Court sets limits on subcontracting

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In two rulings issued in July 2000, France's highest court, the Cour de Cassation, laid down limits governing the transfer of employment contracts arising from a change in an employer's legal status. The judgments have important implications for the subcontracting and outsourcing of activities by companies.

The industrial relations chamber of the Cour de Cassation (France's highest civil and criminal court, responsible for ensuring that rulings made by judges comply with the law) recently laid down limits governing the transfer of employment contracts arising from a change in an employer's legal status. Two rulings issued by the Court on 18 July 2000 prevent the Perrier Vittel France (PVF) drinks company from transferring non-core activities as well as employees to a subcontractor. At the heart of the debate is the notion of the "autonomous economic unit".

The dispute stems from Perrier Vittel France's desire to subcontract the manufacture and repair of wooden pallets at its two plants in Vergèze (Gard) and Contrexéville (Vosges) to an outside company called Palette Rouge. In 1997, the trade unions represented at PVF challenged the company's decision to transfer around 50 employees (37 at Vergèze and 15 at Contrexéville) to a subcontractor.

Article L.122-12 of the Labour Code stipulates that in the case of a "change in an employer's legal status, in particular, through inheritance, sale, merger, change in activity or incorporation, all employment contracts valid on the day of the change of status are to be honoured by the new employer." Employers have often used this article, which was originally designed to protect workers, in order to offload their employees. Employment contracts must be honoured by the new subcontracting company, which in most cases provides less favourable employment conditions and benefits (for example, some subcontracted activities are not covered by the same collective agreement).

In 1990, the Cour de Cassation ruled that Article L.122-12 applied to "all transfers of economic units, where their specific identity is maintained and where their operations are either continued or taken over".

In July 2000, the industrial relations chamber of the Cour de Cassation overturned PVF's appeal against two rulings by the Nîmes and Nancy Courts of Appeal, on the grounds that it did not consider the activity being transferred to be an autonomous economic unit. Economic entity status can be assessed only on a case-by-case basis. The court defines this notion as "an organised body of people together with the tangible and intangible assets required to carry out its own objectives through a specific economic activity". Consequently, in its ruling on the transfer of operations at the Vergèze plant, the Cour de Cassation considered that the outsourcing of the department in question amounted to "nothing more than a break-up of the servicing departments of the company". It ruled that the department "did not have autonomy within the Vergèze establishment, in terms of its staffing resources or the organisation of production [...] and possessed neither the specific facilities for its own individual output nor an independent economic purpose"." In its second ruling concerning the Contrexéville plant, the court applied a similar rationale, based on the fact that the transferred workshop did not have its own staff or accounts and had not even been taken over by the subcontractor, Palette Rouge."

Therefore, according to the court, the employer is required to either reintegrate the employees concerned back into its own workforce or to implement a social plan, requiring redeployment when various conditions are met. The automobile manufacturer, Peugeot has to some extent pre-empted this ruling by recently deciding to outsource the upholstery and wiring operations at its Mulhouse plant while retaining and retraining the 1,000 employees concerned within the company's workforce.

The solicitor for the unions which brought the PVF cases underlined that outsourcing a non-autonomous operation requires employers to "address the social impact of their decision". The Cour de Cassation's ruling bolsters the position of those unions opposed to the outsourcing of operations considered core to a company's production process.

The management of PVF is now required, without any possibility of appeal, to comply with the court's decision, even though the company's solicitors still contend that "pallet" operations may constitute an autonomous unit.