German law, based on the German Co-Determination Act (Mitebstimmungsgesetz - MitbestG) and the German One-Third Participation Act (Drittelbeteiligungsgesetz - DrittelbG), grants employees of German companies the right to directly participate in company policy by being represented in the supervisory board. In order for the MitbestG or the DrittelbG to apply, certain thresholds have to be met.

Now, with resolution dated February 16, 2015, the German Regional Court of Frankfurt am Main (Az. 3/16 O 1/14), has decided that, considering the law of the European Union, the term “group“ pursuant to the MitbestG and the DrittelbG has to be interpreted that employees who are employed in abroad subsidiaries of a group – in particular in the European Union – shall also be taken into account in calculating the threshold for a co-determined supervisory board. This resolution might have substantial effect on company practice.

Facts: The subject of the court decision was a German group, which employs in Germany 1,624 employees, and abroad within the European Union, 1,747 employees. A supervisory board was set up according to the DrittelbG, which consisted of 12 employer representatives and six employee representatives.

Court Decision: The Regional Court of Frankfurt am Main decided that the supervisory board had to be set up on equal terms and had to consist of six each of employer representatives and employee representatives. The threshold of “more than 2,000 employees” pursuant to Sec. 1 MitbestG was reached as in addition to the 1,624 employees employed in Germany the 1,747 employees employed abroad also had to be taken into account pursuant to Sec. 5 MitbestG. According to previous practice, only the employees being employed in Germany had to be counted.

Consequences for Practice: This court decision, which is not yet final, might have great importance for many companies, if the court opinion should prevail that such employees also have to be taken into account who are employed abroad. In particular, internationally operating companies and groups could be affected by the changed jurisdiction.

Companies and groups to which the DrittelbG applies could reach the threshold of “more than 500 employees“ more quickly than before, exceeding it for the first time by taking into account employees who are employed abroad. The same pertains to companies and groups to which the MitbestG applies and which are intervened by the MitbestG when reaching the threshold of “more than 2,000 employees”. As a consequence, affected companies would have to set up a supervisory board for the first time or would have to increase the number of employee representatives in already-existing supervisory boards.

The principals of the court decision could also be applied to operational co-determination according to the German Works Constitution Act (Betriebsverfassungsgesetz - BetrVG). In particular, the group works councils pursuant to Sec. 54 et seqq. BetrVG or, if applicable, also the economic committee pursuant to Sec. 106 BetrVG, could be affected, if the "company" term according to these provisions in extensive interpretation would also include employees being employed abroad.

Already, companies being potentially affected by this court decision should think about remedial strategies. Organizational and restructuring measures can be taken preventively. Moreover, currently in case of company acquisitions, the consequences of this court decision have to be taken into account, in particular as the organizational and financial effects are substantial, and as it is not clear at the moment if this legal opinion will prevail. The outcome of the proceedings shall therefore be awaited with excitement. We will keep you informed in this regard.

Client Alert 2015-161