German Corporate Co-Determination of Employees and EU Law – The Opinion of the Advocate General of the CJEU of 4 May 2017

This blog follows-up on the author's blog of 27 February 2017, which summarises the hearing of 24 January 2017 in the case Erzberger v TUI referred to the Court of Justice of the European Union (‘CJEU’) (C-566/15) by the Berlin Court of Appeal, and analyses the arguments presented in this politically ‘hot’ case, in which the stand of EU law regarding those provisions of German law which give the right of co-determination through elected representatives on a company's supervisory board only to employees of the company working in Germany and of its German subsidiaries (therefore excluding employees working in establishments of the company in EU/EEA Member States and employees employed by EU/EEA subsidiaries) is put to the test. Advocate General Saugmandsgaard ØE, in his opinion delivered on 4 May 2017 (no 113), has held that:

‘Articles 18 and 45 Treaty on the Functioning of the European Union (‘TFEU’) (sc, non-discrimination principle and free‑movement of workers) must be interpreted as meaning that they do not preclude legislation, such as that at issue in the main proceedings, which provides that only employees employed in the establishments of a company or in the companies of the group situated on national territory have a right vote and to stand for election as employee representatives on the supervisory board of that company.’

The purpose of this blog is to present and analyse the main arguments of the Advocate General (the ‘Opinion’).

1. Partial exclusion from the Advocate General's analysis

Contrary to the question referred to by the Berlin Court of Appeal (no 23), the Advocate General's Opinion analyses only employees employed in subsidiaries established in other Member States (‘MS’) – employees employed in the company's establishments, or dependent branches in other MS are excluded from the analysis on the ground that TUI, as the Opinion says, does not have such establishments or dependent branches (no 12, 35). The Advocate General does not cite any source for his statement of facts. The referral by the Berlin Court of Appeal is silent on the existence or non‑existence of foreign establishments and dependent branches of TUI. As such, I contend that the Opinion is inconsistent when it answers, as cited above, the question submitted to the CJEU by the Berlin Court of Appeal – which pertains also to establishments – to the extent that it expressly excludes establishments in other MS from its analysis.

2. Connection with EU law/applicability of Art. 45 TFEU

The Advocate General discusses first the aspect of free movement of workers and then the non-discrimination issue since, according to CJEU case law, Art 45 para 2 TFEU is lex specialis to Art 18 TFEU (no 39 s).

According to the Advocate General (no 44), the right to elect, and to stand for election of, representatives of employees on a company's supervisory board falls within the scope of ‘other conditions of work and employment’ within the meaning of Art 45 (2) TFEU. That term, according to CJEU case law, must be interpreted as having a broad scope insofar as Art 45 (2) TFEU provides for equal treatment in all matters directly or indirectly related to the exercise of an activity as an employee in a host MS (no 43). The Opinion does not deal with the discussion at the hearing of whether the right to vote and to stand for election are related to the individual activity by the employee and the conditions governing such activity, but rather revolves around the employee’s status as a criterion for rights under company law.

As regards to the applicability of Art 45 TFEU at large, TUI, the Works Council of TUI, and the German government have all argued a lack of cross-border element. The Opinion in this respect makes a distinction between employees of TUI subsidiaries established in other MS and employees of the TUI Group employed in Germany.

1. Employees of subsidiaries established in other MS

Using a concrete example (no 54), the findings of the Advocate General may be summarized as follows: most, if not all, of the employees of a French subsidiary of a German parent have not previously moved to France (no 48). The situation of an employee employed by the French subsidiary of the TUI Group is purely internal to the French republic (no 54). The fact that decisions by the German parent company's supervisory board affect employees of the French subsidiary does not bring within the scope of Art 45 TFEU situations which have no connection with the free movement of workers. Therefore, Art 45 TFEU is not applicable to employees employed in TUI subsidiaries established in other MS (no 58).

According to the Opinion (no 59), Art 18 TFEU is not applicable to the employees employed in TUI subsidiaries established in other MS either, since, as the CJEU has consistently held, ‘the principle of non-discrimination enshrined in that article cannot be applied to situations which are wholly internal to a Member State and which are in no way connected with any suggestions envisaged by EU law.’ Such finding appears quite doubtful. To stay with the above example of the French subsidiary, at stake is not whether French law as the law applicable to the French subsidiary violates the non-discrimination principle: French law, because of the territoriality principle, might not give any rights to elect and to stand for election to the supervisory board of the German parent company in the first place, and, therefore, discrimination can be a mute issue for French law. However, it is a discrimination issue for German law when a particular law gives the right to elect and to stand for election only to employees of German subsidiaries and not also to employees of subsidiaries in other MS. The cross-border element inherent in the principle of non-discrimination therefore can hardly be denied, with the consequence that Art 18 TFEU – contrary to the opinion by the Advocate General – appears applicable.

2. Employees of TUI Group in Germany

Art 45 TFEU, according to the Advocate General and contrary to the view of TUI and the German Government, can be applied to the employees of the TUI Group in Germany (no 60). The situation where an employee of the TUI Group in Germany leaves, or wishes to leave, Germany in order to take up a post in a TUI subsidiary established in another MS is one of the situations referred to in Art 45 TFEU (no 61). The Opinion rejects the arguments by TUI that this situation is purely hypothetical (no 62), and by the German government that Art 45 (3) (c) TFEU affords workers only the right to stay in a MS for the purpose of employment ‘in accordance with the provisions governing the employment of nationals of that State laid down by law, regulation or administrative action’ (no 63). The Opinion, in this respect, refers to CJEU case law which holds that Art 45 (3) TFEU is intended not to define the scope of Art 45 TFEU, but rather to specify the content of the right to freedom of movement in the event that Art 45 TFEU should in fact be applicable (no 64). The Opinion (no 65ss) also argues that, contrary to TUI and the German government, the lack of harmonisation at EU level in relation to employee participation (sc, co-determination at board level) cannot have any impact on the applicability of Art 45 TFEU. In the absence of such harmonisation, the MS are free to determine the degree of employee involvement in the management of companies operating on their respective territories; however, they must exercise that competence in compliance with EU law and, in particular, with the Treaty provisions on freedom of movement for workers (no 66). In my view, these findings of the Advocate General are well founded.

3. The absence of a restriction of the free movement of workers of TUI Group in Germany

After his conclusions on the applicability of Art 45 TFEU, as far as employees of the TUI Group in Germany are concerned, the Advocate General (no 70ss) deals with the question of whether the freedom of movement of workers is restricted by German legislation. The Opinion (no 71ss) summarises CJEU case law on national provisions that preclude or deter a national of a MS from leaving her country of origin in order to exercise her right to freedom of movement, or that are capable of hindering or rendering less attractive the exercise of the fundamental freedoms guaranteed by the Treaty – thus constituting an obstacle to, and a restriction of, the freedom of movement under Art 45 TFEU. The Opinion then summarises the position of Mr Erzberger, the EFTA Surveillance Authority, and the Commission that the exclusion of employees of the TUI Group employed in other MS from the German system of employee participation entails a restriction of the free movement of workers, as well as the position of TUI, the Works Council of TUI, and the German, Luxembourg, Netherlands and Austrian Governments that there is no such restriction (no 72ss).

As regards his own position, the Advocate General (no 74ss) refers to the wording of Art 45(3)(c) TFEU, which gives workers the right ‘to stay in a Member State for the purpose of employment in accordance with the provisions governing the employment of nationals of that State laid down by law, regulation or administrative action’; a migrant worker thus benefits from equal treatment with the national workers in the host MS; on the other hand, Art 45 TFEU does not grant that worker the right to ‘export’ the conditions of employment which she enjoys in her MS of origin to another MS.

According to CJEU case law, Art 45 TFEU (Opinion no 76) is not concerned with any disparities in treatment which may result from divergences between the laws of various MS, so long as such laws affect all persons subject to them in accordance with objective criteria and without regard to their nationality. The Opinion (no 77) in addition refers to CJEU case law according to which EU primary law can offer no guarantee to an insured person that moving to another MS will be neutral in terms of social security; that reasoning, according to the Advocate General, can be directly transposed to the systems of employment participation. In that regard, the Opinion also puts forward the argument that the right to vote and to stand for election to the company's supervisory board as provided for in German law constitutes a condition of work and employment under Art 45 CJEU. From all of this, the Advocate General concludes (no 78) that an employee who leaves Germany in order to pursue an economic activity in another MS cannot retain, under Art 45 TFEU, the benefit of the rights to participate in co-determination as provided for in German legislation; on the other hand, such employee will benefit from the rights of participation conferred under the legislation of that MS upon him.

After this general discussion regarding the move to another MS for employment by an employer unconnected with the previous employer, the Opinion (no 79ss) goes on to state that the aforesaid result does not change because of the fact that the employee is moving from a German company to a foreign company of the TUI Group. The Opinion sees no basis in CJEU case law on which to draw a distinction between an employee moving to an unconnected company in another MS and an employee moving to a company that belongs to the same group of companies. Both situations involve moving from one MS to another, with all the implications for the employee, including, in particular, a change in the applicable conditions of employment (no 69). In the absence of harmonisation of involvement of employees in the management of the national companies of the MS, the question of whether employees of the group employed in other MS should or should not be included in the national employee participation system is a matter of choice for the MS that has such a system (no 82). Consequently, the German law in question does not constitute a restriction of the free movement of workers under Art 45 TFEU (no 84).

4. Summary of points of criticism

Anyone reading Advocate General’s findings so far is left with a certain disappointment. The Advocate General, based on this own statement of the facts, has excluded from his analysis employees employed in, or moving to, the company's establishments/dependent branches in other MS, without excluding establishments/dependent branches from his answer to the question by the Berlin Court of Appeal.

The starting point of the Opinion is the proposition that the right to elect and to stand for election to the supervisory board of a company is part of the employment conditions. There is no in-depth argument in support of that proposition and, in particular, there is no discussion of the counter-position that such right follows from company law because it concerns the composition of the supervisory board of a company which is governed by the so-called company statute.

As regards employees in a foreign subsidiary, the Opinion holds both Art 45 and 18 TFEU to be inapplicable because there is no cross‑border element. This assumes that the employment relationship is established with the subsidiary. However, this position does not take account of the fact that, in groups of companies, it happens rather often that particular senior employees will be seconded for a limited period of time to work in foreign subsidiaries on the basis that their employment contract will remain with the parent employer company, regardless of whether the contract remains fully in effect, or only insofar as specific benefits promised by the parent company to employees are concerned, eg, pension and bonus promises. The cross-border element can hardly be denied in such a case. The Advocate General himself states (footnote 37) that where an employee in an establishment/dependent branch in another MS is directly employed by the company, the employment relationship takes on a cross-border character. The consequence is that Art. 45 and 18 TFEU become applicable. This result ought to be the same when an employee is employed under an employment contract with a German employer company, while working in a foreign subsidiary of such company.

As regards employees in Germany – to which Art 45 TFEU, as the Opinion states, is applicable – the Advocate General denies a restriction of the free movement of workers regarding the German legislation on the ground that Art 45 TFEU does not grant a migrant worker the right to ‘export’ her conditions of employment from her MS of origin to another MS. However, the Opinion in this respect misses the real issue. The issue is not whether the migrant worker can claim in the host MS, under host MS law, that she has the right to elect and to stand for election to the supervisory board of her new employer company established in the host MS or to the supervisory board of the German parent company/her previous employer. The issue is, rather, whether she can retain her right, as a right, under German law, to elect and to stand for election to the supervisory board of such German employer/parent company.

It neither follows from the wording of Art 45 TFEU, nor from CJEU case law that whichever protection is afforded, or not, to the migrant worker in the host state per se means that she may be deprived by her MS of origin and employment of whichever rights she may have there, eg, pension rights under MS social security systems or employer pension promises, financial entitlements under employer bonus plans, or voting rights from shares held in the employer company under an equity participation plan for employees, solely based on the move across the border.

To deny a restriction of the free movement of workers by German legislation on the ground that a migrant worker does not have the right to ‘export’ to another MS, say France, her right to elect and to stand for election to the supervisory board of her German parent company, to me seems somewhat circular: Germany may take away such right from the migrant worker, because France does not give her such right.

The Advocate General denies a restriction in the meaning of Art 45 TFEU by the MS of the parent company/original employment also on the ground that, in the absence of harmonisation of MS laws on employee co-determination, MS are free to decide whether or not to give employees employed in subsidiaries in other MS the right to elect and to stand for election. This argument, which the Advocate General could have presented also in the context of Art 18 TFEU, resembles the argument in the Daily Mail case of 1988, according to which, in the absence of harmonisation on cross-border recognition of companies, England was not in violation of the freedom of establishment when it insisted that Daily Mail had to pay English taxes on unrealised hidden reserves in its balance sheet before it could transfer its seat of management to the Netherlands. The argument of absence of harmonised recognition of companies has since been dropped by the CJEU in Centros, Überseering and Inspire Art. The lack of harmonisation of national laws no longer excludes the existence of a restriction of the fundamental freedom of establishment, nor a violation of the non-discrimination principle. Why should this be different with other fundamental freedoms such as the free movement of workers?

In the absence of harmonisation of the MS laws on employee co-determination, the MS of the parent company and the MS of the subsidiary are indeed free to determine whether each of them wishes to give the employees a right of co-determination on the board of companies established in the respective state. However, when the respective MS introduces such a system it must not discriminate, and it must not restrict the free movement of workers. This  means the MS of the subsidiary is prohibited from excluding workers from the right to elect and the right to stand for election to the board of companies established in such MS on the ground that they are coming from another MS, and, likewise, the MS of the parent company is also subject to the prohibition of restriction of free movement of workers and to the non-discrimination principle when dealing with the question of whether an employee is denied the right to elect, and to stand for election to the supervisory board of the parent company solely because she is employed in a foreign subsidiary. Whatever either MS does in its territory does not affect the sovereignty of the other MS. This fact, too, supports the conclusion that whether the host MS, as regards subsidiary companies established in its territory, has a system of employee co-determination and however that system is eventually structured have no relevance for the question of how the MS of origin for the parent company that has a system of co-determination established in its own territory applicable to subsidiary companies must structure such system so that it does not violate EU law.

5. Additional alternative argument of the Opinion: Justification of the restriction

The Advocate General (no 90-100) dismisses the principle of territoriality presented as a justification argument by TUI and the German and Austrian Governments, and rejected by Mr Erzberger and the EFTA Surveillance Authority. According to CJEU case law, territoriality in the field of taxation serves to resolve specific problems in that field, including the problem of double taxation; however, no such problems arise in the context of employee participation (no 95). Contrary to the contention of TUI and the German and Netherlands Governments, the inclusion in the German employee participation system of employees employed in other MS would not, as such, entail an interference with the sovereignty or the legislative powers of the other MS (no 96). Here, too, the Advocate General joins the position of the EFTA Surveillance Authority and the Commission (no 96). The Opinion (footnote 75) mentions that the German Government, in reply to a question put by the Court, acknowledged that there would be no interference with the competence of other MS if employee participation were organized in such a way that the management of the parent company granted the right to vote and to stand for election to employees employed in subsidiaries abroad and if the company itself organized such election. The Advocate General notes that it is the specific conception of the German employee participation system that prevents employees employed in other Member States from being included in that system (no 99).

The Advocate General (no 103 s) hesitates to characterise the German employee participation system as an element of national identity within the meaning of Art 4 (2) TEU, as had been argued by the TUI Works Council. However, he has no doubt that the German employee participation system ‘constitutes an essential element of the German employment market and –more broadly – of the German social order'. The Advocate General notes that ‘employee participation in the management of the company constitutes a legitimate objective from the perspective of EU law. However, EU law recognises the diverse forms of national rules and practices in the area of social policy and, more particularly, as regards the way in which workers are involved in the decision-making within companies. As EU law currently stands, it leaves to the Member States the choice whether or not to adopt legislation on employee participation and the respective employee participation systems and the task of determining the procedures of their respective employee participation systems’ (no 104). The Opinion concludes (no 106) that the German national employee participation system reflects legitimate economic and social policy choices which, as the EU law currently stands, are a matter for the MS, and, therefore, finds that the German legislation ‘is justified by the objective of ensuring employee participation within the company, in accordance with the national social, economic and cultural particularities’ (no 106).

The aforesaid argument by the Advocate General basically consists of two elements: the absence of harmonisation of employee participation on the one hand, and national social, economic, and cultural particularities of Germany on the other hand. This argument, in a nutshell, implies that, in the absence of harmonisation, any MS is free to restrict and to discriminate as long as that takes place in a self-defined system of national, social, economical and cultural particularities. It remains to be seen how the CJEU will deal with this position of the Advocate General, which, if accepted by the Court, will have extremely far reaching consequences.

6. Concluding remarks

The CJEU will hand down its decision on 18 July 2017.

For completeness sake, it should be mentioned that the Advocate General’s Opinion does not deal with the second German co-determination law issue with EU relevance that, as reported in my previous blog, was briefly discussed at the hearing in the Erzberger v TUI case: namely, whether German law is in conformity with EU law when it comes to excluding employees working abroad from the head count against the aggregate number of employee thresholds that trigger employee participation in the supervisory board, as well as the size of the board and the number of employee seats thereon.

Hans-Jürgen Hellwig is Partner at Hengeler Mueller, Frankfurt am Main and Honorary Professor of European Company Law at Heidelberg University.