Employee Insolvency Priorities and Employment Protection in France, Germany and the United Kingdom: An Essay on the Use of the ‘Varieties of Capitalism Theory’ in Comparative Law

In several jurisdictions, employees’ claims for unpaid wages and contributions are entitled to preferential treatment over other creditors. Employees, however, may also be protected through social security schemes.

In a new article, I compare employee priority regimes (if existing) in three Member States of the EU (France, Germany and the United Kingdom), by assessing their interplay with social security schemes. The most intriguing question, under a comparative standpoint, is whether these regimes could be explained as deriving from the peculiar ‘variety of capitalism’ that these countries represent. According to a widely accepted academic tradition, the UK is a model of ‘liberal market economies’, and England is the birthplace of all common law jurisdictions, while Germany and France are typical ‘coordinated market economies’ and models for civil law systems around the world.

Following this approach, we would expect that no priority should exist in England, whereas France and Germany should protect employees through insolvency priorities. The historical comparison conducted in this article reveals a much more complex and multi-faceted scenario.

In particular, the German regime, by abolishing priorities in 1999, seems to be more in line with an ideal-type of ‘liberal market economy’, while in France employees’ claim partially rank in priority over secured creditors (‘super-priority’), which is more coherent with its standard classification as ‘coordinated market economy’. Over time, the English regime has placed itself in an intermediate position, since workers’ claims are protected by a priority, which is however capped at a quite low nominal value (just £800). However, if we turn our attention to labour protection in these countries during the 1970s, we observe a quite different scenario. In England, the priority cap was set at £800 in 1976, whose real value at that time would be about £5,200 today; this nominal value has never been adjusted to inflation, with the consequence of reducing it to a quite low real value. In Germany until 1999 employees enjoyed a super-priority which was similar to the French system.

These developments cannot be fully explained only by using the ‘varieties of capitalism’ theory. While the French regime still fits into the ideal-type of ‘coordinated market economies’, the German regime seems to contradict this narrative; furthermore, in the 1970s, the UK regime also contradicted the ideal-type of a ‘liberal’ market economy. Probably, this development can only be explained by looking at how the relation between labour and capital has changed in the last four decades.

When employees are not prioritised, their claims are treated like any other trade partners’ claims and, consequently, labour is conceived like any other commodity that is purchased by a company on a market. By contrast, if employees enjoy a statutory priority, politics treats workers differently from other creditors, which mirrors their peculiar position in the business and the fact that, when a company becomes insolvent, they risk losing their income, not just a certain amount of money. Bearing this in mind, the historical analysis conducted in this article reveals a quite univocal result: that employment protection has been reduced over the last 40 years in England and in Germany, and is now entrusted only (or predominantly) to social security schemes.

Finally, this paper takes issue with the idea that employee priorities and social security schemes are functional equivalents. I have shown that it is not irrelevant whether employees, besides social security protection, also enjoy a priority or not. Social security schemes are normally subrogated to employees’ rights and, therefore, if employees rank in priority over other creditors, the insurance fund should also be treated preferentially. As such, in systems without priorities (eg, Germany) or with a priority capped at a low level (eg, England), the social security scheme risks suffering a haircut. Therefore, describing statutory priorities and social security schemes as functional substitutes does not give a proper account of their legal interconnections and their reciprocal embeddedness.

Federico M. Mucciarelli (and here) is an Associate Professor of Business Law at the University of Modena and Reggio Emilia and a Reader in Financial Law at the SOAS University of London.