German law gives employees of a German corporation and of its subsidiaries the right of co-determination through elected employee representatives on the corporation's supervisory board. The law has detailed rules for the election which is to be organized by the works councils, ie the employee representative bodies at works level. Employees working in branches or subsidiaries in other EU/EEA Member States are excluded from the election – they have neither the right to elect nor the right to be elected.

1.         The Erzberger v TUI case

This raises the question whether such exclusion is in conformity with EU law. Relevant in this context is not only the general principle of non-discrimination (art. 18 TFEU) but also the free movement of workers (art. 45 TFEU), since an employee, when moving from Germany to a foreign branch or subsidiary, loses the right of election and the right to be elected and, if he is a member of the supervisory board, will lose his seat and the associated remuneration. The Court of Appeal of Berlin, by its decision of October 16, 2015 (Erzberger v TUI AG, 14 W 89/15), in accordance with art. 267 TFEU referred this question to the CJEU (Erzberger C-566/15). The case was heard on January 24, 2017 for more than four hours by the Grand Chamber of the CJEU under President Koen Lenaertz which evidences the importance given to the case. Rapporteur is Egils Levits / Estonia, Advocate General is Henrik Saugmandsgaard Øe / Denmark. In the following, I will review some of the issues discussed at the hearing.

Mr. Erzberger argued his view that the exclusion from election violates art. 18 and art. 45 TFEU. This view was shared by the EFTA Surveillance Agency which was involved because the case also has relevance for the European Economic Area (EEA).

a)         The defence argument of the territoriality principle

TUI AG, its employee supervisory board members, its works council and the German trade unions present, as well as Germany and a few other Member States, presented as their main argument that the violation is justified on the ground that the German legislator can legislate only for employee elections within Germany – to provide for elections outside Germany would violate the territoriality principle under international public law.

The Advocate General in this context referred to Denmark and Norway, both of which have taken a different legislative approach than Germany. In Denmark, after the employees have opted-in for co-determination, the employees of the corporation (including those in branches situated in another EU/EEA state) and of its Danish subsidiaries (including those in branches of such subsidiaries situated in another EU/EEA state) have the right to elect, and to be elected, to the supreme management body. Upon opt-in by the shareholders’ meeting of the corporation, the employees in subsidiaries domiciled in another EU/EEA state are also included in the co-determination and have the right to elect and to be elected. The elections in Denmark and in the relevant other countries are organized by a so‑called Election Committee which the management is obliged by law to form and which consists of a minority of management representatives and a majority of employee representatives. These employee representatives are appointed by the employee members of the so‑called Cooperation Committee which is provided for in the collective agreement between Danish Employee Confederation and Danish Confederation of Trade Unions; in case no cooperation committee has been formed, the employee representatives in the Election Committee are appointed by the management, with the proviso that preferably elected works council members are to be appointed.

As regards Norway, the definition of employees, with the right to elect and to be elected, includes by law not only employees of the Norwegian corporation with its foreign branches but also employees in Norwegian and foreign subsidiaries. For the purposes of implementing this compulsory co-determination scheme, the Norwegian law calls for the conclusion of a group co-determination agreement which requires government approval. Such agreement can be structured in very flexible ways, eg by providing for different election rules in different countries. As a result, Norway has a broad experience with group co-determination agreements which include not only branches and subsidiaries in EU/EEA but also in other states, such as the USA and Australia.

Against the background of the law in Denmark and in Norway, on the one hand, and the German territoriality argument, on the other hand, the Advocate General wondered whether the approach taken by Denmark and Norway violates international public law.

The approach taken by Denmark and Norway to include employees abroad in the co-determination demonstrates that Germany is the (intended?) ‘victim’ of its own approach – the German legislator and the German works councils cannot reach beyond the German borders. The problem would disappear, and employees abroad could have the right to elect and to be elected, if Germany were to change its approach in the direction that the law itself gives the active and passive right of election to employees abroad, be they in a foreign branch or in a subsidiary of the corporation, and requests the management of the corporation to organize the election on the basis of whichever model ensures the participation of employee representatives. The management is not subject to the territoriality principle. By virtue of its rights under company law and labour law, it can reach across the border and have the elections carried out also in other countries, just like management ensures the inclusion of foreign branches and subsidiaries in its annual accounting (accounts of the corporation itself and consolidated group accounts), as well as in the compliance and risk management systems of the corporation.

b)         Other defence arguments and other issues at the hearing

France considered that the violation of the non-discrimination principle and the free movement of workers under the present German co-determination system is justified because the exclusion of employees in other countries serves to maintain different social systems, similar to how there exist differences in national tax laws.

The European Commission, which in the written pleadings had shared the view of Mr. Erzberger, in the hearing took the position that a possible violation of art. 18 and art. 45 TFEU ‘might be justified’ (sc. not: is justified) because the exclusion of employees abroad may protect the functioning of the co-determination system and the purposes pursued by such a system.

Both these arguments were countered by Mr. Erzberger who said the purpose of maintaining national systems cannot take primacy over EU primary law, in particular when they are in violation of basic EU principles, such as the non‑discrimination principle.

Several parties at the hearing presented the view that there is no discrimination and no restriction of free movement because the exclusion of foreign employees follows from differences in the laws of the Member States. Other parties, in particular the Commission, rejected this position by arguing that the differences in Member State laws have no relevance in this case – the German company law applicable to the German parent corporation does not change when the employee moves within the group from Germany (right to elect and to be elected) to abroad (no active and passive right of election).

Austria (in line with some German scholars) defended the exclusion from election also by the argument that the rights of employees to elect and to be elected flow, not from corporate law, but from labor law, and that under conflict of law rules employees working abroad are exclusively subject to local labor law with which Germany must not interfere. This argument did not play a role in the hearing, for good reasons, because, even if the starting position – co-determination is part of labor law – were correct, EU law in any case has primacy over national systematics and national conflict of law rules (eg, Centros, Überseering and Inspire Art).

President Lenaertz raised the interrelationship between art. 18 TFEU (lex generalis?) and art. 45 TFEU (lex specialis which supersedes art. 18 TFEU?). With respect to art. 45 TFEU, he wondered whether one would not have to differentiate between foreign branches of the corporation (free movement of employees) and foreign subsidiaries (no free movement?). He also discussed the case of a French employee in a French subsidiary of a German corporation and wondered about the necessary cross-border aspect. Mr. Erzberger counter-argued that in the case of the French employee in France, the exclusion from election is a discrimination and that the right of free movement is restricted in the case of an employee employed in Germany who may be transferred to abroad, with the consequence that he is no longer included in the election and must give up his supervisory board seat.

c)         The change of position by the Commission

The Court asked many questions, in particular with respect to the difference between the written and the oral submission by the Commission. No explanation was given for this change of position. One is probably safe to assume that the change is due to the intensive lobbying that, as insiders know, was undertaken after the written pleadings by German government, trade unions and employer associations, that in the hearing the Commission ought to defend the exclusion of foreign employees from the election. One remembers in this context that when France (once again) violated the Maastricht criteria, the Commission took no steps ‘because it is France’. Was there a change of position ‘because it is Germany’? It is striking in this context that, in the press release issued after the hearing, the Commission claims to have defended the German rules on co-determination – ‘They are in conformity with EU law’.

The change of position by the Commission may also be seen against the background of the Commission’s Communication ‘EU Law: Better Results through Better Application’ (C (2016) 8600 final of December 21, 2016), where the self-defined ‘political’ Commission announces, as ‘guardian of the Treaties’, to follow ‘a more strategic approach to enforcement in terms of handling infringements’ by making use of its ‘discretionary power in deciding whether or not […] to start an infringement procedure […]’ while, on the other hand, it ‘will continue to value the essential role played by individual complainants in identifying wider problems with the enforcement of EU law affecting the interests of citizens and businesses’, and ‘will therefore pursue rigorously all cases of national rules or general practices which impede the procedure for preliminary rulings by the court of justice […]’. This having been stated by the Commission, one wonders whether its discretionary power, which opens the door to opportunism, is also meant to apply to the position that the Commission takes in preliminary reference cases before the CJEU, which have been initiated by and among EU citizens and businesses.

2.         The Rieble v Deutsche Börse case

The aforesaid right of election of employees abroad is not the sole aspect of German corporate co-determination of employees that is under judicial review for its conformity with EU law. Another aspect under review concerns the determination of the size of the supervisory board and of the number of seats for employees’ representatives. Corporations with more than 500 employees in the group must have a supervisory board, and one third of the seats is reserved for the employees’ representatives. The total number of seats is fixed by the shareholders, with a proviso that it must be at least three and must be divisible by three. If the total number of employees is above 2,000, the employees have one half of the seats and the total size of the supervisory board, depending on the number of employees, is 12 or 16 or 20. Employees employed in branches and subsidiaries situated in another EU/EEA state are not included in the headcount for the aforesaid thresholds which determine whether and how large a supervisory board must be formed and whether one third or one half of the seats goes to the employees.

Here the question arises whether the exclusion of employees abroad from the headcount is in conformity with EU law. This question is pending before the Court of Appeal of Frankfurt am Main (Dr. Rieble v Deutsche Börse AG, 21 W 91/15). The Court, by decision of June 17, 2016, has stayed the case until the CJEU has handed down its decision in the Erzberger case. The main argument for not making an additional reference to the CJEU is given in the following three sentences: ‘[a]s regards the inclusion of employees employed abroad when determining the thresholds stated in section 1 para. 1 in no. 2 Co-Determination Act, a violation of EU law in the view of the court is to be considered only if the foreign employees have the right to be elected. Without such right to be elected, the method of counting under the existing rules as presently practiced does not meet with any doubts under EU law. A reference to the ECJ independent and separate from the question of the right of election is therefore not necessary’. Such short argumentation (which is rather a postulation) would not meet the CILFIT criteria for acte clair if it were given in a decision on the merits and not in a staying order.

The Deutsche Börse case was known to the CJEU, and some aspects of it were briefly touched upon in the hearing in the Erzberger case. One is safe to assume that the court in its decision will at least bear in mind, if not even deal with, the issues at stake in the Deutsche Börse case. Relevant in that case is only the issue of discrimination, not the issue of restriction of free movement. Further it is to be noted that, while in Erzberger the employees abroad are individually and personally affected, such personal effect is absent in the Deutsche Börse case. The fact that employees abroad are not counted against the thresholds does not produce direct nor indirect effects for an individual employee. The headcount is a mere mathematical exercise without cross‑border consequences of its own.

In the absence of a violation of EU law specifically by not including employees abroad in the headcount that determines in the abstract whether there must be co‑determination and in which intensity, it is in my view difficult to base the inconformity with EU law of the non‑counting solely on the inconformity of the exclusion from election. An EU law argument for inclusion in the counting might be that, without the inclusion in the counting, there may be cases where no supervisory board at all or a supervisory board with fewer seats in total and fewer seats for employees would have to be formed. As a consequence, inclusion in the counting can bring into existence and broaden co‑determination for all employees which increases the chances of employees abroad to be elected to the supervisory board. On the other hand, if the exclusion from the counting is in violation of EU law, even though the exclusion from election is not, the employees in Germany would benefit twice: first, from the inclusion of the employees abroad in the counting against the thresholds which helps to bring into existence and to enlarge the right of co‑determination; and, second, from their exclusion from the election to the supervisory board which means that they do not have to share the right of co‑determination with the employees abroad. In any event, there is no per se link between the two issues, in the sense that if either issue is decided upon in a certain way, the decision on the other issue must automatically be the same.

3.         How will the CJEU decide?

To conclude, the court gave no signal in the hearing on January 24, 2017 in which direction it will decide the Erzberger reference and will deal with the Deutsche Börse case. The decision by the CJEU may have far reaching relevance beyond the concrete case: how much cross-border/single market relevance is required for EU primary law to be applicable? Under which circumstances is the non-discrimination principle (art. 18 TFEU) applicable, if at all, besides the free movement of workers (art. 45 TFEU) and the other fundamental freedoms? How much decision making scope remains with the Member States?

We now have to await the opinion of the Advocate General on May 4, 2017.

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