Labour representation at board level is a well-established part of the German corporate governance system. According to the German Co-Determination Act, a corporation with more than 2,000 employees has to establish a co-determined supervisory board composed of an equal number of shareholders’ and employees’ representatives.

So far it has been the overwhelming opinion of German scholars that, according to the German co-determination law, only employees employed in Germany count for the calculation of this threshold pursuant to the German Co-Determination Act. In other words: employees employed outside Germany, be it by the same corporation or its (foreign) subsidiaries,were not considered in the calculation of such threshold. Consequently the employees employed abroad had also no voting right in the elections of the employees’ representatives on the supervisory board, neither actively nor passively.

However, this may change in future due to a decision of the Berlin Court of Appeal (Kammergericht) of 16 October 2015, which referred the question of whether non-representation of employees employed abroad is compatible with the European principle of non-discrimination and free movement of employees within the European community to the European Court of Justice (ECJ).[1]The ECJ’s decision could change the system of German employee representation dramatically. If the German co-determination law is in conflict with European law, German co-determination law would be inapplicable and in future only shareholder’s representatives could be appointed to the supervisory board, at least until the German legislator has reacted and passed a revision of the code termination law that is compliant with European law. However, the outcome of the ECJ decision is open and the possible impact on German employee participation is heavily debated in German legal literature. A decision by the ECJ is not expected before 2017.

With its decision dated 16th October 2015 the Berlin Court of Appeal presented the ECJ the question whether the German Co-Determination Act violates European law. The order of reference was issued in a so-called status procedure (Statusverfahren)challenging the due composition of the supervisory board of stock listed TUI AG– a corporation with 10,000 employees working in Germany and approximately 40,000 employees working in other EU member states. In the case at hand the plaintiff is of the opinion that the TUI AG supervisory board is not properly composed. Instead of comprising equally shareholders’ and employees’representatives, the board should solely be composed of shareholders’representatives, since the co-determination law stands in contradiction to European law. The Berlin Court of Appeal considered a violation of European law at least possible and referred the case to the ECJ.

The question whether German co-determination law violates European law – in particular the prohibition of discrimination on grounds of nationality (Art. 18 of the Treaty on the Functioning of the European Union (TFEU)) and against the freedom of movement for workers (Art. 45 TFEU) – is controversially discussed in juristic literature in Germany.

One central argument of those opposing the current German Co-Determination system is that the employee’s freedom of movement is currently affected as employees would be deterred from moving abroad due to the loss of their active and passive election right in future elections of employee representatives to the supervisory board.

As such, a number of employees would not be sufficiently represented despite the fact that the supervisory board of an international company is responsible for the entire group and not only for a limited national part.

A key argument against a violation of European law is that a national legislator does in fact not have the competence to implement regulatory rules for employees working in another EU-Member State. As a consequence, a national legislator can also not violate European Rules outside his sphere of national competence, according to this legal opinion.

The current system of employee participation in German companies stands on shaky ground. It may disappear or even be expanded in the future. Until the decision by the ECJ has been rendered, it is not possible to predict the outcome. However, company leaders are well advised to take this uncertainty into account for upcoming structural decisions. Corporations in the form of a European Stock Corporation (Societas Europaea) are for example not affected by these uncertainties, since they are governed by an autonomous co-determination regime according to the German law governing the participation of employees in a European company. For the time being an increasing number of status proceedings maybe expected challenging the right composition of a corporation’s supervisory board, either with the argument that no employee participation is applicable or with the argument that even employees in other EU member countries should count for determining the thresholds under the Co-Determination Act. Chances should be good to achieve a suspension of such proceedings until the decision by the ECJ has been rendered.

About the Authors:

Dr. Michael Sörgel LL.M. (Partner) and Dr. Patrick Müller LL.M. (Associate) are Lawyers both specialized on the field of corporate and commercial law at the law firm Heuking Kühn Lüer Wojtek in Düsseldorf/Germany.

E-Mail to: [email protected] and [email protected].

[1] Pending at the ECJ under the file reference– 566/15.