Compliance: The remuneration of works council members is a minefield.

 The Braunschweig Regional Court acquits managers of the accusation of breach of trust.

Compliance: The remuneration of works council members is a minefield.

Board members and managing directors who conclude unlawful remuneration contracts with works council members may face fines or even imprisonment. How can legal risks be prevented?

The Braunschweig Regional Court recently acquitted three former managers and one current manager from an automotive corporation of charges of breach of trust as the judges found no indication of intent (Ref.: 16 KLs 406 Js 59389/16 (85/19)). Charges of this nature are always a risk if board members and managing directors approve inappropriately high payments and bonuses for particularly influential employee representatives.

In this case, the prosecution assumed that the managers charged had acted with intent and in violation of their duties with regard to the remuneration of senior members of the works council of the German carmarker VW. During the hearing at the Braunschweig Regional Court, it was disputed whether the company even possessed binding and adequately precise regulations governing the remuneration of employee representatives.

Human resources managers find themselves in difficult terrain given that the Works Constitution Act leaves many questions regarding the remuneration of employee representatives unanswered. Declaring the beneficial payments as operating expenses on tax returns also incurs the risk of charges of tax avoidance. Furthermore, this is compounded by claims for damages on the part of the company against those people responsible for the payments.

When are payments to the works council appropriate?

It is often difficult to determine what is appropriate, in particular for employee representatives who have been released from their duties over the long term. In accordance with Section 37 Works Constitution Act, the following applies: The position as an employee representative is an honorary post. It may not receive special benefits through remuneration or bonuses, allowances for additional work, company vehicles or company-owned accommodation. Otherwise, this can lead to the suspicion of attempts to buy the loyalty of the works counselor. In this case, this represents a criminal offense in accordance with the Works Constitution Act.

Conversely, the works council may not be disadvantaged in comparison to comparable employees. Therefore, in accordance with the so-called loss of earnings principle, the remuneration of works council members is not to be assessed lower than that of comparable employees with normal career development.

In addition, the remuneration must be continuously adapted to match the development of the remuneration of a group of employees who performed similar activities at the time the works council duties were assumed. However, this is frequently not the case.

The managers on trial before the Braunschweig Regional Court argued that the employee representatives negotiated on an equal footing with the management. They argued that, as a consequence, it was not appropriate to pay them their entry-level salary over the long term. This argument is frequently used by employee representatives at major corporations who have been released from their duties for many years, when their position on the works council becomes more demanding and leads to greater responsibility compared to their original job. This frequently leads to the question of what career level the person would have achieved today if they had chosen a management position instead?

In this respect, the lack of clear guidelines regarding remuneration frameworks or comparative professional groups for classification in the Works Constitution Act is problematic. If the law is interpreted strictly, qualifications obtained while working as a works counselor may not lead to a higher salary. The only relevant factor is the occupational group to which the works councilor belonged when they were released from their other duties. However, according to the Federal Labor Court, the parties may reach specific agreements governing the adjustment of the remuneration of employee representatives.

Until the legislator provides answers to these open questions, HR managers can prevent legal risks through the following measures:

  1. Document binding and sufficiently precise regulations regarding the salary determination of employee representatives.
    Disputes before the labor courts or even investigations by the prosecutor’s office repeatedly occur when it is unclear which comparable employees need to be used for the classification. In view of this, it is advisable to develop and document a plausible method of calculating the remuneration and annual bonuses.
  2. Regularly adjust the compensation to match comparable employees.
    According to Sec. 37 (4) Works Constitution Act (BetrVG), the remuneration must be continuously adjusted to match the remuneration of “workers in a comparable position who have followed the career that is usual”. In view of this, the company parties need to define transparent decision-making processes as part of a collective guideline: Which workers in a comparable position are defined when a works council member is released from their duties whose average remuneration development is used for the released employee representative? Who decides on further salary development, when and according to which criteria, such as further education or additional qualifications?
  3. No hidden or secret salary increases, such as lump-sum overtime payments or special bonuses, granted without involving official committees.
    Lump-sum additional payments to works councilors are not generally permissible. As a consequence, overtime resulting from their employee representative duties must primarily be compensated through leave. Financial compensation is only permissible in exceptional cases.

The current legal situation confronts HR managers with numerous problems. Companies use the decision by the Braunschweig Regional Court as an opportunity to review the compliance of existing agreements. If the works council remuneration fails to comply with the law, there is a risk of criminal prosecution due to breach of trust or favoritism of works council members as well as tax evasion, in the worst case.