In a decision dated January 30, 2025, the Court of Cassation recalled that settlement indemnities paid in the context of a dismissal are not systematically subject to social security contributions.
- Background: A dismissed employee had entered into a settlement with his employer, which had paid him compensation for moral and professional damages. However, the employer subjected to social security contributions the portion of this sum which, when combined with the dismissal indemnity, exceeded two annual social security ceilings (PASS). Challenging this deduction, the employee had initiated a “seizure and sale” procedure to obtain reimbursement.
- Decision of the Court of Cassation:
- In principle, the sums paid in return for or in the context of work are fully subject to social contributions (social security contributions and CSG / CRDS).
- By way of derogation, termination indemnities that are not taxable under the French Tax Code are exempt from social security contributions up to 2 PASS.
- However, sums which, although awarded in the context of the termination of the employment contract, are intended to compensate for a damage, are excluded from the basis of social security contributions, regardless of their amount, even if they are not expressly exempt from tax by the French Tax Code.
- In this case, it resulted from the settlement agreement that the purpose of the sum awarded was to compensate for damages, in particular moral and professional damages, which the employee claimed because of the conditions in which he had performed his duties and had been deprived of his job.
- Key takeaway from this decision:
- This decision is a reminder of the importance of properly qualifying the sums paid in a settlement agreement and the prejudice they compensate.
- A termination indemnity is only exempt from social security contributions up to a limit of twice the PASS, whereas an indemnity paid on the termination of the employment contract but compensating for damages arising from the conditions of exercise of the employment contract and its termination may be completely excluded from the basis of these contributions. The Court of Cassation, however, did not rule on the question of whether such an indemnity should be subject to the CSG and the CRDS.
It is therefore necessary to be vigilant when drafting a settlement agreement, especially since we do not yet know if and how the administration will take this decision into account in practice. A detailed analysis of the damages compensated, and a clear and rigorous drafting of the settlement agreement are thus essential to optimize the tax and social security regime of the sums paid in accordance with the rules in force while limiting the risk of social or tax readjustment.
Cass. 2ème Civ., 30 January 2025, n°22-18.333