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Individual dismissals for personal and economic reasons in French firms: One or two models?

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Abstract

Most OECD countries divide dismissals into different types, depending on their grounds, as either disciplinary or economic. Restricted to individual dismissals, this article seeks to better understand how the differences between these two grounds with regard to statutory provisions result in the dismissal behavior of employers. Do employers choose this designation to minimize termination costs (severance payment and damages)? Using an original database of French establishments from 1999 to 2009, this article aims to analyze the factors influencing employers’ use of economic and personal dismissals, providing insights into the enforcement capability of legal dismissal rules and the part played by strategic behavior. In our view, strategic behaviors should be reflected in the factors influencing both types of dismissal decisions identically, whereas compliance with legal provisions induces contrasting influences. Thus, the hypothesis tested—called the uniqueness of the model of dismissal—is the absence of specificity of the determinants, especially regarding the economic conditions of the firm and related human resource management characteristics, between the two types of dismissal. The results highlight the existence of two quite different models of dismissal even though the personal dismissal determinants are not orthogonal to the economic conditions of the firm. Economic dismissals are essentially explained by the economic conditions of firms, whereas personal dismissals are linked to the propensity of human resource management to retain employees.

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Notes

  1. An employer that, within 30 days, lays off ten or more employees because of redundancy must hold several meetings with the relevant work council or other employee representatives and must write a “job preservation plan” (Plan de Sauvegarde de l’emploi) that attempts to limit layoffs and reclassify dismissed workers. This plan may include measures such as transfers, new operations, training, and a reduction in work to decrease the number of layoffs.

  2. See Boeri et al. (2017), Malo (2001), Malo and Pérez (2003).

  3. This does not mean that we exclude possible strategies to circumvent these “job preservation plans”, but we think it is more a matter of dividing several dismissals through time. Moreover, this issue must be analyzed in a more general framework in order to take into account all the other open-ended contract terminations. The possibility of substitution is wider and includes not only personal dismissals but either mutually agreed terminations (rupture conventionnelle in French), retirement, quits, etc.

  4. For example, Mexico and Brazil seem to share this specificity (Estreicher and Hirsch 2013).

  5. Case law adds two other motives: the reorganization of the company to preserve competitiveness and the cessation of activity of the company. These two motives were added to the labor code in 2016.

  6. In September 2008, the “Labor Modernization Law” changed these legal provisions to alleviate the differences between the two types of dismissal: the severance payments for the personal motive doubled.

  7. An example of a tenure of more than 10 years can be useful: an employee with 20 years of service who is dismissed is entitled to 5.33 months of wages if the motive given is economic and 2.67 months if the motive is designated as personal.

  8. Collective agreement at the level of the branch can state a larger amount for severance payment, but this applies rarely and mainly for executives.

  9. Regardless of motive, the amounts are considered modest. The OECD annex for calculating the EPL index estimated that the average unjust dismissal award in 2008 for a French employee with 20 years of service was approximately 16 months’ pay. A 2003 study found that a typical severance award for a forty-year-old white-collar employee earning €30,000 (US$43,924.64) per year who was laid off after 10 years of service was €7187.94 (US$10,529.27)—less than one-half of the €16,047.80 (US$23,507.67) average payment to similarly situated employees in the EU as a whole (example from Estreicher and Hirsch 2013).

  10. However, this motive has been less accepted in court after a change in case law in 2004.

  11. This also implies that the employer must provide information on the economic situation of the firm, information that can have implications with regard to shareholders or competitors.

  12. More precisely, the EAE-Esane does not detail the financial part of the profit and loss accounts of companies or their balance sheet.

  13. In France, a company can have several establishments.

  14. According to the accounting definition, the current result before tax is equal to the operating profit plus the financial result plus joint operations (allocated profit) and minus joint operations (loss supported).

  15. It also makes it possible to restrict the endogeneity bias that might appear if the severance payments to be paid or to be provisioned were deducted from the result.

  16. According to the accounting definition, net profit (the profit or loss of the year) is the difference between the income and expenses for the year. More precisely, it is equal to the current result before tax plus extraordinary results and minus income taxes and employee participation in the results of the company.

  17. As a reminder, the data used deal with worker flows and firms’ economic activity. Henceforth, the data do not contain information on workers’ seniority, individual performance, etc. Moreover, our data do not provide information on the existence of union representatives in the firm or, more generally, variables characterizing work organization.

  18. The Dmmo source does not provide information about the stock of employment by qualification, age or sex. These proxies are calculated from the structure of the job flows in each firm. For example, the share of movements by managers indicates the ratio of the number of entries and exits of managers to the total number of entries and exits in the firm, excluding transfers and CDDs. We thus assume that companies with a high turnover rate of managers also employ mainly managers.

  19. This variable is constructed as the difference between the market share and the number of companies per APE (main activity of the company), the market share reporting the turnover of the company to the sum of the turnover of the APE to which the company belongs. This variable was calculated in the EAE-Esane database before any transformation and matching with the other database.

  20. In the case of discrete variables, the use of a fixed-effects model raises the problem of the incident parameters, which prevents the convergence of the estimation. The Mundlak method (1978) overcomes this problem, as suggested by Greene (2011).

  21. Another result concerns the role played by unobserved heterogeneity in employers’ dismissal behaviors: the share of the variance of the error term due to unobserved heterogeneity constant over time is approximately 25% in both motives (Table 1).

  22. However, this is partly because the influence of the evolution indicator has been constructed as binary.

  23. If the ratio of the current result before tax to turnover in t − 1 increases by one unit, the probability of economic dismissal decreases by 0.0466% points (“Appendix 2”).

  24. The role played by social pressure on dismissals has been estimated in a recent article on French data: see Bassanini et al. (2017).

  25. However, there is an obligation to make an “impact assessment” for any new bill since 2009 in France, but these assessments seem in fact not very informative and do not assess empirically the possible effects of the bill.

  26. The possibility, especially for employees, to bring the case before a court and thus to have to pay an additional cost in case of unjust dismissal.

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Acknowledgments

The authors would like to thank Muriel Roger for her advice and comments, as well as those received from two anonymous referees. The usual disclaimer applies.

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Authors and Affiliations

  1. Aix Marseille Univ, CNRS, LEST, Aix-en-Provence, France

    Camille Signoretto

  2. Centre d’Études de l’Emploi et du Travail, CEET - Cnam, Noisy-le-Grand, France

    Camille Signoretto

  3. Centre d’Économie de la Sorbonne (CES, UMR CNRS 8174), Univ Paris 1 Panthéon-Sorbonne, Paris, France

    Julie Valentin

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  1. Camille Signoretto
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Correspondence to Camille Signoretto.

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Appendices

Appendix 1

See the Table 2.

Table 2 Descriptive statistics of the sample.
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Appendix 2

See the Table 3.

Table 3 (mean of individual) Marginal effects of the main variables associated of estimation of the bivariate random effects probit model with Mundlak correction.
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Signoretto, C., Valentin, J. Individual dismissals for personal and economic reasons in French firms: One or two models?. Eur J Law Econ 48, 241–265 (2019). https://doi.org/10.1007/s10657-019-09625-6

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