Works council remuneration following the Volkswagen ruling

Offense of breach of trust and preferential treatment of works council

The core issue is the question of what remuneration a works council member may receive and what limits apply in this regard. The Federal Court of Justice made it clear that the objective facts of breach of trust (Sec. 266 of the German Criminal Code (Strafgesetzbuch "StGB")) can be realized if an executive board grants excessive remuneration to a works council member in violation of the prohibition of preferential treatment under works constitution law in Sec. 78 sentence 2 of the Works Constitution Act (Betriebsverfassungsgesetz "BetrVG"). In the case under review, a "Works Council Remuneration Commission" existed at the car manufacturer VW, which was responsible for the remuneration of exempted works council members. The defendants were members of this commission. In the course of the years 2011 to 2016, various works council members were granted higher monthly salaries or voluntary bonus payments. In terms of their salaries, the works council members were in some cases ultimately comparable to the top management circle. Legal advisors had confirmed this procedure as lawful. 

The Federal Court of Justice regards this practice as a breach by the former members of the executive board of their fiduciary duties under Sec. 93 para. 1 Stock Corporation Act (Aktiengesetz "AktG"). For authorized signatories, these fiduciary duties already result from the procuration as such. The remuneration practice was not in line with the principles of works council remuneration under works constitution law. The increase in the works council remuneration in violation of the prohibition of preferential treatment under Sec. 78 sentence 2 Works Constitution Act constitutes a violation of the fiduciary duties. The remuneration agreement is void under Sec. 134 German Civil Code (Bürgerliches Gesetzbuch "BGB"). The company thereby suffered an uncompensated pecuniary loss. This applies even if these payments were intended to promote trusting cooperation with the works council for the benefit of the company. 

No "special careers" for works councils

The decision of the Federal Court of Justice is exciting when it comes to the criteria for a violation of the prohibition of preferential treatment. The provisions of works council remuneration under works constitution law are anchored in Sec. 37 of the Works Constitution Act. 

According to this, the works council office is an honorary office (Sec. 37 para. 1 Works Constitution Act). The principle of loss of pay applies (Sec. 37 para. 2 Works Constitution Act). This means that the works council member may be released from work to the extent necessary for the exercise of his office without losing his salary entitlement. During their term of office and for one year thereafter, the remuneration of works council members may not be set at a lower level than the remuneration of comparable employees with a development customary in the company (Sec. 37 para. 4 Works Constitution Act). 

The Federal Court of Justice has now applied the wording of Sec. 37 of the Works Constitution Act very strictly and clarified that an evaluation of works council activities for remuneration purposes is ruled out. This also applies to qualifications acquired in the works council office, insofar as they are not related to the previous work activity. The strict standard to be applied in the interest of the independence of the works council office prohibits taking into account the hypothetical salary development of the works council member in the event of a special career. Rather, only those persons were comparable who, at the time of assuming office, had performed similar activities with essentially the same qualifications and were professionally and personally qualified for them in the same way as the works council member. A development is customary if the majority of the comparable employees have taken such a development typically in the course of normal operational and personnel development. These rules also apply to promotions. In particular, a promotion is only customary in the company if the majority of comparable employees have achieved such a promotion. The payment of a higher remuneration presupposes that the works council member has not been promoted to the correspondingly remunerated position only as a result of taking office. Increases in remuneration going beyond this violate the prohibition of preferential treatment under Sec. 78 sentence 2 Works Constitution Act. 

The Federal Court of Justice thus follows the case law of the Federal Labor Court (BAG) and rejects such voices in literature, according to which the special qualifications of the works council acquired through the exercise of office are to be taken into account in the hypothetical career. According to case law of the Federal Court of Justice, works council members are therefore in principle to be remunerated during their term of office in the same way as they were remunerated before taking office, taking into account the development of comparable employees in the company. The Federal Court of Justice has thus put a stop to special careers for works council members. 

The Brunswick Regional Court now has to reopen the case, in particular with regard to the findings on the mens rea of breach of trust. The Federal Court of Justice did not allow the fact that expert opinions had been obtained confirming the legality of the actions of the "Works Council Remuneration Commission" to be sufficient to deny intent. This applies in particular to expert opinions which are intended to provide "legal flank protection" for the actual handling. Even if the person acting was aware that he was moving on a legal borderline area, the awareness for wrongdoing required for criminal liability could exist.

Consequences for practice

The ruling has considerable consequences for practice. On the one hand, it serves the purpose of promoting the independence of works councils. In concrete terms, however, it also means that companies must review their practices to ensure strict compliance with the requirements of works constitution law. Downward salary adjustments and the assertion of claims for repayment are also possible in order to avoid accusations of breach of trust by executives and board members.