The French government has scrapped a tax break on overtime pay in a bid to stimulate job creation, it has been announced.

New president Francois Hollande is to reintroduce the charges on overtime bills that were axed in 2007.
His socialist government argues that the incentive discourages recruitment, as each extra hour of overtime is taxed less than an hour worked by a new employee.

The move reverses the policy of former president Nicholas Sarkozy, who wanted to reward industrious staff who were prepared to work longer than the standard 35-hour week.

But the tax break – which benefited nine million employees – cost the French treasury an estimated €4.5 billion in 2010. There were also claims that some businesses were attributing normal working hours to overtime to avoid paying the required tax and social security contributions.

The government hopes its decision will help reduce the unemployment rate in France, which stands at 10.1 per cent compared to 8.1 per cent in the UK.

However, Neil Roden, HR consulting partner at PwC, questioned whether increasing the tax on overtime would have the desired outcome of stimulating hiring in France.

“The cost of extra recruits and the bigger fixed costs they bring will likely far outweigh overtime tax, so it remains to be seen whether the changes will have the intended effect,” he explained.

Roden also emphasised the difference between employment laws here and across the Channel.
“The UK has a more flexible labour market, the US more flexible still,” he said.

“Clearly a balance needs to be struck between giving employees due protection and allowing firms to align employment costs with economic conditions. But there is a strong argument that a flexible labour market can help reduce unemployment, by enabling firms to preserve jobs by adapting policies.”