France: Government seeks to cut taxation of overtime pay
In June 2007, the centre-right government proposed legislation that would abolish income tax on the earnings from overtime work and cut the social security contributions levied on this part of workers' pay. The proposals are in line with the policy of the new president, Nicolas Sarkozy, to encourage workers to "work more to earn more" and thus boost the economy.
On this page:
Current situation
Hours concerned
Tax and social contribution relief
Conditions
Overtime in small firms
Trade union opposition
Employers generally positive
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Key points
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The draft law "in favour of work, employment and purchasing power" provides that from 1 October 2007 earnings from overtime work – essentially all working time beyond the statutory normal working week of 35 hours – would not be subject to income tax. Further, employers and employees would pay a reduced rate of social security contributions on these earnings.
France introduced the statutory 35-hour normal working week in 2000, and President Sarkozy believes that this has contributed to a lack of disposable income for workers and an insufficient number of hours being worked in the economy. The Bill aims to allow employees to increase their purchasing power by working longer hours, with employers receiving compensation for the additional cost of the overtime in the form of cuts in social security contributions. The government also hopes that employers will be encouraged by the new measures to increase the supply of work. Longer working hours will, the argument goes, lead to more economic growth and more wealth.
Since the introduction of the "Aubry law" of 2000, the statutory normal working week stands at 35 hours, but employees may work additional hours above this figure.
Overtime hours (heures supplémentaires) must attract a pay premium, which stands at a minimum of 10% if it is set by a collective agreement. If there is no such agreement on the issue, the law requires a premium of 25% for the first eight hours of overtime per week, and of 50% for any further hours. However, for companies with fewer than 20 employees, the statutory minimum pay premium stands at only 10% for the first four hours of weekly overtime.
By law, employees may work up to 220 hours of overtime a year (the figure may be varied by collective agreement), with any hours above this quota generally requiring authorisation from the labour inspectorate. However, under legislation that came into force in 2005, employees may, if they wish, work "chosen hours" (heures choisies) beyond the annual overtime quota, without authorisation, if this is permitted by a collective agreement. These hours must attract at least the same pay premium as overtime hours.
Part-time employees may work "complementary hours" (heures complémentaires) beyond the working time laid down in their employment contract, though these may not bring their weekly hours up to the full-time statutory norm of 35 hours. In any week or month, these complementary hours may not exceed 10% of the hours laid down in the employee's contract, or one-third of these hours if the matter is regulated by a collective agreement. Hours worked above part-timers' normal hours attract a 25% pay premium.
At present, remuneration received for working overtime, "chosen" or complementary hours is subject to income tax and employees' and employers' social security contributions, in the same way as other pay. The Bill provides that from 1 October 2007 the earnings from these hours will be exempt from income tax, while the social security contributions payable will be reduced.
The proposed tax exemption and social contribution reductions would apply to overtime, chosen or complementary hours, as defined above.
For the purposes of the proposed scheme:
With regard to complementary hours worked by part-timers, the scheme would apply only to those up to 10% in excess of their contractual hours.
Many, mostly managerial, employees work under "inclusive agreements" (conventions de forfait), whereby a certain amount of overtime is assumed to be worked each year, calculated in hours or days and remunerated automatically. The new scheme would apply to such staff, covering hours in excess of 1,607 per year or days in excess of 218 per year, depending on the nature of the agreement concerned.
Special provisions would apply to people working for private individuals (eg providing childcare), who are covered by different working time rules, and for those groups of employees whose working time is not regulated by the general provisions laid down in the Labour Code.
Tax and social contribution relief
The proposed scheme would apply to virtually all private and public sector employees. Earnings for all additional hours, as defined above, would be exempt from income tax. Further, contributions to social security and similar schemes levied on employees' pay for these hours, based on law or collective agreement, would be reduced. The employees' contributions concerned are those for sickness insurance, old-age pension insurance, unemployment insurance, supplementary pension insurance and the general CSG and CRDS "social tax" schemes. The government would make up the resulting shortfall in contributions to the various funds – estimated at €2.7 billion to €3 billion a year.
The amount of the reduction in employees' contributions is to be set by a decree, and is likely to amount to 21.5% (or some 2.7% of gross pay), the equivalent of €2.22 per hour for an employee earning the current rate of the smic minimum wage and receiving a 25% overtime pay premium. The new reductions would not be additional to any social-contribution relief already applying to an employee.
Further, employers would have their social security contributions reduced in respect of additional hours worked by their employees. This would apply to employers already covered by a general social-contribution reduction programme – known as the "Fillon" scheme – introduced in 2003. Many public sector employers would thus be excluded, along with individuals employing people in their home. The amount of the reduction will be set, at a flat rate, by a separate decree, and is likely to be €0.50 per hour, or €1.50 in companies with fewer than 20 employees (see below).
The new reduction in employers' contributions for overtime would be additional to any relief already received by the employer under the Fillon scheme (this relief would apply in full to overtime pay).
The planned reductions in social security contributions would apply only where employers comply with statutory and collectively agreed rules on working time and overtime pay premia. The social security reductions will apply to pay at the premium rates laid down in the relevant collective agreements or, in the absence of agreement, the statutory rates (25% or 50% for overtime, 25% for complementary hours and 25% for employees with "inclusive agreements" calculated in days).
The Bill contains measures to prevent employers from ceasing to pay existing elements of remuneration, such as bonuses, and using the new overtime hours scheme as a substitute.
As mentioned, in companies with fewer than 20 employees the statutory minimum pay premium stands at 10% for the first four hours of weekly overtime. The Bill would abolish this special treatment, imposing a minimum premium of 25%, the same as currently applies in larger firms, from 1 October 2007.
However, in compensation, enterprises with fewer than 20 employees would benefit from a larger reduction in employers' social security contributions on the pay for their employees' overtime hours. This is likely to be a flat-rate hourly reduction of €1.50 (three times higher than the reduction for larger employers).
Three of the five main trade union confederations – the CFDT, CFE-CGC and CGT – issued a joint statement opposing the overtime proposals on 8 June 2007. They argued that the proposed cuts in tax and social contributions on overtime pay, while ostensibly attractive to some employees, would cost several billions of euros, with the bill met by the general public. The scheme, they stated, would increase inequalities – notably between full- and part-time workers, and higher and lower earners – without necessarily having any positive effect on employment levels. The three confederations claim that the proposals would also have severe consequences, which have been "largely ignored", on work organisation, such as the abrogation of current collective agreements on working time and a reduction in the "quality of work".
The FO confederation, which (along with the CFTC) did not sign the joint statement, has expressed concern that the planned reductions in employees' social security contributions will contribute to a creeping "fiscalisation" of social security financing – ie funding from general taxation rather than employees' and employers' contributions – "to the detriment of solidarity". It has accused the government of pursuing a policy of "tax competition" with other European countries, and of giving preferential treatment to those with high incomes.
Medef, the main employers' confederation, has given the proposals a generally warm welcome. It stated that the scheme seems to provide incentives for all those involved – employees, companies and investors – and will make France a more attractive location for business. However, while acknowledging that the proposals seek to help small companies, it believes that the hoped-for benefits for firms with fewer than 20 employees are "uncertain".
Following consultation with the Conseil d'Etat (France's supreme administrative court, which pronounces on whether legislative acts are in conformity with the law) and the social security funds, and further debate in the cabinet, the Bill will be put to parliament with a view to being adopted during the summer.
This article is based on material submitted by Christophe Boulay, European Employment Review correspondent for France.
