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Irreconcilable dissonance?

Matrix structures and the German Works Constitution Act

The number of German enterprises integrated into European or international matrix organisations is steadily increasing. As group headquarters are often located abroad in other European countries, America or Asia, significant decisions are taken on an international level also affect business establishments in Germany. Pyramid structures and a cross-divisional overall hierarchy are replaced by so-called matrix structures, where central functions are bundled into one or more group-affiliated entities and the business is structured according to product segments or functional areas across corporate entities. This leads to a situation where managers in a matrix structure are responsible for the results of a specific business division which, organisationally speaking is part of several legal entities in a number of different countries. Therefore, the legal limits for such local legal entities no longer play a role in day-to-day operations. For instance, the manager is employed by the parent company and vested with the necessary powers, yet works to the fullest extent in subsidiaries of the group and controlling cross-company teams working at different locations. The authority of managers is manifold. Modern means of communication allow them to assume a wide variety of group-wide responsibilities.

Disconnect between employer’s functions

Matrix structures are usually characterised by the fact that an employer’s functions are separated rather than bundled. While on the one hand the technical or functional managers are the matrix managers, who frequently work with other legal entities in Germany or abroad but are employed by a parent company abroad, while the disciplinary employer function - the contractual employer (for employment relationship issues) - remains with the respective business establishment, where the employee conducts his or her activities.

Integration of the manager into the matrix of a business establishment

The application of matrix structures in German business establishments raises some extremely complex legal issues. As various recent decisions of the regional labour courts show, German works constitution law is reaching its limits as it is based on a classical concept of a business establishment. It is indeed questionable whether matrix managers are really integrated into the business establishment where they are managing staff and providing technical direction.

Pursuant to the German Works Constitution Act (Betriebsverfassungsgesetz), the works council has a right of codetermination if employees are integrated into the business establishment and perform tasks there (Section 99 of the Works Constitution Act).

According to German case law, employment within the meaning of the Act (Section 99 (1), first sentence) will exist if persons are integrated into the business establishment in order to achieve the establishment’s operational purposes by carrying out activities in line with instructions together with the staff already working at that establishment. Hence, a matrix manager carrying out activities in such a business establishment is considered to be integrated into the establishment, with the effect that the works council responsible for this establishment is entitled to a substantial number of rights vis-à-vis the matrix manager, although the matrix manager is not engaged in any contractual relationship with the establishment as employer. Integration into the organisation of the business establishment was not subject to the condition that the activities were performed personally, on the premises. The concept of business establishment was not to be interpreted in the geographical sense, so that the operating range of the business was not to end at the borders of the business property or the business premises. It was decisive, though, whether the employer pursued the operational purposes of its business establishment with the help of the staff. Minimum periods, in which the manager was actually present at the business establishment, were not a prerequisite for achieving this purpose.

This legal position would lead to a situation where German works councils would have codetermination rights not only with regard to employment, but also in numerous other respects if such matrix managers were somehow involved in or contributed to the achievement of the operational purposes of the respective business operation. This would already be the case because of the matrix manager’s right of technical instruction vis-à-vis employees of a unit, while the managers themselves were in an employment relationship with another employer of the same group and were not subject to any instructions, not even from the managing director of the unit. Such cases illuminate the limits of the classical concept of a business establishment in relation to the modern matrix structure.

The contradictory and incomprehensible situation for global companies becomes even more blatant in certain situations, where the matrix manager would be qualified as an executive officer in one unit and as a regular employee in the other unit within one and the same company.

Under certain circumstances, this manager would fall within the scope of different works council agreements that would not apply in the company where he or she is actually employed. The regional labour courts’ legal practice also gives rise to contradictory evaluations, because it allows for the matrix manager to be simultaneously integrated into the organisation of different business establishments in Germany to the extent that he or she is responsible for employees of the establishment and gives those employees technical instructions. An extreme case might therefore bring about a duplication or even multiplication of codetermination rights of the works council.

In the meantime, the Federal Labour Court (Bundesarbeitsgericht) has rendered judgment (which has yet to be published) on the appeal of a judgment of the Regional Labour Court of Dusseldorf of 10 February 2016. Here the Federal Labour Court has obviously, at least in part, come to a different finding, but it remains unclear on which legal grounds or considerations these findings are based.

Possible solutions

Even if many works councils are not interested in confrontation with employers and shareholders in relation to the integration of matrix managers into their business establishment, some of them do, in fact, take their rights under the works constitution law seriously and assume responsibility for external employees. In practice, works councils and companies currently conclude agreements granting works councils certain rights in relation to the matrix managers acting within their business establishment. In this way, it can be ensured that the codetermination rights of works councils do not affect the advantages of a matrix structure. Should the Federal Labour Court take account of the particularities of the matrix structure compared to the classical German concept of a business establishment and come to a different finding than the regional labour courts, this would positively influence the conclusion of such agreements.

If you have any questions related to this topic, please feel free to contact Markus Künzel (Lawyer, Licensed Specialist for Labour Law) and Dr Dominik Sorber (Lawyer).

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Arbeitsrecht

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Markus Künzel T   +49 89 35065-1131 E   Markus.Kuenzel@bblaw.com
Dr Dominik Sorber T   +49-89-35065-1131 E   Dominik.Sorber@bblaw.com