a law of March 9, 2006, which created the CPE, only to decide immediately after that its effects should be suspended, and finally withdraw it a few days later.

Although the legal and political future of the CNE can be questioned, it remains a useful tool for both large foreign companies having few or no employees in France and small or medium-sized French businesses seeking employment flexibility, at least for the first two years.

Footnotes

1. For a summary of this rule: http://en.wikipedia.org/wiki/At-will: "Under English common law, an indefinite term of employment was presumed to be for one year. The at-will rule has its genesis in a rule in Horace Gay Wood’s 1877 treatise on master-servant relations. Wood cited four U.S. cases as authority for his rule that when a hiring was indefinite, the burden of proof was on the servant to prove that an indefinite employment term was for one year. In Toussaint vs. Blue Cross & Blue Shield of Michigan, the Court noted that "Wood’s rule was quickly cited as authority for another proposition. Some courts saw the rule as requiring the employee to prove an express contract for a definite term in order to maintain an action based on termination of the employment. Thus was born the U.S. at-will employment rule, which allowed discharge for no reason. This rule was adopted by all U.S. states. It was not until 1959 that the first judicial exception to the at-will rule was created. Since then, several common law and statutory exceptions to at-will employment have been created. However, in the majority of cases, the at-will relationship remains asymmetrical and in favour of the employer, with the burden of proof on the discharged employee."

2. An ordinance is a Government decision taken within the scope of a specific authorization granted by Parliament. The Ordinance of August 2, 2005 on the CNE was later explained by a document entitled "Questions and Answers on the CNE" (the "Questions & Answers") issued by Government on October 7, 2005.

3. There are two types of courts in France: some dealing with administrative law and others dealing with all other legal issues. The Cour de Cassation is the highest court for "judicial" (or non-administrative) matters; the Conseil d’État is the highest court for administrative matters.

4. Pursuant to Article 4 of the Treaty, such cause must be linked to the employee’s skills or conduct or to the running of the business.

5. An ordinance is a decision taken by Government within the scope of an authorization granted by Parliament. It can be ratified or not by a subsequent law. Until it has been ratified, it remains an "administrative" decision whose legality is to be reviewed by administrative courts.

6. The Tribunal des Conflits is a court made up of both judicial and administrative judges who decide whether "administrative" or "judicial" courts (juridictions administratives ou judiciaires) have jurisdiction over a certain legal issue.

7. The Tribunal des Conflits decided that, since the Ordinance was implicitly ratified by subsequent laws that provide under which terms and conditions individuals, whose CNE is terminated within the first two years, are entitled to unemployment benefits, the Ordinance thus became a law and is no longer an administrative decision.

8. According to statistics issued by government in March 2007, the CNE encourages new hiring by small or mid-sized companies that choose that type of contract to test employees for a longer time period and to prevent a potential decrease in business (Dares Acoss: "le Contrat Nouvelles Embauches Un An Après"). It seems that 850,000 CNEs have been signed since August 2005 (Les Echos, March 20, 2007) and that between 360,000 and 460,000 individuals are currently employed under a CNE (Libération, March 20, 2007). One CNE out of two is terminated during the first year, half of which by the employee (Libération, March 20, 2007).

9. Article 5 of the Ordinance provides that on December 31, 2008 at the latest, a commission of employer and trade unions shall provide its assessment of the use of the CNE and its impact on job creation.

10. When employed under an indefinite-term employment contract, the employee must undergo a "pre-hiring" medical examination during the trial period. Since there is no trial period in the case of a CNE, this examination must be taken before the employee starts working.

11. To the best of our knowledge, the following lower court decisions are the only known decisions that ruled in favour of the employee on CNE termination issues.

12. Both companies jointly owned a third company that performed all human resources tasks, and both companies apparently shared common managers and shareholders.

14. In addition to damages for unlawful temporary work employment contracts and an indemnity in lieu of notice.

15. The Questions & Answers even specify that when a CNE follows a valid fixed-term employment contract, the accrued length of service during the first contract does not count for the purposes of the consolidation period.

16. The time limitation for the employee to file a lawsuit challenging his or her termination is twelve months from the sending of the termination letter provided that such time limitation is specified in the termination letter; if not, such a lawsuit can be filed within thirty years.

17. Upon expiration of a fixed-term employment contract, an indemnity is also due to the employee in the absence of gross misconduct on his or her part. By law, such indemnity is equal to 10%, but can be reduced to 6% within the scope of a collective bargaining agreement. When choosing between a fixed-term employment contract (contrat à durée determine – CDD) or a CNE, other considerations must also be taken into account, such as the maximum duration and reliability of the contemplated CDD. In any event, the CDD must be chosen whenever "seasonal" or "customary" jobs are concerned.

18. A circulaire (instruction memorandum) of the Justice Department of March 8, 2006 confirms this interpretation.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.