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29 August 2012
Works council members may not be given preferential treatment over other employees on the grounds of their activities. Granting prohibited economic benefits may have serious consequences, potentially leading to criminal charges for all parties. This update considers the following questions:
According to the principles of the Works Council Constitution Act, works council members work on a voluntary basis without additional remuneration. The employer should not be able to 'bribe' the works council. Preferential treatment (whether overt or hidden) towards works council members is prohibited pursuant to Sections 37(1) and 78 of the act.
However, in practice companies sometimes give their works council members direct payments or other non-cash benefits over and above the mandatory limits prescribed by statute. A few years ago the scandal of special annual bonuses and the reimbursement of travel expenses for works council chairmen at Volkswagen AG caused a stir - both the works council chairmen and those responsible at Volkswagen were sentenced.(1) At the end of 2011 the monthly overtime remuneration paid to works council members at Adam Opel AG who had been exempt from their contractual duty to work was the subject of public debate. Although the state prosecutor's investigations were shelved in April 2012, this should not be seen as justifying any kind of payment or benefit to works council members.
The unlawful preferential treatment of works council members is not just an issue for large companies; medium-sized companies can also be affected. The act gives the works council extensive co-determination rights. Important business decisions, such as personnel measures or instructions to work overtime, may be significantly delayed or even blocked by a works council veto. Hence, the employer's natural reaction is to ask itself how it could get the works council's consent or how it could make a decision easier for works council members. The employer may be tempted to favour the works council and grant its members preferential treatment in order to overcome the 'obstacle' of co-determination.
Section 37(4) of the act provides remuneration protection for works council members. Under statute, a works council member's remuneration may not be lower than that of a comparable employee with normal professional experience, depending on the job and qualification. The remuneration of members of the works council - who in some cases are exempt from their contractual duty to work - must be adjusted according to salary developments. However, where works council members enjoy such an exemption (as at least one will do if the company employs 200 or more staff), they may not receive a minimum payment which exceeds the remuneration of a comparable employee; nor may they receive monthly bonus payments in respect of their function.(2)
The law grants very few exceptions for remunerating works council members for overtime work. Pursuant to Section 37(3), the works council must, in principle, fulfil its duties during working hours. Only if operational reasons so require may works council duties be considered overtime - for example, if a works council meeting is held outside working hours at the employer's request. On the other hand, the works council may not carry out its activities outside working hours for reasons related to the works council itself - for example, if a trade union representative can participate in a works council meeting only at a certain time. If works council activities are performed outside working hours, the law primarily provides for compensation in the form of paid leave. Overtime can be paid only if paid leave is not granted within one month because the employer has operational reasons for not doing so. Agreements between the employer and the works council are invalid if they deviate from these statutory provisions and allow the works council to complete its duties outside regular working hours, or purport to justify overtime pay instead of the preferred statutory compensation in the form of paid leave.
Permitting a company car to be used for private purposes also violates the ban on preferential treatment if the works council member would not otherwise have a company car in his or her position and comparable employees do not enjoy the benefit of a company car for private use. The employer is also prohibited from releasing works council members from their contractual duty to work beyond the limits defined in Sections 37(2) and 38(1). Even concluding particularly favourable pre-retirement part-time agreements with works council members may violate the ban on preferential treatment.(3)
Of course, recent corporate scandals have provided more extreme examples of what is not allowed, such as payments for private travel to Brazil or India and for services offered by prostitutes.
An agreement between the employer and a works council member which violates the ban on preferential treatment is void pursuant to Section 134 of the Civil Code. The works council member is not entitled to benefits arising under such an agreement, but it is unclear whether the employer can reclaim payments that have already been made to the works council member. In German legal commentary the view is sometimes taken that payments cannot be reclaimed(4) if the employer was conscious of violating the statutory ban on preferential treatment when the benefit was granted. As yet, there has been no case law from the highest courts on this issue, so there is a risk that the employer will be unable to reclaim its money.
If inappropriate payments to works council members have caused the company economic losses, those responsible at the company may be liable to claims for compensation on the grounds that they violated their obligation to manage the company with due care.(5) The liability of company employees - for instance, those responsible for human resources management - comes into question pursuant to Sections 280, 611 and 823(2) of the Civil Code. Those persons responsible on behalf of the company also run the risk that their own service or employment relationship may be terminated by the company without notice.
In addition to the consequences under civil law, breaching the ban on preferential treatment may also have criminal consequences. Section 119(1)(3) of the Works Council Constitution Act makes preferential treatment of works council members a criminal offence, which is punishable by a fine or up to one year's imprisonment. However, criminal prosecution is possible only if a criminal complaint is lodged in time (ie, within three months of becoming aware of the breach). The works council, the central works council, the groups works council, the employer or a trade union represented at the business establishment may initiate prosecution, but not an individual employee.
There may also be a criminal offence arising from a breach of trust pursuant to Section 266 of the Criminal Code – the authorities may prosecute such an offence in the absence of a complaint. The board of directors and the management are obliged to safeguard the company's financial interests. Individual employees who are free to make decisions on their own initiative and who arrange for payments to works council members may also be criminally liable under Section 266. Such an offence is punishable by up to five years' imprisonment or a fine. The Federal Constitutional Court and the Federal Court of Justice have created barriers to criminal prosecution for breach of trust, depending on the circumstances of the case, but preliminary investigations and a criminal charge by the state prosecutor's office remain a possibility. In the Opel case, the state prosecutor's office initially investigated a breach of trust and during the Volkswagen affair those responsible were sentenced.
If unlawful payments to works council members are recorded as operational expenses, this constitutes criminal tax evasion pursuant to Section 370 of the Tax Code, in conjunction with Section 4(5)(10) of the Income Tax Act.
In light of the ban on the preferential treatment of works council members (and the legal penalties available), any form of benefit should be carefully scrutinised in advance. Works councils can exercise considerable power and it is understandable that temptations arise in day-to-day business operations, where time is money. However, the consequences of a breach are severe and the employer must not make concessions to illegal demands; otherwise, the individuals who act on the employer's behalf risk jeopardising their own employment relationship and exposing themselves to compensation claims from the company. The worst case scenario is criminal prosecution. Even if a prosecution is ultimately abandoned,criminal investigations can seriously tarnish a reputation.
For further information on this topic please contact Bjoern Gaul, Bernd Roock, Antje-Kathrin Uhl or Eva Schäfer-Wallberg at CMSHasche Sigle by telephone (+49 711 9764 248), fax (+49 711 9764 96249) or email (firstname.lastname@example.org, email@example.com, firstname.lastname@example.org or email@example.com).
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