Mutual termination – more costly as of September 2023

Introduction of a distinct employer contribution of 30%: mutual termination indemnity more costly as of September 2023

The law ‘loi de financement rectificative de la sécurité sociale’ modified the regime applying to the indemnity paid in the context of a mutual termination agreement in France. It will come into force on 1 September 2023 and will make conventional termination in many cases more costly for the employer. The reform replaces the current social and tax treatment of the termination indemnity with a distinct contribution of 30% at the charge of the employer, regardless of the employee’s situation.

The objective of the measure is to prevent employees from falling into unemployment just before liquidating their pension.

To better understand the different impacts, here a comparison of the old and new treatment of the mutual termination indemnity.

Termination indemnity before 1 September 2023

Currently, the social and tax regime of the termination indemnity differentiates two situations: the case where the employee can or cannot benefit from the statutory retirement pension.

Employee can benefit from the statutory retirement pension:
The contractual termination indemnity is subject to social contributions and employee’s wage taxes from the first euro. Meaning both, employer and employee pay French social contributions and payroll taxes on the termination indemnity.

Employee cannot benefit from the retirement pension:
The regulations are complex. To simplify, the termination indemnity, up to the amount corresponding to the legal or treaty-based indemnity, is subject to a flat rate of 20% only – at the charge of the employer. Within this limit there are no deduction on the employee’s side.

New flat rate of 30% as of 1 September 2023

From 1 September the 20% flat rate will be replaced by a single contribution of 30% payable by the employer, regardless of the employee’s retirement situation. The new flat rate also applies to the indemnity due in the event of a retirement requested by the employer.

Mutual termination: cost comparison before and after 1 September 2023

To compare the impact on the employer cost here an example of a mutual termination indemnity of € 10000 corresponding to the legal indemnity.

Mutual termination indemnity before 1 September 2023

Statutory pension entitlement no yes
Employer contributions 20 % on indemnity:
€ 2 000
fully subject to contributions
(about 44 – 46% for high earners €4400 – €4600)
Employee deductions none social contributions of about 20 – 22%, plus wage taxes

Mutual termination indemnity as of 1 September 2023

Statutory pension entitlement regardless of pension entitlement
Employer contributions 30 % on indemnity: € 3 000
Employee deductions none

With the mutual termination in many cases being more costly as of September 2023, it is recommendable to anticipate any upcoming mutual agreements. In this regard, it is important to take into account the duration of the procedure of the mutual termination agreement (notably the withdrawal period and the delay for application for approval).