Corporate codetermination in Germany and its compatibility with EU law
By Axel Braun and Stephan Sura
The European Court of Justice (ECJ) recently confirmed that corporate codetermination in Germany is compatible with EU law, especially with the free movement of workers. In a highly relevant proceeding for the domestic legal situation, the Court stated that employees in subsidiary companies in another Member State are not to be taken into account for threshold values for a specific legal act’s application. Furthermore, even the transfer of employees abroad, including the loss of the right to vote or stand as a candidate for the supervisory board, is not contrary to higher-ranking community law. According to the decision, national legislators are free to provide regulations that apply exclusively to domestic employees in the fields of collective representation or their participation in the bodies or boards of corporations as the EU has not harmonized these topics yet.
Background: Codetermination in Germany
Collectively, employees in Germany have different levels of statutory codetermination rights in terms of their working and employment conditions. Through elected representatives, they can exercise these rights vis-à-vis their employers at undertaking, company or group level. With private employers, basic codetermination in an undertaking (betriebliche Mitbestimmung) is implemented by the works council (Betriebsrat) and the Executive Committee (Sprecherausschuss). With public employers, the role of the works council is taken by the personnel council (Personalrat). Both councils have a wide-ranging, graduated spectrum of rights for codetermination, such as the right to be informed, heard and consulted, veto rights and initiative rights. Regarding working circumstances, works councils and employers can stipulate works agreements or company agreements, which not only specify rights and duties, but also establish binding provisions for all employees of the undertaking or company, similar to a law or a collective agreement between a trade union and an employer or employers’ association.
The statutory basis for codetermination in an undertaking is laid down in the Works Constitution Act (Betriebsverfassungsgesetz, BetrVG), the Executive Committee Act (Sprecherausschussgesetz, SprAuG), the Federal Staff Representative Act or the individual Federal State Staff Representative Acts (Bundespersonalvertretungsgesetz, BPersVG; Landespersonalvertretungsgesetze, LPersVG) and the Act on European Works Councils (Gesetz über Europäische Betriebsräte, EBRG). Codetermination in the undertaking applies to all German-based undertakings and employees who are employed abroad, provided they have an adequate connection to the domestic undertaking.
A difference has to be made between codetermination in an undertaking and corporate codetermination, which takes the form of the workforce participating in the bodies or boards of corporations. The specific scope of participation is determined by the legal form of the company. Influence can be exerted on the management by modifying the institutions provided for in the company’s articles of association. For this purpose, works council representatives sit on the supervisory board of the company. The aim of corporate codetermination is to ensure that the interests of the employees are taken into consideration appropriately when it comes to both corporate planning and smaller decisions regarding the entire corporation, which are seen as equal to the shareholders’ interests. By sitting on the supervisory board, the workforce receives direct access to planning, management and organizational oversight.
For corporate codetermination, the statutory basis includes the Codetermination Act (Mitbestimmungsgesetz, MitbestG), the One-Third Participation Act (Drittelbeteiligungsgesetz, DrittelbG) and the Coal, Iron and Steel Industry Codetermination Act (Montanmitbestimmungsgesetz, MontanMitbestG). For European companies, European Council Directive 2001/86/EC supplementing the Statute for a European company with regard to the involvement of employees was implemented in German law as part of the German SE Employee Involvement Act (SE-Beteiligungsgesetz, SEBG) in 2004. Which Act applies to which undertaking is determined by the total number of employees and the purpose of the company. This also affects the number of members and the proportion of works council and shareholder representatives on the supervisory board:
The One-Third Participation Act applies to corporations with more than 500 employees. As the name suggests, the works council appoints one-third of the supervisory board members, section 4 (1) One-Third Participation Act. The Act’s regulations also apply to smaller stock corporations if they were founded before August 10, 1994 and if they are not family-owned enterprises.
The Codetermination Act applies to corporations with more than 2,000 employees, stipulating the composition of the supervisory board on a basis of parity, which means that the works council and shareholders nominate half the board members. In the event of a stalemate, the shareholders have the advantage of controlling the appointment of the chairperson, who has a double voting right in these situations (section 29  Codetermi-nation Act).
The Coal, Iron and Steel Industry Codetermination Act (and its Supplementary Act) applies to corporations with more than 1,000 employees in the coal, iron and steel sector. It also specifies parity in the supervisory board’s composition between the shareholders and the workers’ representatives. Due to the change from traditional to new economy, the importance of special rules for the iron and coal industry has become very limited.
In European companies, workers’ representatives in the form of a special negotiating body, and the oversights of the participating companies are obliged to reach an agreement on arrangements for the involvement of the employees within the SE. Pursuant to sections 22 (1) no. 2, 34 German SE Employee Involvement Act, the highest level of codetermination within the participating companies is adopted in the SE if an arrangement is not found within one year from the establishment of the workers’ negotiating body. In fact, most companies choose a similar arrangement beforehand. Domestic corporate codetermination law is not applicable to the SE (section 47  no. 1 German SE Employee Involvement Act).
Since the decision of the German Federal Labor Court (Bundesarbeitsgericht, BAG) dated November 4, 2015 (ref. no. 7 ABR 42/13), temporary transferred employees have to be taken into account for the relevant number of employees for an Act’s application. With the amendment of the Temporary Employment Act (Arbeitnehmerüberlassungsgesetz, AÜG) in April 2017, the German legislator implemented this principle in law for transfers which last at least six months (section 14  sentences 5 and 6 Temporary Employment Act).
Threshold values, employees abroad and EU law
In general, workers in subsidiary companies abroad were not taken into account for the relevant threshold values. Legal practice and the prevailing opinion in legal literature always assumed a principle of territoriality applying to corporate codetermination, which is why employees working for undertakings or companies in other countries were not relevant for the application of a codetermination act to a domestic group’s parent company.
This principle was challenged recently, however, for its compatibility with EU law. In a proceeding at Berlin Higher Regional Court (Kammergericht Berlin), Konrad Erzberger, a shareholder of German travel and tourism group TUI AG, objected to the exclusion of employees abroad from the active and passive right to vote on the supervisory board. In his opinion, the German Codetermination Act contained a violation of European Union law, especially the free movement of workers, because it only takes domestic employees into account for the threshold value of 2,000 employees for the application of the Act. As employees abroad are in general not German citizens, this would also imply discrimination on grounds of nationality. Furthermore, he claimed that the potential loss of a seat on the supervisory board when transferred to another (Member) State can prevent employees from making use of their freedom of movement.
The Berlin Higher Regional Court suspended the proceeding (order dated October 16, 2015, ref. no. 14 W 89/15) and requested a decision by the ECJ. The contested issues were extremely relevant to the composition of supervisory boards, especially regarding the issue of the threshold value of the Codetermination Act being reached, and if the latter needs to be applied instead of the One-Third Participation Act. In a parallel proceeding on this specific situation, the Frankfurt am Main Regional Court decided that all employees in subsidiary companies in other EU Member States have to be taken into account as section 5 (1) Codetermination Act states that “the employees of subsidiary companies have to be taken into account for the Act’s application to a group’s parent company,” not mentioning any relevance of the subsidiary companies’ individual places of business (order dated February 16, 2015, ref. no. 3-16 O 1/14).
ECJ approves corporate codetermination
Nevertheless, the ECJ declared the legal situation on corporate codetermination in Germany as valid and compatible with EU law (decision dated July 18, 2017, ref. no. C-566/15 – Erzberger). The court distinguished the two situations: Regarding employees in subsidiaries abroad, a potential discrimination could not be based on the grounds of nationality in general, but only on the grounds of the free movement of workers, which represents a special prohibition on discrimination on the grounds of nationality within the scope of employment conditions. Despite this legal framework, the court notes that the free movement of workers is, however, not applicable to all employees, meaning those who never made use of this freedom or who do not want to make use of it. In this respect, it has no relevance that a subsidiary company is controlled by a group’s parent company in another Member State.
Employees in Germany, on the other hand, are covered by the free movement of workers when they are transferred to a subsidiary abroad. Neither the loss of the rights to vote or stand as a candidate for the supervisory board nor the potential loss of a seat on it would constitute a violation of EU law. According to the ECJ, the free movement of workers does not guarantee social neutrality for a transfer to another Member State. Due to the different legal systems and provisions in Member States, a relocation can always include advantages or disadvantages for the employee’s individual working situation. In such cases, the free movement of workers does not include a right to claim for the working and employment conditions in his or her home country or the former country of work. In general, the rights of workers to collective representation or participation in the bodies or boards of corporations have not been harmonized or even coordinated within EU law yet. The Member States would therefore be free to enact provisions that only apply to employees in domestic companies.
The decision of the ECJ clarifies the situation in Germany and prevents cross-border groups from engaging in extensive proceedings concerning the right composition of their supervisory boards. The Court’s arguments deserve approval in this regard: EU law, in this case the free movement of workers, does not provide universal protection for employees when moving to another country. The harmonization of Member States’ law does not include consolidation of the best employment principles from former working places. In addition, not all employees in foreign subsidiaries have to be included in threshold values for domestic questions of corporate law, even though their working and employment conditions are controlled by a parent company abroad. The different corporate systems in the Member States need a certain degree of sovereignty, especially when an issue like codetermination has such a strong legal and practical foothold in the country.