Global companies are increasingly focused on their employees as a source of growth. With CEOs and others predicting a shortage of skilled workers in key global markets, employee trust and engagement are expected to become more important in attracting and retaining talent. Achieving a high level of engagement, however, can be challenging. A recent Gallop survey found that 70 percent of US employees are not engaged in the workplace or, even worse, actively disengaged, costing employers between USD450 to USD550 billion each year in lost productivity. Companies are increasing efforts to harness employee ideas to improve the quality, productivity and competitiveness in the global economy's workforce. The tools available to employers to achieve their human capital strategy, however, differ from jurisdiction to jurisdiction. In particular, a company's ability to form employee committees, quality circles and other innovative team concepts depend on the host country's culture and laws.

Many countries have adopted various participative and representative structures to provide a channel for employee involvement in the workplace. In the US, however, federal labor law acts as a significant constraint on a broad range of employee groups, limiting employer-employee collaboration. Foreign-headquartered companies operating in the US should be cognizant of these limitations as they implement employee engagement strategies across borders.

European Works Council

European nations have adopted a participative or codetermination model for making workplace decisions. Under national laws, which vary by jurisdiction, employers are required to establish a works council when the size of the workforce exceeds a certain threshold. The election process, composition and duties of works councils can vary.

In general, the works council is involved in day-to-day business decisions and must be consulted on various subjects, such as changes in wages, benefits, working conditions, operational matters or even the entrepreneurial direction of the business (e.g., plant closing or the sale of a business unit). Employers must cooperate with works councils in good faith and comply with specific participation rights granted to works councils under applicable laws, such as rights to information, rights of consultation and cooperation, veto rights and rights of consent (i.e., the works council has the right to block management decisions until an agreement is reached or a decision by the labor court is taken overruling the veto); and/or rights of codetermination (i.e., the employer cannot make or enforce any decision without the works council’s consent or a decision of a conciliation board).

In systems with codetermination, works councils generally elect or select worker representatives for seats on a supervisory board or management board. There are, however, mature mechanisms in place to reach a compromise, and many European companies and workers view employee representation as playing a central role in economic growth and prosperity.

In theory, the works council operates in parallel with any trade union which represents the workforce. Similar to the situation in the US, however, union density in European workforces is low. For example, in Germany only about 17 percent of the workforce is represented by trade unions. In the US private-sector, less than 7 percent of the workforce is represented by a union. With the erosion in sectoral bargaining, the involvement of works councils in workplace governance is increasing. At the same time, US companies evaluating similar structures are limited by federal labor law.

Employee Committees Don't Translate in the US

As with many employment concepts, employee participation committees do not always translate globally. In the US, the National Labor Relations Act can impede employee groups from having input on workplace issues outside of formal union representation. In particular, Section 8(a)(2) makes it unlawful for an employer to dominate or interfere with the formation or administration of any labor organization or contribute financial or other support to it. 29 U.S.C. §158(a)(2). The NLRA defines a labor organization broadly as “any organization of any kind, or any agency or employee representation committee or plan, in which employees participate and which exists for the purpose, in whole or in part, of dealing with employers concerning grievances, labor disputes, wages, rates of pay, hours of employment or conditions of work.” 29 U.S.C. § 152(5). This prohibition grew out of concerns about employers establishing "company unions" to negotiate favorable contracts and ward off independent unions. While the specter of company-dominated unions seems anachronistic, federal labor law remains largely unchanged.

The National Labor Relations Board and court decisions place significant limits on the structure and operation of employee committees, as well as the level of management involvement. The NLRB addressed the legality of "employee involvement" or "employee participation" organizations in Electromation Inc., 309 N.L.R.B. No. 163 (1992), aff'd, Electromation Inc. v. NLRB, 35 F.3d 1148 (7th Cir. 1994). There, a nonunion company decided to establish employee action committees after employees expressed their dissatisfaction with changes made to the attendance bonus/wage policy. The company established five committees with managers and employees to develop solutions to five key issues: (1) absenteeism/infractions, (2) no smoking policy, (3) communication network, (4) pay progression for premium positions and an (5) attendance bonus. Employees volunteered for committees and were allowed to conduct meetings on company property during paid time. Management members set the meeting agendas and decided whether to submit team proposals to upper management for approval. A majority of the NLRB held that these action committees violated the NLRA.

In reaching its decision, the NLRB adopted a two-step inquiry to determine whether employee committees violate the NLRA: (1) is the committee a “labor organization” under Section 2(5); and, if so, (2) has the employer dominated or interfered with the formation of the committee or contributed financial or other support to it in violation of Section 8(a)(2). According to the NLRB, an organization is a "labor organization" if employees participate, the organization exists (at least in part) for the purpose of "dealing with" employers and these dealings concern "conditions of work" or other statutory subjects of bargaining such as grievances, labor disputes, wages, rates of pay or hours of employment.

Applying these standards, the NLRB found that Electromation's action committees constituted labor organizations within the meaning of Section 2(5) of the NLRA, and that the company had dominated and assisted them within the meaning of Section 8(a)(2). The NLRB noted that the committees were created by the company to deal with conditions of employment through a bilateral process involving both employees and management. According to the majority, "a labor organization which is the creation of management, whose structure and function are essentially determined by management ... and whose continued existence depends on the fiat of management is unlawfully dominated." The NLRB further noted that the back-and-forth between employees and their co-workers and management to reach solutions on the basis of employee-initiated proposals "is the essence of ‘dealing with’ within the meaning of Section 2(5).” Accordingly, the NLRB ordered the company to disband the committees. .

Shortly after Electromation, the NLRB considered the operation of employee committees in a unionized setting in E. I. Du Pont de Nemours & Co. In Du Pont, the NLRB held that six safety committees and a fitness committee were labor organizations and that the company dominated the formation of one of the committees, as well as the administration of all of the committees, in violation of the NLRA. In doing so, the NLRB noted that all of the committees were initiated by the company, the company decided which employees to invite to participate and selected volunteers, employee members served for an indefinite time period and received their regular pay for time spent on committee activities, management members planned the agenda and had to approve all decisions, the company provided the meeting place and supplies, and the company was free to modify or abolish the committees at any time.

Significantly, the NLRB went on to address the limits of "dealing with" under the NLRA and potential safe harbors. According to the NLRB, “dealing with” involves a bilateral mechanism and “ordinarily entails a pattern or practice in which a group of employees, over time, makes proposals to management, management responds to these proposals by acceptance or rejection by word or deed, and compromise is not required.” If, however, the group makes only isolated, ad hoc proposals to management followed by management acceptance or rejection, the element of dealing is missing. Similarly, the mere presence of management committee members does not necessarily mean the committee "deals with" the employer. For example, a committee governed by majority decision-making where management representatives were in the minority and the committee could make decisions — rather than recommendations subject to management approval — does not violate the NLRA. Likewise, there would be no “dealing” if management members participated on the committee as facilitators without the right to vote.

In a later case, the NLRB provided employers with another avenue for employee participation in Crown Cork & Seal Company Inc. There, a nonunion manufacturing company followed a plant governance structure called the “Socio-Tech System.” This system delegated substantial authority to employees to operate the plant through participation on teams and committees. An Organizational Review Board consisting of employees and some managers was responsible for “monitoring plant policies to insure that they are administered consistently,” and suggesting “modifications to plant norms, including hours, layoff procedures, smoking policies, vacations and all terms and conditions of employment.” Decisions of the ORB were in the form of recommendations forwarded to the management team or the plant manager, who had the ultimate authority to review all decisions made by the committees. There was no evidence, however, that the plant manager had overruled the ORB.

Under these facts, the NLRB found no violation of the NLRA. According to the NLRB, if the organization's “purpose is limited to performing essentially a managerial” function, subjecting the recommendations of these managerial teams to upper management review is the “familiar process of a managerial recommendation making its way up the chain of command” and not unlawful “dealing with” the employer.

US Safe Harbors

Employers operating in the US still have opportunities to collaborate with employees without running afoul of the NLRA. Employee committees and other teams, however, must be carefully structured to minimize risks under federal law. Based on NLRB and court decisions, committees with the following characteristics are more likely to be deemed permissible:

  • The committee has decision-making authority. If a majority employee committee has the authority to make a final decision and it is binding on the employer, then there is no “dealing with” and the committee is lawful.
  • The committee performs functions that a front line supervisor or manager would perform, in which case the committee is acting as a management body and not a “labor organization” under the NLRA.
  • The committee process does not involve a pattern of proposals, response and compromise — the hallmark of "dealing with."
  • Employee participation is voluntary, on an individual basis (and not in a representative capacity) and follows a rotating schedule.
  • Management does not set or control the agenda.
  • Committee activity is focused on brainstorming and discussion of ideas or information. In Du Pont, the NLRB noted that a "brainstorming" group that develops ideas, but not proposals, from which management may glean ideas, does not violate the NLRA. Similarly, an "information sharing" committee that simply gathers information or a "suggestion box" procedure where individual employees make specific proposals to management are lawful.

Significantly, the remedy for a violation of Section 8(a)(2) is generally disbandment of the unlawful committee. The risk/reward framework, however, changes significantly in the event of a union organizing campaign. If a campaign is underway at the time the employer initiates employee involvement initiatives, the company may draw an unfair labor practice charge. If the NLRB determines the employer's actions violated the NLRA, it can order the employer to recognize and bargain with the union (even if the employer won the election). Accordingly, employers should consider the timing of any decision to establish employee committees and avoid implementing new structures if it is the target of union organizing efforts.

Finally, under US laws, a union may agree to the establishment of a European-style works council and may also agree to cede its bargaining authority to the works council. Unions have seized upon this wrinkle in US law to urge foreign-based corporations to allow union representation with the promise of agreeing to the establishment of a works council. Management, however, should proceed with caution. Under federal labor law, the agreement to cede authority to a works council is a “permissive” subject of bargaining. This means a union is free at any time (including during the term of a collective agreement) to void its agreement without violating US labor laws. Accordingly, it is critical for an employer considering this option to include strong contractual language to provide an avenue for enforcement of the agreement outside of the labor laws.

Despite statutory limitations on employee committees in the US, employers operating in the US can look across the pond and consider how European and other regional approaches might be adapted to increase employee engagement and participation in the workplace.