Director status and compensation attorney in Paris

Director social status overview

The social status of a corporate director in France depends mainly on the corporate form of the company managed and, for SARLs, on the share held in capital. Two main regimes coexist: the general social security regime applied to salaried-equivalent directors (SAS, SA, SARL managed by a minority or egalitarian manager), and the self-employed regime (TNS) applied to majority managers of SARL and to individual entrepreneurs.

This distinction has major consequences: base and rate of social contributions, level of cover (notably for sickness, retirement and invalidity), payment methods of contributions (monthly or quarterly, nominative social declaration or self-employed declaration), applicable tax regime and compensation-dividends optimisation strategies.

Directors treated as employees

Are treated as employees within the meaning of Article L. 311-3 of the Social Security Code: the president and directors of SAS and SASU, the chairman of the board, the CEO and deputy CEOs of SA, the members of the management board of SA with management board and supervisory board, the minority or egalitarian manager of SARL, the president of SCA. These directors are affiliated with the general social security regime when they receive compensation.

The general regime covers sickness, maternity, invalidity, death, basic and supplementary old-age (Agirc-Arrco), and occupational accidents and diseases. However, salaried-equivalent directors do not benefit from Pôle emploi unemployment insurance (unless voluntary insurance such as GSC or APPI is set up).

Contributions are based on the entirety of the gross compensation paid and are shared between the director and the company, at rates similar to those applicable to employees (employer charges of approximately 42% and employee charges of approximately 22% of gross compensation, varying by salary level and applicable exemptions). In the absence of compensation, the director is not affiliated and generates no rights.

Self-employed directors (TNS)

The following fall under the self-employed regime: the majority manager of SARL (and his/her co-manager belonging to a majority college), the sole-shareholder manager of EURL, the individual entrepreneur (including EIRL and micro-entrepreneur), the manager of SNC. These directors are affiliated with the Self-Employed Social Security (SSI), integrated into the general regime since 2018 but retaining specific rules on contributions and benefits.

TNS contributions are based on the director's net compensation, to which is added, for majority managers of SARL, the fraction of dividends exceeding 10% of share capital, share premiums and amounts paid in shareholder current accounts (Article L. 131-6 of the Social Security Code). This rule aims to prevent optimisation by substitution of compensation with dividends.

The overall cost of TNS contributions is generally lower than that of the general regime (approximately 35 to 45% of net compensation depending on tranches), but the level of coverage is lower, particularly for daily sickness allowances, invalidity and retirement. Subscription to supplementary insurance (Madelin Law) and supplementary retirement is generally recommended.

Setting and revising compensation

The methods of setting director compensation vary by corporate form and statutory provisions. In a classic SA, the board of directors sets the compensation of the chairman, CEO and deputy CEOs (Articles L. 225-47 and L. 225-53). In SA with management board and supervisory board, the supervisory board sets the compensation of management board members. In SARL, the manager's compensation is decided collectively by the partners (Article L. 223-18). In SAS, the articles freely determine the methods, generally by collective decision or decision of the president.

The decision must be formalised in minutes dating the attribution. Failing this, the payment of compensation without prior decision may be qualified as misuse of corporate assets (abus de biens sociaux) or give rise to a restitution claim. Case law admits subsequent regularisation by ratifying decision, provided it occurs within a reasonable time and before any litigation.

Compensation excessive in light of the company's financial capacity, the functions exercised or the results obtained may be challenged on the basis of misuse of corporate assets (joint-stock companies and SARL) or abuse of majority. Control is particularly vigilant in integrated groups and in companies in difficulty (where excessive compensation may be qualified as abnormal management or fault).

Variable compensation, bonuses, profit-sharing

Director compensation may include a variable portion indexed to performance indicators (turnover, operating result, EBITDA, gross margin, ESG indicators). The variable portion must be set in the corporate decision of attribution with objective, measurable criteria established prior to the evaluation period, failing which it may be requalified as an abusive practice or as undecided compensation.

Attendance fees (compensation for the activity of director or supervisory board member) are attributed globally by the general meeting and freely distributed by the board. The PACTE Law renamed attendance fees as "compensation for activity" (Article L. 225-45). These sums are subject to the social and tax regime of non-commercial profits (BNC) or salaries and wages depending on the case.

Profit-sharing and incentive schemes are accessible to salaried-equivalent directors under headcount conditions (1 to 250 employees to benefit from incentive schemes, mandatory incentive schemes above a legal threshold). Company savings plans (PEE) and collective retirement savings plans (PER Collective and PER Categorical) open optimisation levers for the director's deferred compensation.

Combining corporate office and employment contract

Combining a corporate office and an employment contract within the same company is admitted under three cumulative strict conditions established by case law: existence of a real and distinct job from the corporate office, exercised in technical functions clearly separable from general management functions; existence of a legal relationship of subordination characterised by the power of direction and sanction of a distinct hierarchical authority; and compensation under the employment contract distinct from that of the corporate office.

In SA, combination is in principle prohibited for directors (Article L. 225-22) unless the employment contract predates the appointment. The CEO and deputy CEOs may combine under common-law conditions. In SAS, contractual freedom applies but under judicial control of the three conditions, the judge requalifying the fictitious employment contract as a sole mandate.

Combination presents advantages: unemployment cover (Pôle emploi) under the employment contract, protection against dismissal (common-law procedure and indemnities), access to employee savings schemes, accounting separation of compensation. Risks are requalification as a sole mandate (with restitution of unduly paid unemployment contributions and loss of corresponding rights) and qualification as misuse of corporate assets in case of excessive compensation.

Social protection and supplementary cover

Beyond the mandatory regime, the director's social protection may be reinforced by optional schemes: supplementary insurance (incapacity, invalidity, death), supplementary retirement (Article 83 of the General Tax Code for salaried equivalents, Madelin contract for self-employed, company PER contracts), private unemployment insurance (GSC, APPI) for directors excluded from the Pôle emploi regime, supplementary health insurance.

These schemes generally open rights to tax and social deductibility within certain limits (Madelin Law for self-employed, Article 83 and company PER for salaried equivalents). Implementation requires compliance with social formalism (board decision or unilateral decision for categorical contracts, any collective agreement) and registration in an objective category of beneficiaries to benefit from exemptions.

Termination of office and severance

The methods of termination vary by corporate form and nature of the office. The mandates of directors, chairmen and CEOs of SA are revocable ad nutum, without notice, without reason, without severance as of right. Abusive removal (vexatious, abrupt, in violation of the right to be heard) opens a right to damages. The manager of SARL is removable for just cause (Article L. 223-25), failing which he/she may claim compensation.

Contractual end-of-mandate severance (golden parachutes) provided for in the mandate contract or articles is subject, in joint-stock companies, to the regulated agreements procedure (Article L. 225-38 et seq. for SA, L. 227-10 for SAS). In listed companies, the TEPA Law and the Afep-Medef code strictly frame these deferred compensations: performance conditions, quantitative limits, advisory shareholder vote (say-on-pay).

Deferred compensation (golden parachutes, top-hat pensions, non-compete indemnities) must be authorised in advance by the board and submitted for approval by the general meeting in listed companies. The absence of authorisation entails nullity of the agreement and restitution of sums received.

Role of counsel

Counsel intervenes at all stages of the mandate's life: audit of the optimal social and tax status according to the corporate form and personal situation of the director, drafting of appointment and compensation decisions, structuring of the compensation package (fixed, variable, profit-sharing, insurance, supplementary retirement), securing the dual mandate-employment combination, negotiation of end-of-mandate severance, implementation of regulated agreements.

In litigation, counsel assists the client in disputes relating to removal, challenge of excessive compensation, requalification of dual mandate-employment combination, application of regulated agreements, as well as URSSAF reassessments and tax disputes concerning director compensation.

Why Mac Mahon Avocats

The firm combines expertise in corporate law, social law and director taxation to offer an integrated approach to the status and compensation of corporate officers. The team advises directors of SMEs and mid-caps, executives in the process of recruitment or end of mandate, as well as companies and their shareholders on governance and compensation issues.