When a company closes its doors, each employee on a permanent contract who is laid off is entitled to financial compensation. The calculation of this indemnity depends on seniority, the reference salary, and sometimes the applicable collective agreement. Understanding these mechanisms allows one to anticipate the actual amount received and avoid unpleasant surprises on the final payslip.
Reference salary: the basis on which all indemnity calculations rest
Before even discussing seniority or amount, it is necessary to determine the reference salary. This is the foundation of the calculation, and an error at this stage skews everything else.
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The Labor Code provides for two methods. The first involves taking the monthly average of the last twelve months of gross salary preceding the layoff. The second considers one-third of the last three months, including bonuses and incentives pro-rata. The employer must retain the formula that is most advantageous for the employee.
Why does this distinction matter? Because an employee who received a significant annual bonus in the last three months will see their indemnity increase substantially with the second method. Conversely, someone whose remuneration is stable throughout the year will obtain a nearly identical result with both calculations.
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A point not to be overlooked: regular overtime, benefits in kind, and contractual bonuses are included in the reference salary. However, reimbursements for professional expenses are excluded. To fully understand the indemnities in case of company closure, this distinction between elements included and excluded from gross salary is the first reflex to have.
Calculation of the legal severance indemnity: the concrete formula
Once the reference salary is determined, the legal formula applies in tranches of seniority. Here is the mechanism provided by the Labor Code:
- For the first ten years of seniority: one-quarter of a month’s gross salary per complete year
- Beyond ten years: one-third of a month’s gross salary per additional year
- Incomplete years are taken into account pro-rata based on months worked
Let’s take a simple example. An employee with 14 years of seniority and a gross monthly reference salary receives: (10 x 1/4) + (4 x 1/3), which is 2.5 + 1.33 months of salary. The transition from the tenth to the eleventh year increases the calculation coefficient by one-third.
This formula constitutes the legal minimum. No employer can pay less, even in the case of judicial liquidation. However, the applicable collective agreement in the sector may provide for a more favorable scale.
Collective agreement and employment contract
Some professional branches set indemnities higher than the legal minimum. The employee automatically benefits from the most advantageous calculation between the law, the agreement, and their employment contract. The three amounts are not cumulative: only the highest applies.
This verification should be done before any negotiation. An employee in the metallurgy or banking sector, for example, falls under collective scales that are often more generous than the legal scale.
Compensatory indemnity for notice and paid leave during a closure
The closure of a company does not exempt the employer from its obligations regarding notice and leave. These two items are added to the severance indemnity itself.
The compensatory indemnity for notice is due as soon as the employee is exempted from executing it. Its duration depends on seniority and professional category. For an executive, it generally reaches three months of gross salary. For a non-executive with more than two years of seniority, it corresponds to two months.
As for unused paid leave, they give rise to a compensatory indemnity calculated based on the gross salary. The employee receives the equivalent of what they would have earned if they had taken their days off.
In the event of judicial liquidation, these amounts are recorded as liabilities of the company. If the cash flow does not allow for payment, a guarantee mechanism takes over.
Role of the AGS when the company can no longer pay
Are you wondering what happens when the company is in judicial liquidation and no longer has the funds to pay the indemnities? This is where the AGS (Association for the Management of the Employee Claims Guarantee Scheme) comes into play.
The AGS advances employee claims within limits defined by law. It covers:
- Unpaid wages from the last months worked
- The severance indemnity (legal or contractual)
- The compensatory indemnity for notice
- The indemnity for unused paid leave
The AGS only intervenes in the case of a collective procedure opened by the court. The judicial representative submits the claims, and payment to employees generally occurs within a few weeks after validation.
The AGS guarantee ceilings are indexed to the monthly ceiling of Social Security. The higher the seniority of the contract, the higher the applicable ceiling.
Tax and social regime of company closure indemnities
Indemnities paid under a job protection plan (PSE) benefit from special tax treatment. Supra-legal indemnities paid in a PSE are fully exempt from income tax, in accordance with articles L.1233-61 and following of the Labor Code.
From a social perspective, these indemnities (both legal and supra-legal combined) are exempt from social contributions up to twice the annual ceiling of Social Security. Beyond ten times this ceiling, they become fully subject to contributions.
CSG and CRDS on indemnities
The CSG and CRDS apply to the portion that exceeds the smaller of the two following amounts: the legal or contractual severance indemnity, or the limit of twice the annual ceiling of Social Security. For amounts close to the legal minimum, the portion subject to these deductions remains marginal.
An employee laid off in the context of a closure with a PSE thus retains almost all of their net indemnity, which is not the case with a classic conventional termination where the exemption regime is more limited.
The closure of a company opens specific rights, framed by the Labor Code and guaranteed even in the event of the employer’s insolvency. Checking one’s collective agreement, verifying the reference salary retained, and ensuring that the judicial representative has properly submitted the claims to the AGS: these three concrete steps make the difference between a correctly received indemnity and a right that remains on paper.