Capital Gains on Shares: Exclusion from Calculation of Compensation for Unfair Dismissal

Imagine for a moment: you are a sales executive in an SME in Perpignan. For five years, you have accumulated a fixed salary, a variable component, and above all, you have subscribed to an employee shareholding plan. In 2020, you exercise your options and realise a nice capital gain. But two years later, your employer dismisses you. At the employment tribunal, you claim damages for unfair dismissal. The question arises: should the capital gain on your shares be included in the calculation of this compensation? In other words, is this capital gain an element of your remuneration?

This question is asked by hundreds of employee shareholders. The answer was given by the Court of Cassation on 30 March 2011, in a judgment that has become a reference. It ruled: capital gains realised upon exercising share options, even if subject to social security contributions under Article L. 242-1 of the Social Security Code, do not constitute remuneration granted in return for work. Consequently, they are not included in the calculation base for compensation for unfair dismissal. In short, to assess your loss, these financial gains from shareholding are not taken into account.

But concretely, what does this change for you, whether you are a property owner, employee or manager in Perpignan or Le Barcarès? This article analyses this decision, explains how it applies, and gives you practical advice to avoid nasty surprises.

The facts: a story that happens every day

Mr X, an employee of a company based in Perpignan, benefited from a company savings plan (PEE) and share options (stock options). In 2005, he exercised his options and sold his shares, realising a capital gain of €150,000. His employer dismissed him for economic reasons in 2007. Mr X challenged this dismissal before the Perpignan employment tribunal. He won: the dismissal was held to be unfair. But the dispute concerned the amount of compensation. Mr X argued that the capital gain on his shares should be included in the calculation of his reference salary, which would increase his compensation. The employer, on the other hand, maintained that this capital gain was a capital gain, not remuneration.

The employment tribunal ruled in favour of Mr X, including the capital gain in the calculation base. The employer appealed. The Montpellier Court of Appeal reversed the judgment: in its view, the capital gain did not constitute remuneration. Mr X appealed to the Court of Cassation. In its judgment of 30 March 2011, the Court of Cassation dismissed his appeal and upheld the appeal decision. It recalled that the capital gain realised upon exercising share options is based not on the employment contract, but on the holding and sale of shares. Even if social security contributions were paid on this capital gain (pursuant to Article L. 242-1 of the Social Security Code), this does not change its nature: it is not a salary.

The reasoning of the court — analysed

The Court of Cassation relies on two pillars. The first: Article L. 242-1 of the Social Security Code, which subjects to contributions sums paid in return for work. However, the capital gain is not paid by the employer in return for work, but results from the sale of shares. The second: the concept of remuneration under labour law. The Court recalls that only sums granted in return for work are included in the calculation of compensation for unfair dismissal. Capital gain is a capital gain, income from assets, not a salary.

What few people know is that the Court of Cassation clearly distinguishes here between the basis for social security contributions (broad) and the concept of employment tribunal remuneration (more restrictive). In short, what is subject to contributions is not necessarily a salary for the calculation of dismissal compensation. The decision confirms previous case law on stock options, but innovates by applying it to free shares and gains from exercising options. It is a confirmation of the restrictive line: courts are not extending the calculation base for dismissal compensation to the financial gains of employee shareholders.

Mr X's arguments were nevertheless solid: the capital gain was subject to contributions, it was linked to his status as an employee (since the option to purchase was offered by the employer). But the Court considered that the link with work was too indirect. However, note that this decision only concerns capital gains on disposal, not dividends or free share awards (which may, under certain conditions, be considered a salary supplement).

What this changes for you — concretely

If you are an employee shareholder, this decision means that your capital gains on shares will not inflate your compensation for unfair dismissal. For example, if you are dismissed and receive €50,000 in damages, you cannot request an additional amount by arguing the capital gain on your shares. On the other hand, if you are a director or majority shareholder, this decision protects you: it limits the amount of compensation you might have to pay in the event of a contested dismissal.

Take a concrete example in Le Barcarès: an employee of a service company, unfairly dismissed, received a monthly salary of €3,000. He had realised a capital gain of €100,000 on shares acquired through a company savings plan. Without this decision, his compensation could have been calculated on the basis of a salary including the capital gain, i.e. €100,000 + (€3,000 x 12) = €136,000 annual salary. With the decision, his reference salary remains €36,000. The compensation, according to the scales (between 3 and 20 months), would therefore be between €9,000 and €60,000, instead of up to €226,000. The difference is huge.

For a landlord in Perpignan who employs a worker, this case law prevents you from having to include your employees' capital gains in the calculation of their compensation. But be careful: if you award free shares to your employees, their value may be considered a salary. Consult a lawyer before setting up a shareholding plan.

Four tips to avoid this type of dispute

• Clarify the nature of the benefits in the employment contract: If you grant stock options or free shares, specify in the contract or plan rules that this is an extra-salary benefit, not included in remuneration for the calculation of dismissal compensation.
• Document share awards: Keep the award decisions, subscription forms, and any document proving that the capital gain is linked to the holding of shares, not work.
• For employers: calculate dismissal compensation based solely on fixed and variable remuneration: Do not include capital gains. If an employee challenges this, you can rely on this case law.
• For employees: do not rely on capital gains to increase your compensation: If you have shares, know that their capital gain is not included in the calculation. To maximise your rights, negotiate a salary increase or a bonus instead.

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Further reading: related case law and developments

This decision is part of a consistent line of the Social Chamber of the Court of Cassation. As early as 2004 (judgment no. 02-45.318), it held that stock options do not constitute a salary. In 2012 (no. 10-27.103), it extended this reasoning to free shares awarded under a company savings plan. The trend is clear: courts strictly distinguish remuneration for work from gains arising from shareholding.

However, a recent development deserves attention: since 2020, the Pacte Law (2019) has relaxed the regime for free share awards. Some recent court of appeal decisions (not yet validated by the Court of Cassation) have sometimes reclassified free awards as a salary supplement if they were linked to individual performance. So remain vigilant: if your shareholding plan provides for conditions linked to your work (objectives, seniority), the judge may see it as disguised salary. When in doubt, seek legal advice.

Summary and next steps

FAQ:

1. Can I include my capital gain on shares in the calculation of my dismissal compensation? No, according to the Court of Cassation, it is not remuneration.
2. Does my employer have the right to dismiss me unfairly? No, but the calculation of compensation does not take the capital gain into account.
3. What if my employer refuses to include my capital gain? Nothing, he is right. Taking the matter to the employment tribunal would be pointless on this point.
4. Does this decision apply to dividends? Yes, dividends are also excluded, unless they are paid as a salary supplement.
5. Can I negotiate a shareholding plan that would be considered a salary? Yes, if the shares are awarded based on individual performance, they could be reclassified. But beware of contributions and tax implications.

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