Good for Governance: Erzberger v TUI AG and the Codetermination Bargains

Important if underwhelming, Erzberger v TUI AG (2017) C-566/15 has held national codetermination laws are not an ‘impediment to free movement of workers’ in the European Union. Codetermination laws, from the Oxford University Act 1854 to Germany’s Codetermination Act 1976, now benefit people in the majority of EU and OECD countries (map below). Quite rightly, the Court of Justice’s Grand Chamber resisted what has been an absurd challenge to democratic life. But it missed the opportunity (seen in AG Saugmandsgaard Øe’s Opinion

Second, the Grand Chamber missed the opportunity to say that codetermination is ‘an essential element’ of ‘the German social order’ (AG Opinion,

POST WAR

Post-WW2 reconstruction undid the cartel economy and enabled free collective bargaining. This was how codetermination revived. By the Control Council Law No. 22 of 1946, unions bargained with employers to re-establish work councils. For board seats, unions bargained with coal and steel owners before any law. There is a myth among some corporate lawyers that British occupiers imposed codetermination on Germany, perhaps to weaken its industry. The evidence shows the reverse is true. The Allied Military Government delayed German states’ legislative action, so unions remade the ‘codetermination bargains’. Like after WW1, with business in ruins financially and morally, labour’s bargaining power was less unequal. As the Grundgesetz 1949 was drafted, the principle of voice at work was cross-political party consensus. Consolidating the traditions of Paulskirche and the essence of Weimar’s article 165, the Federal Republic was declared a ‘democratic and social’ state, bound by the rule of law (GG art 20). The principle of codetermination is in the core of the German constitution, and has been for close to a century.

3. Conclusion: what courts can do

Today codetermination is as inviolable to Germany as the NHS is to Britain. Voter turnouts are consistently high: 70-80% in work councils. The corporate lawyers who still oppose it are a shrinking minority, because the evidence is becoming too persuasive. Leximetric data, like at the Centre for Business Research, is showing that productive, sustainable, long-term corporate governance needs votes at work. The systems that encourage unjust enrichment of boardrooms, asset managers, or banks are outperformed by models where stakeholders have votes. In fact, the German model is far from the best. But now the debate is more than economics. From the AfD to Le Pen, to Putin, Brexiteers and Trump, authoritarians in the economy again are threatening democrats in politics. So, the economy must become democratic. True freedom needs votes at work, as much as votes in Parliament. 

What can courts do? Certainly the judiciary is at its worst when it sees itself as limiting democratic society, rather than using rights to empower every person’s voice, to realise their full potential. Erzberger was not a decisive end to the poorly justified free movement cases, like Commission v Netherlands (2006) C 282/04 that struck down public participation in systemically important enterprises, or ITF v Viking Line ABP (2007) C-438/05 that placed unprincipled limits on labour and human rights. (cf Cartesio Oktató és Szolgáltató bt (2008) C-210/06, fortunately rejecting AG Maduro’s anti-social opinions that time.) There is still more to do, to ensure free movement rules are compatible with democracy and social justice, not a Hayekian nightmare. Workers move faster than companies establish. But capital moves faster still. The only things that outrun them all are ideas and collective will. More than ever there is a need to reverse the causes of Eurozone austerity and the Brexit disgrace. A Court of Justice committed to protecting Europe’s integrity takes democratic governance seriously, in politics, corporations and the workplace. 

Summary of Germany’s codetermination system:

• With over 5 staff, elected work councils get binding rights on 13 issues, including hours, breaks, health and safety, pensions and social affairs (Work Constitution Act 1972 §§1 and 87). 
• With over 20 staff, work councils may defer redundancy dismissals to arbitration on a ‘social plan’ (WCA 1972 §111-113). 
• With over 500 staff, workers can elect one third of a company’s supervisory board (Aufsichtsrat), which in turn elects the executive (Vorstand) with day to day power to run the company (One Third Participation Act 2003 §1 ff). 
• With over 2000 staff, workers elect half the supervisory board, but the chair with a casting vote is appointed by shareholders. (Around 60% of shareholder votes are cast by banks, under Aktiengesetz 1965 §135, but statistics were shut down from 2005: chart below, contrast Switzerland since 2013). Just one executive is a worker or union representative (Codetermination Act 1976 §§1, 7, 27-29, 33)). 
• With over 8000 staff, workers by default delegate their trade union their votes, but can opt out (CA 1976 §§9 and 18). 
• In mining companies over 1000 staff, today only a few companies, employees elect half the supervisory board. Shareholder/bank representatives have no casting votes (Mining Codetermination Act 1951 §1 ff). 

This blog post draws on E McGaughey, ‘The Codetermination Bargains: The History of German Corporate and Labour Law’ available at SSRN.

Dr Ewan McGaughey is a lecturer in private law at King’s College, London and a Research Associate at the Centre for Business Research, University of Cambridge.