Corporate co-determination and attribution of employees of subsidiaries in other EU countries: Domestic remains domestic?!

In a current preliminary ruling (TUI ./. Erzberger, C 566/15), the European Court of Justice (ECJ) has to assess whether the territorial restriction of the active and passive voting rights for employee representatives on the supervisory board to employees employed in Germany, as provided for under German co-determination laws, is compatible with EU law. On May 4, 2017, the Advocate General responsible for the preliminary ruling issued his opinion, which was eagerly awaited by practitioners.

Companies which, in view of their legal form (above all GmbH, AG) and a minimum number of employees regularly exceeding 500 or 2,000, are subject to the scope of application of the One-Third Participation Act (DrittelbG) or the Co-Determination Act (MitbestG), must establish a supervisory board at least one third (DrittelbG) or half (MitbestG) of which consists of employee representatives.

When determining the number of employees relevant for the application of the German One-Third Participation Act (DrittelbG) or the German Codetermination Act (MitbestG), the employees from group companies of the company concerned must also be taken into account under certain conditions in accordance with the statutory provisions. The employees from the Group companies to be taken into account generally also have active and passive voting rights for the Supervisory Board mandates of the employee side if they are taken into account for the threshold values.

According to the understanding of the legislator and previous practice, only employees employed in Germany are generally covered by the personal scope of application of the co-determination laws; this with reference to the territorial principle to be observed for the application of German (co-determination) laws.

These foundations of the domestic territorial principle have recently been challenged by two small shareholders who want to have employees working in foreign subsidiaries of the EU taken into account when assessing the thresholds and the right to vote and stand for election. To this end, they have initiated various legal status proceedings, of which the “TUI ./. Erzberger” proceedings have been pending before the ECJ since the fall of 2015.

For which co-determination issues is the number of employees in the company or group of companies decisive?

The number of employees is, in the starting point, decisive for the assessment of the thresholds of more than 500 employees or more than 2,000 employees, which can trigger corporate co-determination pursuant to the DrittelbG or the MitbestG.

Furthermore, the number of mandates of a supervisory board to be composed in accordance with the MitbestG is assessed according to the number of employees. Depending on the number of regularly employed employees, the Supervisory Board must comprise up to 20 mandates (in the case of more than 20,000 regularly employed employees).

What is the concrete content of the territorial principle?

According to the current legal understanding, the territorial principle limits the application of co-determination laws to (group) companies with their registered office in Germany and, for these companies, only to establishments located in Germany. Only employees who fulfill these two requirements cumulatively are to be taken into account for the employee figures in accordance with the territorial principle and are entitled to vote and stand for election to the Supervisory Board.

According to the territorial principle, employees from (EU) foreign (group) companies and from (EU) foreign establishments of the company or group of companies are therefore not to be taken into account.

What is the background to the current ECJ case with regard to the territorial principle?

In the current ECJ proceedings, the ECJ has to clarify the legal question of whether the territorial principle limiting the application of co-determination laws is compatible with the requirements of EU law. The plaintiff small shareholders dispute this on the grounds that the exclusion of employees from EU-foreign Group companies and operations violates, among other things, the free movement of employees under EU law.

What is the content of the Advocate General’s opinion?

The Advocate General has issued the opinion that the exclusion of employees from EU-foreign group companies and establishments from the scope of German co-determination rights is compatible with European law and, in particular, does not constitute a violation of the free movement of employees under EU law.

What’s next?

From a legal point of view, the ECJ is not bound by the Advocate General’s opinion in the preliminary ruling proceedings. In fact, however, the ECJ judges follow the Advocate General’s vote in the vast majority of preliminary ruling cases.

If the ECJ does not follow the Advocate General’s opinion and considers the territorial principle laid down in the co-determination laws to be incompatible with the requirements of EU law, this may have serious consequences in individual cases for domestic companies with (EU) foreign subsidiaries and establishments. Companies that have not yet set up a supervisory board in accordance with the DrittelbG or the MitbestG in view of the fact that they have fewer than 500 or 2,000 employees in Germany, but which exceed the respective threshold by adding the employees working in other EU countries or at an EU foreign subsidiary, would be subject to the scope of application of the DrittelbG or the MitbestG for the first time. This means, for example, that companies in the legal form of a GmbH (limited liability company) with fewer than 500 employees regularly employed in Germany, which previously had no supervisory board, must elect a supervisory board for the first time, one third of which would be made up of employees.

This would also entail significantly more complex election procedures for the election of employee representatives, which would then also have to be carried out in the (EU) foreign group companies or in the (EU) foreign establishments.

The companies concerned would have to investigate whether these possibly – above all – undesirable consequences from an entrepreneurial point of view could be eliminated or avoided by suitable restructuring measures (e.g. a change to a legal form not subject to co-determination laws, by unbundling individual subsidiaries under group law, etc.).

Outlook

The ECJ is expected to deliver its ruling in the preliminary ruling proceedings in late summer 2017. We will be happy to keep you up to date on this and further developments in this context with our Client Alert.