Regional Court of Frankfurt:

Employees of non-German subsidiaries to participate in German Employee Co-Determination

According to a sensational decision of the Regional Court of Frankfurt of February 2015 (ref. 3-16 O1 / 14), employees of non-German subsidiaries are relevant for purposes of German co-determination law, and are allowed to vote for employee representatives in the supervisory board. This contradicts the previously unanimous opinion in literature and case law, according to which only employees of German based companies are taken into account for purposes of German co-determination.

The decision was granted to a labor law professor from Munich acting as plaintiff against Deutsche Börse AG, the German Stock Exchange, in a so-called status proceeding. At the time of the decision, Deutsche Börse AG employed around 1,600 employees in Germany and an additional 1,700 employees in non- German subsidiaries (mostly in countries of the European Union). The Regional Court of Frankfurt held that the  current supervisory board  has not  been lawfully established. According  to  the number of employees of Deutsche Börse AG in Germany, six out of eighteen members had been elected by the employees. The case was, however, not submitted to the European Court of Justice – as intended by the plaintiff – but much to everyone's surprise, the Court demanded equal representation of employee and employer representatives, taking into account the 1,700 employees in non-German subsidiaries.

According to German co-determination rules, the level of employee representation in supervisory boards exclusively depends on the number of employees. In companies with more than 500 employees, one third of the members have to be elected by the employees, and in companies with more than 2,000 employees, even half of the members mandatorily represent the employees in the supervisory board. Prior to the decision of the Regional Court of Frankfurt, these provisions have been applied only to employees of German companies and German subsidiaries, leaving out employees of non-German subsidiaries.

If the decision however is confirmed by the Court of Appeals in Frankfurt, the formation and composition of many supervisory boards will change dramatically. Many existing supervisory boards currently com- posed with one third of employees will be subject to 50% co-determination in the future. In addition, many companies exceeding the 500 employee threshold only when taking into account employees in non- German subsidiaries will be subjected to co-determination, imposing on them the requirement to establish a supervisory board for the first time. Employees in non-German subsidiaries for the first time would be entitled to participate in the respective elections. Structural changes in conglomerates or changes in form might be considered an option in order to avoid co-determination. On the other hand, union representatives might feel compelled to initiate further status proceedings in order to increase the level of co-determination throughout Germany. Moreover, there are no procedures in place regarding the election process involving employees of non-German subsidiaries, as the corresponding electoral rules are tailor- made to Germany.

However, the reasoning for the unexpected decision by the Regional Court of Frankfurt is very formal: According to the decision, employees of non-German subsidiaries are to be included, simply because the regulation itself does not contain an express exception regarding such foreign employees. Consequently, the Court would like to apply the legal definition of "affiliate" pursuant to the German Stock Corporation Act (Aktien¬gesetz), which in fact also includes foreign entities. In addition, the court claims that the exclusion of employees in non-German entities would be a violation of the laws of the European Union, which prohibit discrimination of EU citizens. Ultimately, the court says the decision would avoid the distortion of competition because of differing standards regarding co-determination.

This decision clearly contradicts court rulings and positions of scholars on the subject. Also, the electoral rules in place are designed only for German companies. Additionally, there are further good reasons why the appealable decision will be reversed by the Court of Appeals in Frankfurt:

  • Firstly, the mere omission of employees of non-German subsidiaries is no conclusive evidence that in fact these are within the scope of the regulation. German traffic rules also only apply in Germany, although foreign roads are not expressly excluded. According to the underlying princi- ple of territoriality, national social regulations may not affect the territory of other states.
  • Moreover, the legislative history clearly demonstrates that the principle of co-determination has been designed only for employees of German companies.
  • Finally, there are European rules on cross-border employee representation in the so-called Euro- pean Works Council Directive, so that the alleged violations of European law seem far-fetched. Also, the result of such a disputed violation would not be the automatic inclusion of employees of non-German entities, but simply the invalidity of the law itself. In this case, the German legislator would be prompted to resolve on a change of law. Therefore, the alleged violation of EU law does not support the ruling of the Regional Court of Frankfurt.

It is to be hoped that the decision of the Regional Court of Frankfurt will not be followed by others. The Higher Regional Court of Frankfurt will be handling the appeal and has the power to annul the decision, limiting the application of national co-determination rules to employees of German entities.