Non-compete agreement concluded after the severance notification but before the effective end of the employment contract : indemnity exempt from social security contributions

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Date:
14 May 2012

Under certain conditions, the indemnity paid by the former employer by virtue of a non-compete agreement concluded after the severance notification, but before the effective end of the employment contract, is exempt from social security contributions. 

Under certain conditions, the indemnity paid by the former employer by virtue of a non-compete agreement concluded after the severance notification, but before the effective end of the employment contract, is exempt from social security contributions.

It was generally admitted that a non-compete indemnity was exempt from social security contributions only if, among other things, the non-compete agreement was concluded after the effective end of the employment contract. 

The Supreme Court nuances this principle in a judgment of 19 March 2012. In this case, two agreements were concluded on the same day between an employee and his employer: on the one hand, a transactional agreement on the termination of the employment contract (after the severance notice), and on the other hand, a non-compete agreement. Parties also agreed that the employment contract would effectively end only on the second day after the conclusion of those agreements. In addition, the employment contract did not contain a non-compete clause. 

The Supreme Court decided that even if paid by virtue of an agreement concluded after the severance notification, but before the effective end of the employment contract, the non-compete indemnity is not necessarily awarded because of the termination of the employment contract: it does not therefore constitute remuneration subject to social security contributions. 

This ruling reduces the importance of the exact moment of the conclusion of a non-compete agreement concluded within the framework of the termination of an employment contract. In order for a non-compete indemnity to be exempted from social security contributions, such an agreement should not necessarily be concluded after the effective end of the employment contract.

Note that the exemption from social security contributions always requires that the non-compete indemnity does not constitute, in reality, a veiled indemnity in lieu of notice.  Note that this judgment does not concern the validity conditions of the non-compete clause