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German corporate co-determination on trial

Compared to other EU Member States, German corporate co-decision laws grant employees very wide-reaching rights. Foreign companies often try to avoid these labour rights, which are the most generous co-decision standard in the EU.

What is “corporate co-determination”?

Companies established in Germany, which have a particular legal form, such as corporations (Aktiengesellschaft (AG)) or limited liability companies (Gesellschaft mit beschränkter Haftung (GmbH)), and which have more than a specified number of employees must form a co-decision supervisory board (Aufsichtsrat) of employee representatives. Where the company has usually more than 500 employees, one-third of the members of the supervisory board will be employee representatives (One-Third Participation Act, Drittbeteiligungsgesetz, DrittelbG).

This increases where a corporation normally has more than 2,000 employees, so that half of the members of the supervisory board must be employee representatives (Co-determination Act, Mitbestimmungsgesetz, MitbestG). These employee representatives may be regular employees, employees in executive positions or union members. In effect, this means that employees and shareholders can be equally represented on a supervisory body of the company or group.

For the purposes of calculation, the “employees” of a company include the company’s own employees, temporary employees and – in some circumstances – employees of related companies within the group. This will be the case where, for example, the company holds a majority shareholding in the subsidiary or there is a control agreement between the two.

Corporations take critical view

Companies often view corporate co-determination as a restriction on their business freedom. As a result, many companies take measures to ensure that co-determination laws are not applicable to them. Over the past few years, this has also led to a consistent decrease in the number of companies that have supervisory boards with equal shareholder and employee representation.

Practical tip: Companies do not just have to sit back and do nothing about this “restriction” on their entrepreneurial freedom and the demonstrated consequences. There are a number of organisational options for pre-emptive counteraction against possible corporate co-determination. For example, the legal form of the company can be “changed”, so that the company no longer falls within the scope of German co-determination laws. There are also numerous possibilities where a foreign element is involved, such as transferring the registered office to another country, or establishing foreign subsidiaries, etc. Further possibilities include remaining below the thresholds for the number of employees (500 or 2,000) or eliminating the likelihood that the employees of a subsidiary will be attributed to the parent company for the purposes of co-determination, such as by terminating any control agreements between parent and subsidiary.

Corporate co-determination is compatible with EU law

German corporate co-determination was recently on trial, not just politically and commercially, but legally, too. Approximately 10,000 employees in Germany voted for their representatives on the supervisory board of the tourism group TUI. However, approximately 40,000 colleagues from other EU Member States were not granted the right to vote for these representatives. A shareholder of TUI AG brought an action against the resulting composition of the supervisory board and against the common principle of territoriality that had been applied. The lawsuit claimed that the German Co-determination Act impinged on the free movement of workers and the general prohibition against discrimination (Articles 18 and 45 of the Treaty on the Functioning of the European Union (TFEU)). The Court of Appeal (Kammergericht) in Berlin referred the case to the European Court of Justice (ECJ). The ECJ held that the German Co-determination Act did not infringe EU law and thus confirmed the German rules for the election of employee representatives to the supervisory board. Accordingly, employees of German corporations, who are employed in Germany, have more co-decision rights than employees of German groups, who are employed in other countries (Judgment of the European Court of Justice of 18 July 2017 in case C-566/15, Erzberger v TUI AG).

This judgment confirms that the rules for corporate co-determination under the Co-Determination and One-Third Participation Acts are legitimate and can continue to be applied as before. If the ECJ had held that the German Co-Determination Act infringed EU law, the impact would have been considerable.

Outlook

It is no secret that many companies take a critical view of the wide-reaching German corporate co-determination rules. This displeases unions and “left-wing” political parties, which have repeatedly called for the strengthening of corporate co-determination rights and the participation of employees in supervisory boards. One way to achieve these goals would be to change the thresholds set out in the Co-determination and One-third Participation Acts, so that more companies were caught by the corporate co-determination rules.

If you have any questions related to this topic, please feel free to contact
Dr Erik Schmid (Lawyer, Licensed Specialist for Labour Law ).

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Dr Erik Schmid T   +49 89 35065-1127 E   Erik.Schmid@advant-beiten.com