In the contemporary world of international entrepreneurship, a growing number of businessmen, who plan their business according to the norms set forth by the business law, without wishing to hire employees in France (and, therefore, without worrying about the legal norms specific to French labour law), are caught in the trap of a regulation that they at first think they do not have to take into account.
Liliana Bakayoko, Attorney at Law, President of the AAF
The concept of "concealed work" is usually confusing among non-lawyers, to the point that a significant number of concerned entrepreneurs mistakenly consider that it should intrinsically apply solely to situations that are substantially different from theirs: in the mind of the uninformed person, the "concealed work" evokes the relatively marginalized hypothesis in which an employer clandestinely employs an employee, to be able to exploit him without having to pay social charges. Regulated by the Labour Code (Articles L. 8221-1 and following), the "concealed work" seems prima facie to concern only those persons who are supposed to be bound by an employment agreement. However, this is in fact a notion encompassing a heterogeneous number of hypothesis of breach of obligations to formalize an economic activity, most of which do not fall within the scope of the labour law at all (which governs the relationship between employer and employee): the concealed work covers not only the hypothesis under which an employer intentionally fails to fulfil declarative obligations or obligations to issue documents related to an employment agreement, but also all the hypothesis under which a person engages in an economic activity by intentionally evading some of its obligations to formalize the said activity, such as the obligation to apply for registration with the Register of Commerce and Companies or the Trades Register, the obligation to make tax or social declarations, or the obligation not to take advantage illegitimately from provisions relating to posting of workers.
The requirement related to the intentional nature of the commission of the offense is only a relative bulwark against repression in this area, because the characterization of the intentional nature of the concealment falls within the discretion of the judges (Cass. Soc. 14 October 2015, No. 14-12.193). Moreover, even in the absence of an intentional element, a person who violates the standards covered by the concealed work regulations may be convicted of tax evasion, social declarations fraud or violation of the rules on registration with the Register of Commerce and Companies, or the Trades Register.
The seriousness of the incurred sanctions should have encouraged the legislator to make the matter more approachable, so as to protect litigants from surprises related to the transgression, due to lack of information, of a regulation that is inappropriately "concealed" mostly within the Labour Code: the concealed work is a offence, punishable mainly by imprisonment and fine; the additional incurred sanctions include the prohibition to practise a professional activity and / or a commercial or industrial profession, the prohibition of civic, civil and family rights, as well as (for foreigners) the prohibition to enter into the French territory for a duration of five years at the most.
In fact, in addition to the rationalization of the scale of repression (by introducing a requirement related to the characterization of the intentional nature of the concealment), it would have been preferable to also focus on an accentuated prevention tactic, implying better accessibility (and beyond, better intelligibility) of the regulation, in this field: in practice, from the point of view of the international entrepreneurship, the repression of the concealed work has more to do with business law rather than labour law.
The problem related to the lack of correspondence between the positioning of the basic regulations, in this area, and the realities that they are designed to regulate grows over the years, for two reasons: on the one hand, the concealed work regulation only increases in volume over time, encompassing new hypothesis of economic activities that are not directly related to labour law (strictly speaking); on the other hand – in parallel – under the impulse of the phenomenon of economic globalization (that carries with it multiplication of exchanges and human interactions), the concealed work repression more and more often takes completely off guard an increasing number of persons who undertake international business. It hangs like a sword of Damocles, "concealed" within the special labour law regulation, both over persons who undertake business abroad, from France (I.), and over those who undertake business in France, from abroad (II.).
I. The pitfall of "concealed work" in cases of entrepreneurship abroad, from France
Persons who undertake business abroad from France often consider that the French law relating to concealed work cannot apply to their activity abroad, precisely because the said activity is not practiced in France. Sometimes, such an error proves to be fraught with consequences.
Among the many hypotheses usually encountered in practice, that may lead to conviction for concealed work, it is worth mentioning those in which a company registered in France, which creates a subsidiary in another European Union Member State, selects either a manager (A.), or a service provider (B.), supposed to work for the subsidiary.
A. A company registered in France that selects a manager for its subsidiary established abroad: possible hypothesis of complicity in concealed work, by concealment of paid employment
French companies with international activities often find it necessary to set up subsidiaries in other European Union Member States. It is not uncommon that the parent company established in France chooses to appoint one of its employees as manager of the foreign subsidiary: this ensures a double control of the activity of the subsidiary, as the parent company is both the majority shareholder (or the sole shareholder) of the subsidiary and the employer (in France) of its manager.
Due to the employment contract with the parent company, the manager of the foreign subsidiary usually continues to reside in France. He declares his income earned abroad as manager and pays all his taxes in France.
For its part, the subsidiary registered abroad usually declares the management contract and pays the corresponding social security contributions abroad.
However, in reality, under French law, such foreign subsidiary is subject to both declarative obligations and obligations de pay social security and other contributions: pursuant to art. 13, para 1, p. (a) of Regulation (EC) No. 883/2004 of the European Parliament and of the Council of 29 April 2004 on the coordination of social security systems, it is French law that should govern the questions relating to payment of social security contributions under the management contract concluded between the employee of the parent company (as manager) and the subsidiary established abroad. This is the case regardless of whether the foreign subsidiary has a permanent establishment in France or not (moreover, taking into account that the manager of the foreign subsidiary resides in France, the hypothesis of fraud in relation to the establishment may also be characterized, in the matter).
In the event of non-compliance with the declarative obligations imposed in France on the foreign subsidiary, a conviction for concealed work by concealment of paid employment (or, at the least (in case of unintentional concealment), for fraud in relation to social declarations) becomes possible : the manager of the foreign subsidiary should be treated as a salaried manager, because he is a paid employee of the parent company, which has majority control of the foreign subsidiary (and thus, he is in a subordinate relationship with the foreign subsidiary). The possible risk of conviction, this time for complicity in concealed work (or, at the least, for complicity in fraud in relation to social security declarations), also extends to the parent company established in France (as such company has been at the origin of the conclusion of the management contract between its foreign subsidiary and its employee residing in France).
The selection by the parent company of a service provider supposed to intervene with the foreign subsidiary carries, for its part, the risk of conviction for concealed work by concealment of activity.
B. A company registered in France that selects a service provider for its subsidiary established abroad: possible hypothesis of complicity in concealed work, by concealment of activity
For the purposes of continuous training of the staff of the foreign subsidiary or, more generally, for the sake of harmonizing certain working methods within the same group of companies, French companies often have to conclude contract for provision of services between one or more of their employees and their foreign subsidiaries. Due to the employment contract with the parent company, the service provider usually continues to reside in France, moving only occasionally to the country of registration of the foreign subsidiary. He declares in France his income earned abroad as a service provider, and he pays all his taxes in France.
However, in reality, such service provider, assigned by the parent company to work with the foreign subsidiary, is subject to obligations to declare and to pay contributions under French law: pursuant to Art. 13, para 3 of Regulation (EC) No. 883/2004 of the European Parliament and of the Council of 29 April 2004 on the coordination of social security systems, it is French law which should regulate the questions relating to payment of social security contributions under the service contract concluded between the employee of the parent company (as a service provider) and the subsidiary established abroad. What is more, under French law, the activity carried on by the service provider for the foreign subsidiary has the characteristics of an independent liberal activity. As such activity is cumulated with a salaried employment within the parent company, contributions are in principle due in France under both social protection schemes. With regard to retirement, double social security affiliation in France is also compulsory, as well as the payment of contributions under the both corresponding social security schemes.
Moreover, since the service provider operates under the service contract in his own name, under French law he should be viewed as an individual entrepreneur. If his annual turnover does not exceed, for a full calendar year, a maximum of 70 000 €, he can opt for the status of the micro-enterprise (also called self- employment). It is thus a subsidiary business of self-employment, exercised in addition to the status of paid employee within the parent company. He must declare this self-employer activity with the Business Formalities Centre. He must also declare his turnover, either monthly or quarterly (depending on the option chosen). In case where the maximum turnover of 70 000 € is exceeded for two consecutive years,
the provider becomes subject to the sole proprietorship plan (in case where the maximum is exceeded in the first year of activity, the calculation of the turnover is done pro rata temporis – depending on the date the undertaking was created).
In case of non-compliance with the declarative obligations laid down by French law, the conviction for concealed work by dissimulation of activity (or, at the very least (in case of unintentional concealment) for fraudulent social security declarations, or tax evasion) becomes possible. The possible risk of conviction, for complicity in concealed work (or, at the very least, for complicity in fraud with social security declarations, or complicity in tax evasion), also extends to the parent company established in France (as such company has been at the origin of the conclusion of the service contract between his foreign subsidiary and his employee residing in France).
Like their counterparts established in France, those who undertake work in France from abroad must also take special care not to violate the standards concerning concealed work.
II. The pitfall of "concealed work" in cases of entrepreneurship in France, from abroad
Foreign entrepreneurs who operate in France are sometimes all the more surprised by the regulation of concealed work because they interpret this notion literally, given the strict meaning of the word in French. Specialized lawyers are used to this reality on the ground, implying, in the minds of most foreign entrepreneurs, that the fact of having declared their activity in France should exclude, as far as they are concerned, any possible hypothesis of concealed work: for the unsuspecting foreigner, the officialization of the activity excludes, by definition, the "concealment". This error of understanding often leads to a chain of multiple problems, such as those resulting from the situation in which an entrepreneur, who receives a warning letter from the French administration, enjoining him to put an end to a condition qualified as a case of concealed work, considers – sometimes, in good faith – that there is clearly a mistake, to the point that he refuses to comply, without even bothering to consult a lawyer. Such refusal to regularize the situation (that sometimes results from a simple misunderstanding of a misnamed notion) can later serve as evidence of the intentional character of the concealment, thus closing the circle of concealed work, with criminal convictions.
In fact, to avoid being condemned for concealed work, the foreign entrepreneur (just like his French counterpart) cannot simply declare in any way his gainful activity in France: he must carefully carry out the declarations required by French law.
Among the many hypotheses that can pose a problem due (at least) to lack of thoroughness, there are two that should be considered more closely: the case in which the characterization of the offense of concealed work results from the application of the general rules of territorial attachment governing the taxation of profits (A.) and the one in which the offense is deducted from the application of special standards specific to the posting of employees (B.).
A. Concealed work characterized by application of general rules of territorial attachment, for the purpose of taxation of profits
Among the legal concepts that serve as territorial connecting factors for the purposes of profit taxation, the notions of "exploitation", "permanent establishment" and "effective management seat" are the most used. Defined by the State Council, in cases where no international convention on double taxation would be applicable, the notion of an enterprise operating in France allows to tax in France any profit resulting from the usual practice, on French territory, of an activity which constitutes the outcome of operations forming a complete commercial cycle, or an activity which is carried out either as part of an independent establishment or, failing that, by the intermediary of a representative without independent professional personality. Used in international conventions signed by France, the notion of permanent establishment is, for its part, defined, inter alia, by art. 5 of the OECD Model Convention as a fixed place of business, through which an enterprise carries out all or part of its business. It also makes it possible to impose in France the profits resulting from an activity initially wrongly presented by the persons concerned as being exercised abroad. As for the notion of an effective place of management, it is used by French case-law to for the taxation in France of fictitious foreign companies: according to the Council of State, the effective management seat is the "place where the persons exercising the Highest functions make the strategic decisions that determine the conduct of the business of this company as a whole" (State Council, 10 th and 9 th ssr, 16/04/2012, 323592).
AThus, a permanent representative sent to France, a social executive residing in France, a construction site located in France or the realization of purchase and resale operations in France are all possible examples of application of the criteria of attachment of a foreign company to the French territory, for tax purposes.
Beyond the territorial attachment, it is also a basis of subjection of foreign companies to declarative obligations and / or obligations of registration in France. As the breaches of these obligations can be qualified as "concealments" (within the meaning of Article L. 8221-1 S. of the Labor Code), the notions of exploitation, permanent establishment and effective management seat can be used as elements of characterization of concealed work offenses, leading to corresponding criminal convictions.
When a foreign company practices the posting of employees in France, the use of the traditional criteria of territorial attachment is sometimes no more necessary to lead to a conviction for concealed work.
B. Concealed work characterized by application of special rules specific to the posting of employees
The so-called "Professional Future" law (law No. 2018-771 of September 5, 2018) introduced a new hypothesis of “concealed work”, now laid down in art. L. 8221-3, 3° of the Labor Code: is deemed to be concealed work by concealment of activity the exercise of an economic activity by a person who, evading intentionally his obligations, "has availed himself of the provisions applicable to the posting of employees, where the employer of the latter carries on activities in the State on whose territory activities are solely internal or administrative, or where his activity is carried out on the national territory in a habitual, stable and continuous manner" .
Thus, the foreign-based entrepreneur who posts employees to France but who neither produces, processes, repairs or provides services, nor trades as a regular occupation in his State of establishment, may be pursued for concealed work. The same applies for the foreign-based entrepreneur who posts employees to France while performing a usual, stable and continuous activity on the French territory.
Temporary employment agencies registered abroad, that regularly post employees to France, are among those targeted by this new repressive regulation. User undertakings established in France also incur the same penalties, because under art. L. 8221-1, 3 ° and L. 8224-1 s. of the Labor Code, the penalties applicable to concealed work extend to those who "knowingly, directly or through an intermediary, use the services of a person who is engaged in concealed work".
Cross-checks of the Labor Inspectorate, the General Directorate of Public Finances, the URSSAF, the Regional Directorates for Enterprises, Competition, Consumption and Employment, interventions by the Prefect, as head of service to the Interministerial Service for the Animation of Public Policies … even upstream from the Damocles sword of the criminal conviction, the suspicion of a violation of the Labor Code's rules governing concealed work is capable disorganizing the entire activity of a company, forcing it to restructure globally or even to cease its activity altogether.
The resolution of the problem related to the lack of correspondence between the formal positioning of the basic regulations, in this area, (centered on the Labor Code) and the existential realities that it aspires to govern should imply a better refocusing of the legal provisions on business law, by appropriate incorporation in the Commercial Code – at least in the form of legislation by reference -. It should also imply a rationalization in the conceptualization of the realities that are being apprehended: the concept of "undeclared economic activity" may constitute an improved alternative to the concept of "concealed work, by concealment of activity", and the notion of "concealed work" could have its domain reduced to the only hypothesis known as "concealed work, by concealment of salaried employment". Such changes would be beneficial not only to the entrepreneurs concerned, but also to society as a whole: improving the accessibility and intelligibility of repressive regulation leads to an increase of its deterrent effect and engenders a reduction in the numbers of both the offenses and the hypotheses that may give rise to suspicions of offenses; it also induces a decrease in the number of controls. Such a normative improvement could contribute significantly to the reduction of public expenditure.
In any case, and especially in the absence of more affordable regulations, the use of a specialized lawyer at the planning stage of the international entrepreneurship activity is likely to avoid many problems.