PARIS (Reuters) - French Prime Minister Manuel Valls retreated on one of the central planks of the government’s labour reform bill on Monday after protests against the measures, dividing unions and angering business leaders.

French Prime Minister Manuel Valls (L), Labour Minister Myriam El Khomri (C) and Economy Minister Emmanuel Macron pose after a news conference to unveil a revised labour reform bill, that makes concessions to trade unions following mass protests against the measures, at Matignon in Paris, France, March 14, 2016. REUTERS/Charles Platiau

Tens of thousands of students and trade unionists rallied across the country last week against the reform plans, which put almost all aspects of France’s strictly codified labour rules up for negotiation.

In the revised version, the government will no longer impose a cap on severance pay for dismissed workers, a measure many companies argued would have helped reduce the highly uncertain cost of laying off workers. Instead, the new limits will be introduced as non-binding guidelines for labour courts.

“We have a big problem,” said Pierre Gattaz, the head of France’s biggest business group, referring to the guidelines.

“It’s a reform in reverse,” Francois Asselin of the CGPME group of small companies said.

Valls said the reform would leave room for companies and unions to strike in-house deals on a range of issues, but the details will only be unveiled on Tuesday.

“I want a new start for this bill,” Valls told union officials. “To reform is a demanding process. It’s about proposing, discussing and listening.”

The government and business leaders had argued the reforms would have encouraged companies to take on more workers on permanent contracts rather than temporary ones, helping bring down an unemployment rate stuck above 10 percent.

But the government came under increased pressure from Socialist lawmakers, concerned about how they will fare in the 2017 parliamentary election, and became wary of the burgeoning discontent among students, traditionally at the forefront of the largest protest movements.

UNIONS DIVIDED

Despite the concessions, the CGT and FO unions said they wanted the government to scrap the bill completely, suggesting Valls and President Francois Hollande may face further protests in the coming weeks.

“The government is back-pedalling because it got scared of young people,” William Martinet, head of the Unef student union said, calling on protests scheduled for Thursday to go ahead.

But the second-largest union, the reformist CFDT, approved the new version, in a signal to lawmakers in the ruling Socialist party which should make its passage in parliament smoother.

The retreat is unlikely to help France improve its reputation in Brussels, as its European Union partners had given Paris more time to reduce its budget deficit in exchange for structural reforms including to its labour market.

Business leaders praised a few remaining measures, however, including the possibility of striking deals to increase working hours or reduce pay in exchange for more hiring and a more precise definition of what constitutes dismissal for economic reasons.

Currently magistrates can block job cuts if they find that a company’s other affiliates are profitable. The government had wanted to limit the scope for industrial courts to assess the health of a company to a single location, but has now expanded that to include all of the company’s activities in France.

The new plan also increases the right of unskilled workers to training and gives more financial aid to young people.