Allocation of free shares and equal treatment of employees

The Finance Act of 30 December 2004 introduced a system for allocating free shares to employees and directors (L. fin. 2005, no. 2004-1484, 30 Dec. 2004, art. 83, creating C. com., art. L. 225-197-1 to L. 225-197-5). The resulting benefit for the beneficiary is subject to social security and tax rules that have often been amended since then, but which remain favourable to the beneficiary in comparison with a salary supplement.

Free shares may be allocated to company employees or to certain categories of them (C. com., art. L. 225-197-1, para. 1).

According to the tax authorities, “for each category of staff, it is possible to refer to those used for the application of employment law (manual workers, white-collar workers, supervisors, engineers and managers).

Other categories inspired by custom (constant, general and fixed) or collective agreements in force in the profession or business may be retained, if they are determined on the basis of objective, non-restrictive and clearly defined criteria” (BOI-RSA-ES-20-20-10-10, 13 June 2016, [sect] 30).

The Extraordinary General Meeting decides on the allocation of free shares and, in its authorisation decision, defines the categories of employees to whom shares may be allocated.

It is then up to the Board of Directors or the Management Board in the case of SAs, or the managers designated for this purpose by the Articles of Association in the case of SASs, to determine the identity of the beneficiaries of the share allocations within the limits of the authorisation granted by the Extraordinary General Meeting (C. com., art. L. 225-197-1, para. 12).

• No, not according to the wording of article L. 225-197-1 of the Commercial Code, which refers to “members of the company’s salaried staff or […] certain categories of them”, whereas, by comparison, the grant of stock options is intended for “members of the company’s salaried staff or […] certain categories of them” (C. com., art. L. 225-177). The letter of the text would prohibit reserving the benefit of the free allocation of shares to any individual employee.

• Yes, according to ANSA (Association Nationale des Sociétés par Actions – National Association of Joint Stock Companies) and the majority of academic writers: the text only gives the General Meeting the option of defining one or more categories.

In most cases, company law practitioners deduce that this gives them complete freedom to choose the identity of the beneficiaries of free allocations.

Over the last twelve years or so, case law has gradually come to grips with this issue.

The Cour de cassation first ruled on jurisdiction in a number of decisions, holding that the Conseil de prud’hommes has jurisdiction. These rulings also confirm the desire to apply the principle of equal treatment to the allocation of free shares (in particular Cass. soc., 11 September 2012, no. 11-26.045).

A study of the decisions handed down by the Courts of Appeal shows that they carry out a concrete examination of situations in the light of this principle of equal treatment, established as an imperative rule[1], as well as the principle of non-discrimination, as set out in Article L1132-1 of the Labour Code.

This legal provision, which is often misunderstood by company law professionals, expressly prohibits direct or indirect discrimination in the distribution of shares[2].

The labour courts have drawn the necessary conclusions from this, including, where applicable, in terms of determining the damages suffered by an employee who considers himself to have been wronged. A recent ruling dated 4 April 2024 by the Paris Court of Appeal illustrates this point, concerning an employee who was a manager in an insurance company and who was also an elected staff representative:

After noting that the non-partner executives had received an average of 1,719 free shares between 2005 and 2022, while the claimant employee had received only 595, the Court ruled that the company had not provided any objective justification for the difference. It deducted a loss of 1,124 free shares and ordered the company to pay €18,000 for the financial loss suffered (Paris Court of Appeal, Pôle 6, Chamber 5, 4 April 2024, no. 20/08212).

In 2022, on the basis of article L.3121-2 of the French Labour Code, which provides for equal pay for men and women for work of equal value, the same Court of Appeal awarded damages of €51,494 to an Investment Director, who had demonstrated that the male directors of the real estate company that employed her had obtained an increase over 2 years in the number of free shares awarded, ranging from 17.6% to almost 40%, whereas she had been awarded less than 3%.

In order to convict the company, the Court took the following view:

– on the one hand, that the employee, even if the jobs were different, performed work of equal value to that of her male colleagues because their respective duties were at the same hierarchical level of responsibility, were of comparable importance in the running of the company, required comparable skills and represented a nervous workload of the same order;

– secondly, that the company did not provide an objective reason to justify its failure to comply with the principle of equal pay for equal work (Paris Court of Appeal, Pôle 6, 9th Chamber, 25 May 2022, no. 19/03110).

In addition to direct discrimination linked to criteria such as “origin, sex, family status […]”, indirect discrimination can occur when an apparently neutral provision, criterion or practice is likely to have an unfavourable effect on a person or group of persons because of the said criteria compared with other criteria. ]”, indirect discrimination may be constituted when an apparently neutral provision, criterion or practice is likely to have an unfavourable effect on a person or group of persons by virtue of the said criteria compared with other persons, unless this provision, criterion or practice is in fact justified by a legitimate objective and the means of achieving this objective are appropriate and necessary (article 1 of law no. 2008-496 of 27 May 2008).

It is therefore the responsibility of a company planning to award free shares to ensure that the choice of beneficiaries is based on non-discriminatory criteria, on the one hand, and is able to justify this choice by objective factors, so as not to be accused of unequal treatment, on the other.

In a 2015 ruling, the Rennes Court of Appeal listed the following objective factors as likely to justify differences between employees in the allocation of free shares: their experience, their qualifications, the importance of their management or their duties. It concluded that the situations of the beneficiaries were not identical and dismissed an employee’s claim for damages (Rennes Court of Appeal, 3 July 2015, no. 13/02516).

In view of developments in case law, however, the employer company will not only have to justify the existence of the objective factors used to support the choice or treatment of the beneficiaries of free shares, but also their relevance to the purpose pursued by the allocation of shares (Cass. soc., 8 September 2021, no. 19-20770).

Lastly, particular attention must be paid to the case of an employee in notice period at the time of the vesting period or the definitive allocation of shares, as these are most often linked to a condition of the employee’s presence in the workforce. Since, under article L. 1234-5 of the French Labour Code, the employment contract continues to exist until the end of the notice period, even if the employer has exempted the employee from serving the notice period, the employee cannot be excluded from the scheme on the grounds that he or she is no longer actually working at the time of the vesting period or, as the case may be, at the time the shares are allocated. Failing this, the employee may be compensated in full for the loss suffered (Cass. soc., 17 May 2017, no. 15-20.094; Cass. soc., 19 June 2019, no. 18-12.102).

Violation of the principles of equal treatment and non-discrimination in the allocation of free shares can have various legal and financial consequences for an employer, in particular :

• Order to pay damages: as mentioned above, employers may be ordered to pay damages to employees who have suffered prejudice as a result of discrimination or unequal treatment in the allocation of free shares.

• Reinstatement of the employee’s rights: in strict application of employment law (article L 1132-4 of the Labour Code), the employer could in theory be obliged to reinstate the rights of an employee affected by discrimination, which could include the allocation of free shares. In practical terms, however, and from the point of view of company law, this will undoubtedly pose difficulties that will have to lead to another form of compensation, mainly by way of financial reparation.

• The risk of reassessment in terms of social security contributions: in addition to formal non-compliance with the legal procedure for the allocation of free shares, which results in liability for social security contributions under ordinary law and not for the specific contribution provided for such allocations (Court of Cassation, 2nd Civil Division, 25 November 2021, no. 20-16.997), or failure to notify URSSAF of the identity of the employees benefiting from the free shares, as well as the number and value of the shares allocated to each of them, as provided for in Article L. 242-1 al. 13 of the French Social Security Code (Cour de cassation, 2nd Civil Chamber, 20 December 2018, no. 18-11.546), we may speculate that an allocation of free shares that failed to comply with the principles of non-discrimination and/or equal treatment would constitute a breach of Article L 225-197-1 of the French Commercial Code, calling into question the legal compliance of the transaction and its specific social and tax regime.

Even if litigation relating to employees’ claims concerning the allocation of free shares and based on discrimination or a breach of equal treatment remains relatively infrequent, the number of cases is undoubtedly set to increase with the increasingly common practice of such allocations.

It is therefore up to employers and their councils to remain vigilant when implementing bonus share schemes in order to anticipate any difficulties in this area.

[1]Cass soc 29.10.1996, no. 92-43680

[2] “No person may be excluded from a recruitment or appointment procedure or from access to an internship or training period in a company, and no employee may be penalised, dismissed or subjected to a direct or indirect discriminatory measure, as defined in Article 1 of Law No. 2008-496 of 27 May 2008 containing various provisions adapting to Community law in the field of anti-discrimination, in particular with regard to remuneration, within the meaning of Article L. 3221-3, profit-sharing measures or the distribution of shares…”. 3221-3, profit-sharing measures or the distribution of shares…”.