Works council compensation – (K)eine Vergütung auf Augenhöhe?

The legally compliant structuring of compensation, in particular for exempt works council members, is a recurring challenge in practice. Due to its legal conception, works council compensation is associated with considerable risks – risks for the company and its involved HR managers, but also for the individual works council member. For even if the parties involved agree, it must be taken into account that the amount of the works council remuneration is subject to mandatory statutory limits, both downward and upward. In this context, case law has most recently dealt with the criminal liability of board members and personnel managers for breach of trust. In this regard, the Federal Court of Justice (BGH) increased the risk of personal criminal liability of HR managers with its current decision of January 10, 2023. However, the relevant information for companies on what they should do in order to be compliant is missing. We analyze the ruling and the labor law requirements for you and give you recommendations for future action.

1. on the initial situation in the case

The ruling of the Federal Court of Justice (BGH) of January 10, 2023 (Case No. 6 StR 133/22) gives cause to take a closer look at the preconditions for lawful remuneration of works council members in the company, in particular those who have been released from their duties. Works council members are entitled to at least the remuneration of comparable employees with normal career development. They may neither be favored nor disadvantaged compared to other employees when determining compensation. If the compensation is determined incorrectly – in particular if it is set too high – decision-makers may be liable and also personally liable to prosecution.

On September 28, 2021, the Regional Court (LG) of Braunschweig (Case No. 16 KLs 85/19) had already come to the conclusion that the granting of excessive salaries and bonuses to dismissed works council members contrary to the rules of the Works Constitution Act (Betriebsverfassungsgesetz – BetrVG) constituted the objective element of breach of trust. At the same time, however, the court of first instance had acquitted the accused HR managers, two former Executive Board members responsible for HR and two former HR managers, of the charge of breach of trust because, in the court’s opinion, they were guilty of a mistake as to the facts. The court assumed that the defendants were convinced that they acted dutifully and in accordance with the law.

2. annulment of the acquittals

The BGH did not follow this legal opinion in the appeal pursued by the public prosecutor’s office and overturned the defendants’ acquittals. The case is now remanded for a new hearing and decision. The 6th Senate emphasizes that the objective elements of the crime of breach of trust under § 266 para. 1 of the German Criminal Code (StGB) may be fulfilled if a member of the Board of Management or an authorized signatory grants excessive remuneration to a member of the Works Council in violation of the prohibition of favoritism under works constitution law. The required duty to look after assets is violated if a works council is granted remuneration that violates the prohibition of favoritism under works constitution law. Whereas the Braunschweig Regional Court still assumed that the defendants were entitled to assume that they were acting in accordance with the law on the basis of internal and external advice, from now on, according to the view of the highest court, it will have to be considered that a person has sufficient understanding of wrongdoing if, when committing the act, he reckons with the possibility of doing wrong and accepts this. This shall apply in particular if the person acting was aware that he was moving in a legal borderline area. The BGH suggests that the defendants were merely subject to a prohibition error, i.e. they lacked the insight to do wrong when committing the act. They can escape conviction in this case only if their error was unavoidable. In this regard, the BGH also tightens the requirements by stating that the misconception was not already unavoidable when external expertise was obtained. A legal opinion also requires critical appraisal and relevant specialist publications must be taken into account.

3. labor law basics

In view of the threat of legal and also personnel policy consequences, particular attention must be paid to the fundamentals of labor law. The ruling does not yet provide any instructions for action in this regard.

The Works Constitution Act provides the following as the legal framework for the remuneration of works council members:

The honorary principle applies. The works council activity as such is not to be remunerated. Works council members shall be released from their professional duties without any reduction in pay (Sec. 37 (1) and (2) BetrVG). Works councils may not be disadvantaged or favored in the determination of remuneration because of their activities (Section 78 p. 2 BetrVG). Paying works councils as “co-managers” or “at eye level” on the basis of their unpaid honorary office is not permitted.

What sounds simple proves to be difficult in practice, especially in the case of long-lasting “works council careers” and leaves of absence. The law merely sets a lower limit for the prohibition of discrimination and favoritism with regard to compensation: The remuneration of works council members, including the period of 1 year following the end of their term of office, may not exceed not be set at a lower level than the remuneration of comparable employees with normal career development (Sec. 37 (4) BetrVG). In a labor dispute, the works council member must state with which employee he or she is comparable from his or her point of view. Within the framework of the graduated burden of presentation and proof, a claim for information against the employer with regard to salary development is frequently asserted.

The question of whether a hypothetical career path or fictitious promotion opportunities of works councils should be taken into account when determining legally compliant compensation proves to be a difficult one. The BGH states that the strict standard to be applied in the interest of the independence of works council members with regard to the non-remuneration of the works council office prohibits taking into account hypothetical salary developments of the works council in the case of special careers. Unfortunately, there is no explicit discussion of the principles of labor law, so that uncertainties remain.

4. legal consequences of a violation

A violation of the prohibition of discrimination and favoritism can have consequences under civil law in addition to the criminal liability of the executive bodies: An order favoring the works council member and the underlying contractual provision are null and void (Sec. 134 BGB). In principle, this leads to a claim for repayment by the employer under the law of enrichment, which also includes the employee’s social security contributions. Whether the works council member can object to the claim by raising the plea that the service provider has been deprived of the benefit or has violated a prohibition law will have to be examined on a case-by-case basis. The same shall apply to the applicability of agreed preclusion periods or invoking the statute of limitations defense. The compensation of the works council shall be adjusted to the usual compensation of the comparative employees.

5. conclusion and recommendation for action

The risks clearly highlighted by the BGH give the company cause to examine the legality of the current works council remuneration more closely. We are happy to support you with our expertise. From our experience, certain points are of central importance for compliance-compliant handling, which we summarize for you in the following audit scheme:

1) Analysis of the initial situation

• What regulatory bases for compensation exist in the company (collective agreements, relevant company agreements, etc.)? Does a company-internal regular review system for works council compensation already exist in the form of a unilateral instruction or a voluntary regulatory agreement (“guideline”)?
• Is this guideline proper iSv. §§ 37 para. 4 and 78 p. 2 BetrVG conceptualized and practically accompanied by efficient processes? Are incident-related analyses also carried out?
• Who is responsible for reviewing policies and processes for updates and need for improvement?
• Has the policy been lived and operationally implemented in the past?
• Is the documentation of the audit procedures of the respective personnel sufficient and how is their long-term archiving done?

2) In case of a negative finding

• What adjustments to the testing system are required or is there a need to create a new policy? Does the company have sufficient technical expertise to do this?
• Development of a process manual with instructions for regular and ad hoc audits, data protection-compliant specifications for documentation and archiving of data and audit activities.

3) Within the framework of the case-by-case examination

• Creation of a status description: When the works council member took office within the meaning of Sec. 21 Sentence 2 BetrVG (not exemption), was it precisely documented which activities, personal and professional qualifications, classifications and remuneration he or she had?
• Has a comparison group been identified using acceptable criteria? What is their professional development like? Is the development to be assessed as normal for the company? What is the handling of intermediate values – majority, meridian?
• Is there reason to adjust the comparison group? What applies in the case of specialists or the subsequent elimination of comparative persons, restructuring, and individual changes in activity and qualification? Are corrections required? Are there any court rulings or settlements regarding the classification of the works council member?
• If the test was missed, it should be made up and a comparison group formed retroactively. An exact consideration is expedient and avoids disputes.
• Legal consequence: determination of the scope of remuneration development.

What are your questions about this? Get in touch with us here. We are looking forward to the exchange with you.