The remuneration of employee representatives on works councils is intended to save employers money and at the same time ensure cooperation based on trust. In a recent decision, the German Federal Court of Justice (BGH, 10.01.2023 – 6 StR 133/22) sets strict requirements for the legality of the level of such remuneration and does not exclude the possibility of criminal liability where a representative has been paid excessive remuneration where there has been an intentional breach of trust. Employers should take this decision as an opportunity to review their remuneration practices and adjust them where necessary.
Facts of the case
The defendants are two former Human Resource executive board members and two former HR managers of an international German listed automotive group. The public prosecutor filed charges of breach of trust alleging that between 2011 and 2016 they granted inadmissibly high levels of remuneration (including monthly salaries and voluntary bonus payments) to works council members, which significantly exceeded the levels paid to applicable comparators under the Works Constitution Law. As a result, the automotive group had suffered damages of more than 4.5 million euros and, in addition, the payment of taxes had been reduced. The Regional Court of Braunschweig acquitted the defendants. According to the Regional Court, the objective element of the offence of breach of trust had been satisfied by the fact that the works council members had been placed into a group of significantly higher pay grades reserved for the “management circle” and the granting of voluntary bonus payments of between 80,000 euros and 560,000 euros per year per works council member. However, the required intent for a breach of trust was lacking since the defendants had relied on the assessments of internal and external consultants or had found an existing remuneration system and had erroneously assumed that they were not violating any duties in their decision making process. The individuals were therefore acquitted. The prosecution appealed against this decision.
The appeal was successful. The German Federal Court of Justice (Bundesgerichtshof – BGH) overturned the judgement and referred the case back to the Regional Court for a new hearing and decision.
First, the court held that the objective elements of the offence of embezzlement under Section 266 (1) of the German Criminal Code (Strafgesetzbuch – StGB) may be satisfied if a member of the management board or authorised signatory of a public limited company, in breach of the prohibition of preferential treatment under the Works Constitution Act (Betriebsverfassungsgesetz – BetrVG), grants a member of the works council excessive remuneration and thus breaches his duty of care under company law. Such an advantage could lead to a prohibited outflow of assets and would therefore be void.
According to Section 37(4) sentence 1 BetrVG, the remuneration of a works council member is to be determined on the basis of the remuneration of comparable employees with a normal career path in the company. This means that an employer must determine what remuneration the member would have earned had they not been a member of the works council. The BGH emphasised that the office of a works council member is an honorary office and unpaid. According to the BGH, activities undertaken as a member of the works council activities should not be assessed for the purpose of determining the individual’s remuneration. This also applies to qualifications acquired in the course of works council work, such as passing a business management examination, unless they are related to the previous position which the individual held.
In the interest of the works council’s independence, a strict standard of comparison had to be applied. Therefore, only persons who, at the time of taking office, had performed similar activities with essentially the same qualifications and who were professionally and personally at the same level of qualification as the works council were the correct comparators. In this respect, it was not permissible to take into account the hypothetical salary development of the works council member as if having an exceptional career. Standards such as the performance of complex tasks, participation in “complex entrepreneurial decision-making ” or negotiating “on an equal footing” with management and senior staff would be inadmissibly linked to the assessment of works council activity as such and would find no support in works constitution law. In particular, a promotion was only customary in the company if the majority of comparable employees had achieved such a promotion. The payment of higher remuneration presupposed that the works council member had not been promoted to the correspondingly remunerated position merely as a result of taking office. Any further increase in remuneration was in breach of the ban on preferential treatment.
It was not possible to determine from the Regional Court’s judgment which system was generally used to regulate the remuneration of employees in the automotive group, which criteria were used for classification into applicable cost centres and remuneration groups, which rules were used for promotion to higher remuneration groups and to the various “management circles”, and which standards formed the basis for determining the granting of a bonus and the level of such bonus. It was therefore not possible to assess whether the granting of any bonus was contrary to the principles of the Works Constitution Law.
Finally, the Regional Court’s assessment of the evidence of the accused’s intent was incomplete because it took into account only the classification of the works council members in certain salary brackets, but not the bonus payments made to them over and above their basic salaries, which in some cases were substantially higher than the basic salaries.
With this decision, the Federal Court of Justice clarifies that works council remuneration is only permissible if it is based on comparable persons in the company and not on “individual hypothetical special careers”. Unfortunately, the ruling provides little guidance for employment law practice, but it does add to the considerable uncertainty that exists for managing directors, board members and senior executives on an issue that has always been fraught with risk. There is a risk of criminal liability not only under section 266 of the Criminal Code (breach of trust), but also under section 119 of the Works Council Constitution Act (favouring works council members). Employers should now review and, if necessary, adjust the remuneration practices of their works councils, ensuring a strict application of the German Federal Labour Court’s criteria, in particular with regard to the comparators that apply.
On this and other current topics, we invite you to our webinar “Arbeitsrecht aktuell” on 30 March 2023, which will be held in German only (register here).