Works Council Remuneration Remains in Spotlight in Germany

​In January, the German Federal Court of Justice (Bundesgerichtshof—BGH) ruled on the unduly high remuneration granted to works council members (judgment dated Jan. 10) that has caused a considerable stir.

In its judgment, the BGH 6th Criminal Division stated that the objective element of embezzlement (Section 266(1) of the German Criminal Code (Strafgesetzbuch—StGB)) could be satisfied if a management board member or authorized officer of a stock corporation were to grant a works council member remuneration that violates the prohibition of preferential treatment under works constitution law. According to the judgment, it was evident that the persons involved in the remuneration acted intentionally, particularly regarding bonus payments.

Fundamentally, the BGH stated, it was not possible to conclude that there had been an error in relation to prohibition—which would exclude criminal liability—where so called "flank-protection opinions" (Flankenschutzgutachten) had been obtained. Ultimately, the BGH overruled the acquittals handed down by the Braunschweig Regional Court, which had been based on the assumption of a lack of intent, and remanded the case to another criminal division of the Braunschweig Regional Court.

In response to the BGH judgment, many companies have reviewed and adjusted the remuneration of their works councils, in many cases to the detriment of the works councils, leading to strong reactions from those affected. Lawsuits have already been filed before the employment courts by those impacted.

Probably so as to cushion the displeasure of the works councils and to eliminate existing legal uncertainties, the German federal government has announced its intention to introduce new regulations on works council remuneration. According to the Federal Ministry of Labor, the aim of such regulation is to ensure that remuneration for works council members remains fair, transparent and legally certain in the future. A commission of experts is to make concrete regulatory proposals for an amendment to the Works Constitution Act by the beginning of July.

Effects of the BGH Judgment

In its judgment, the BGH stated that the objective element of embezzlement can be realized if a works council member is granted remuneration that violates the prohibition of preferential treatment under works constitution law.

Two former management board members and two former HR managers of a stock corporation had been acquitted by the Braunschweig Regional Court (judgment dated Sept. 28, 2021). Although the court was satisfied that granting the remuneration at issue in the proceedings to certain members of the Works Council fulfilled the objective element of embezzlement, it concluded there was insufficient proof of the defendants having acted intentionally, as those responsible had relied on the assessments provided by internal and external advisors and had erroneously assumed in each case that their decisions to grant the remuneration were not in breach of their fiduciary duty.

The BGH overruled the acquittals and remanded the case to another criminal division. It deemed the regional court to have been correct in its initial conclusion that the objective element of embezzlement could be realized through the payment of excessive remuneration to works council members. According to the BGH, however, the regional court's findings with regard to intent did not satisfy the statutory requirements, which is why another criminal division would have to reassess whether the defendants acted with intent.

The judgment contains relevant remarks in terms of both employment and criminal law.

Employment Law Content

The BGH emphasizes, as does the Federal Employment Court (Bundesarbeitsgericht—BAG) in its established rulings, that works council activities must be performed without compensation, to which a strict standard must be applied in the interest of the independence of works council members. The statutory provision of Section 37(4) Sentence 1 of the Works Constitution Act (Betriebsverfassungsgesetz—BetrVG), which states the remuneration to be paid to a works council member is to be measured on the basis of the remuneration of employees in a comparable position who have followed the career that is usual in the establishment, precludes works council activities being evaluated for remuneration purposes. According to the BGH, therefore, it is not possible to base salary progression on a special career.

Rather, the only possible comparison to the relevant works council is a person who, at the time of taking office, performed a similar activity with essentially the same qualifications, and was equally qualified to do so.

The judgment states that advancement of the corresponding works council member is only usual in the establishment if the majority of comparable employees have also achieved such advancement. By contrast, payment of higher remuneration than the usual progression in the establishment presupposes that the corresponding works council member had only not risen to the correspondingly remunerated position as a result of taking office. Remuneration increases above and beyond this would violate the prohibition of preferential treatment under Section 78 Sentence 2 BetrVG.

This is no different if the works councils in question pass an entity's internal management audit, negotiate with board members and managers on an equal footing and perform complex tasks as works councils. In the view of the BGH, these criteria are unduly linked to the intrinsic activity of a works council.

In practical terms, this means that a strict standard must be applied when determining works council remuneration on the basis of Section 37(4) Sentence 1 BetrVG. In principle, higher remuneration than at the beginning of the term of office can be granted only if the majority of employees comparable with the works council have also achieved a corresponding advancement. Higher remuneration than this usual level can only be paid if the works council member has only not been promoted to the correspondingly higher remunerated position as a result of taking office.

Particularly with regard to the legality of taking hypothetical careers into account, however, the court provides little guidance, merely emphasizing that works council activity and its demands may not themselves be taken into account, and that higher remuneration due to allowing for a special career violates the prohibition of preferential treatment. This is particularly problematic in view of the provision of Section 78 Sentence 2 BetrVG, which states works council members may not be disadvantaged—or favored—because of their activities, including in terms of their professional development. This leads to considerable uncertainties in practice, as the distinction between a prohibited special career and an arguably still lawful, hypothetical career—in accordance with the relevant BAG rulings—is not always easy to draw.

Criminal Law Content

For practical purposes, the following is likely to be relevant:

• Remuneration paid to works council members in violation of the prohibition of preferential treatment under works constitution law pursuant to Section 78 Sentence 2 BetrVG constitutes a breach of fiduciary duty. The extent to which the prohibition of preferential treatment has been violated is irrelevant in this case. The form taken by the preferential treatment is also irrelevant, meaning that, for example, paying undue bonuses, granting an undue company car and paying unduly high company pensions can also constitute a breach of fiduciary duty.
• If significant bonus payments have been made to works council members that contravene the prohibition of preferential treatment under works council constitution law, this is an important indication of intent according to the BGH.
• Obtaining legal advice does not exclude criminal liability if the advice is only aimed at achieving the client's desired legal outcome (for example by ignoring other legal views—known as "Flankenschutzgutachten" or "flank-protection opinions").
• Last but not least: In addition to the criminal liability for embezzlement, the objective elements of the offense under Section 119 (1) No. 3 BetrVG (prohibition of preferential treatment and discrimination) and of tax evasion (Section 370 of the German Tax Code (Abgabenordnung—AO) must be kept in mind. The latter since violations of the prohibition of preferential treatment are subject to the prohibition of tax deductions pursuant to Section 4 (5) Sentence 1 No. 10 of the Income Tax Act (Einkommensteuergesetz—EStG), according to prevailing opinion.

The Federal Government's Plans

According to the Federal Ministry of Labor, a revision of the regulations governing works council remuneration is planned. A commission of experts was to start work on May 15 and make concrete regulatory proposals for an amendment to the Works Constitution Act by the beginning of July. The team is made up of high-caliber experts, with the panel to be chaired by the President of the Federal Social Court, Rainer Schlegel. In addition, members will include the former President of the BAG, Ingrid Schmidt, and Bonn Law Professor Gregor Thüsing.

As regards the content of the planned changes, the Federal Ministry has already advised that no fundamental revision of the works council office is planned. The honorary and thus unpaid nature of the works council office is to be retained. Thus, there are no plans for a "Works Council Remuneration Act." Instead, the existing provisions of the Works Constitution Act are to be amended.

It is not yet clear what a new version of the existing provisions will look like. It would, however, be conceivable to standardize a statutory presumption provision that would ease the burden of presentation and/or proof that a works council member has not been promoted to a correspondingly higher-paid position merely as a result of taking office and that higher remuneration is therefore possible than for employees who have followed the career path that is usual in the establishment.

The topic of works council remuneration will keep legal practice busy for a long time to come. In particular, the employment courts will increasingly have to deal with the issue. Presumably, some matters will also occupy the BAG in the distant future. It remains to be seen whether legislators will succeed in eliminating existing legal uncertainties while keeping the office of works council attractive.

Flavia Lang is an attorney with Freshfields Bruckhaus Deringer in Hamburg, Germany. Torsten Lauth is an attorney with Freshfields Bruckhaus Deringer in Dϋsseldorf, Germany. © 2023 Freshfields Bruckhaus Deringer. All rights reserved. Reposted with permission of Lexology.