Remuneration of the works council/staff council - Update 2023

1. Basic principles for determining the remuneration of the works council/staff council I: Principle of honorary office and loss of wages

Pursuant to Section 37 of the German Works Council Constitution Act (Betriebsverfassungsgesetz, BetrVG), the office of works council member is an honorary office without remuneration. For the works council activities required by the nature and scope of the business, the individual works council member is to be released from his or her professional duties for the employer without reduction of remuneration (Section 37 (2) BetrVG). Section 37 (2) BetrVG does not establish an independent claim to remuneration, but secures the works council's claim to remuneration under Section 611 of the German Civil Code (Bürgerliches Gesetzbuch, BGB) in conjunction with the relevant legal basis (employment contract, collective agreement, works agreement, etc.). For the remuneration of the staff council member, the same guiding principles apply in terms of content in accordance with the respective legal basis under staff representation law (cf. inter alia Section 50 of the German Federal Staff Council Act (Bundespersonalvertretungsgesetz, BPersVG)) and corresponding provisions of the law of the individual federal states).

The remuneration to be granted by the employer for the period of the office activity shall include all remuneration components which the works council/staff council member would have received if he/she had performed his/her original activity during this period (loss of earnings principle). To this end, the employer must make a hypothetical assessment of what remuneration the works council/staff council member would have earned without the time off. The principle of loss of earnings implies that only the remuneration owed on the basis of the employment relationship is also to be granted for periods of office. The individual member should therefore receive the remuneration to which he/she is contractually entitled during the term of office, but also no more or less. In addition, for the calculation of the hypothetical remuneration, the particularities of the individual remuneration component with regard to its content-related prerequisites are to be taken into account and, in this respect, for performance/output-dependent variable remuneration components, the German Federal Labour Court (Bundesarbeitsgericht, BAG) refers to an estimation in the individual case according to the principles of Section 287 (2) of the German Code of Civil Procedure (Zivilprozessordnung, ZPO), whereby the parameters for the hypothetical achievement of objectives may be, inter alia, the average degree of achievement of objectives of the works council/staff council member and the average degree of achievement of objectives of the employees comparable to him/her (see section 3.) in the years prior to taking office.

2. Basic principles for determining the remuneration of the works council/staff council II: Prohibition of discrimination and favouritism for the specific official activity

The principle of loss of earnings is embedded in the prohibitions under works council/staff council law against discrimination and favouritism towards individual works council/staff council members (Section 78 s. 2 BetrVG/Section 52 (1) s. 2 BPersVG and corresponding federal states law): The individual member must not suffer any economic disadvantage as a result of the official activity, whereby a disadvantage includes any worse position compared to the employees in the peer group which is not based on objective reasons but on the official activity. An objective disadvantage is sufficient, an intention of the employer to discriminate is not required. Similarly, the prohibition of favouritism prohibits any better position and/or granting of advantages which is causally connected with the official activity and which is not based on objective (= legally permissible) reasons. The causal connection requires a causality between the official activity and the concrete betterment.

3. Basic principles for determining the remuneration of the works council/staff council III: Prohibition of discrimination and favouritism also for the further development of remuneration, in particular of the works council member on leave of absence

The legislator has defined the scope of the prohibition of discrimination and the prohibition of favouritism to include not only the remuneration for the specific office activity but also the development of remuneration in the further course of the employment: The remuneration of the works council/staff council member may not, in addition to the period of office, be less in the 12 months following the end of the term of office than the remuneration of employees comparable to the member with a career development customary in the enterprise (cf. Section 37 (4) BetrVG/Section 52 (1) s. 2 BPersVG and corresponding federal states law).

These guiding principles apply both to members released separately for their official activities (= complete release from the operational activity in accordance with Section 38 BetrVG/Section 52 (2) BPersVG and corresponding federal states law) and to official members who, in accordance with the loss of earnings principle, are released only for the specific official activities required in accordance with Section 37 (2) BetrVG/Section 52 (1) s. 1 BPersVG and corresponding federal states law. According to the case law of the BAG and the German Federal Administrative Court (Bundesverwaltungsgericht, BVerwG), the assessment of the professional development customary in the company - and thus also the development of the remuneration - must be made on the basis of the fictitious tracing of the professional development customary in the enterprise which the released member would have taken without exercising the official activity. The customary professional development is to be traced on the basis of a comparative group of employees to be formed by the employer, whose professional career and performance profile are comparable to those of the released staff council member - it is thereby assumed that the released member would have taken a professional development which corresponds to the customary development of the members of the comparative group. Usual is a development which the comparable employees have taken in professional terms when taking into account the normal operational and personnel development. Usuality arises on the basis of uniform conduct of the employer and a rule established by the employer. In this context, the course of events must be so typical that, based on the circumstances and regularities, the respective development can be expected at least in the predominant number of comparable cases. The transfer of higher-ranking activities is then customary in the company if these should have been transferred to the member according to company practice or if the majority of comparable employees achieve such an advancement. Comparable employees are those who, at the time of taking office, carried out similar activities with essentially the same qualifications and were professionally and personally qualified for them in the same way as the works council member.

Remuneration practice typically implements these requirements by means of a remuneration system which, in addition to specifying a (minimum) number of persons to be used for the comparison in each case, has a - robust - catalogue of comparison criteria (e.g. educational qualification, personal and professional qualifications, performance level, comparable qualified activity and job function, in each case related to the time of assumption of office).

4. "Hypothetical exceptional career as a manager" of the released member as an alternative connecting factor for the development of remuneration during the term of office - and its rejection by the BGH in the infidelity judgement

The determination of the remuneration on the basis of the professional development customary in the company encounters limits in practice with individual exempt members (or sometimes a commercial lack of understanding on their part). (or sometimes a commercial lack of understanding on the part of these members) if they (1) have already been released from their duties for several terms of office (and in this respect the duration of their term of office in release exceeds their previous operational activities), and/or (2) in the course of their term of office they have undergone comprehensive further training and education, particularly in business and human resources management, and have also developed comprehensive management-related competences from their cooperation with the employer side and their representative function vis-à-vis the employees they represent, which they neither had in their previous operational activities nor needed for these.

In the recent past, practice - especially in large (capital market-oriented) companies - has attempted to take into account these more extensive qualifications and skills acquired during office in determining the remuneration of the released members. In order to avoid a violation of the prohibition of preferential treatment, various approaches have been developed, which essentially aim at the argumentative justification of the comparability of the individual member with employees in executive positions (above all with employees who, due to their activity and competence profile, are to be qualified as executive employees within the meaning of Section 5 (3) BetrVG). As argumentative anchors for the remuneration to be determined on the basis of a "hypothetical exceptional career as a manager" deviating from the usual professional development in the company, in practice, for example, the participation of the individual member in internal company assessment centres or the application and selection of the member for corresponding qualified vacancies with the employer (with subsequent rejection of the relevant offer of an employment contract by the member with reference to the office activity) have been developed.

The BGH has rejected this approach of the "hypothetical exceptional career as a manager" in the infidelity judgement. It justifies the rejection briefly and pointedly: Such a consideration (and also the argumentative anchors) is inadmissibly linked to the assessment of works council activity as such and finds no support in the BetrVG.

In this context, the BGH's position on qualifications acquired in the works council office, which - at least also - have a connection with the original work activity, is not entirely clear. A clarification of the case law (especially of the BAG) remains to be seen.

5. Professional development customary in the company as the limit of the assessment standard for the determination of remuneration and (otherwise) criminal liability of management

At the same time, the BGH clearly stated in the infidelity judgment that the professional development customary in the company is to be assessed on the basis of a comparison group to be formed at the time of assuming the office. A remuneration system based on other remuneration criteria in favour of the works council/staff council member can constitute a criminal offence of breach of trust under Section 266 of the German Criminal Code (Strafgesetzbuch, StGB) for the persons of the employer who adopt the remuneration system and are responsible for remuneration payments based on it at the expense of the company. In addition to the members of the legal representative body of the employer's company (= ,management board in the case of a public limited company/SE, managing director in the case of a private limited company, etc.), employees with validly granted (individual) procuration may also be affected by the criminal liability.

In doing so, the BGH rejects the approach, which has sometimes been followed in practice, of eliminating the intent of the acting persons required for criminal liability by means of legal opinions on the legal admissibility of the "hypothetical exceptional career as a manager" approach or to establish an unavoidable error of prohibition for the acting persons (which also exempts them from punishment). In the case of the persons acting, the legal borderline area of the approach that eliminates the unavoidability of the prohibition error - at least in the case of/on the basis of a comprehensive public expert discussion with sound argumentation for its legal inadmissibility - is to be assumed to be known.

These legal principles established by the BGH for the assessment under criminal law must also be observed by the statutory representative bodies for their possible liability under civil law vis-à-vis the company. In particular, the members of the management board of the AG/SE and the managing directors of the GmbH must critically assess legal opinions when determining the content of the remuneration system for the works council and in this regard take the legal principle recognised by the BGH at this point in the disloyalty judgement as a guideline for their decision that "[a legal opinion] which is intended to provide legal flank protection for the actual handling requires particularly critical assessment". At this point, the BGH (once again) sharpens the scope of assessment of this group of persons in the exercise of the business/legal judgement rule.

6. Consequences of the disloyalty judgement for remuneration practice: (Only) Professional status quo at the time of taking office counts - further development of the catalogue of comparison criteria, comprehensive(r) documentation of the professional development customary in the company, agreement with the works council/staff council

The assessment and determination of the remuneration of works council/staff council members according to the professional development customary in the company on the basis of a comparison group to be formed at the time of assuming the office, which was determined by the BGH in its infidelity judgement as a basic anchor without any alternative, is at the same time an opportunity for employers to review the existing remuneration system for members of the works council/staff council and to develop it further in line with requirements. This can be done, inter alia, by:

• to further concretise the catalogue of comparison criteria for the formation of the comparison groups or to generalise them as required with regard to the original operational activities of individual members who are no longer present in the company in terms of content, and
• expand the accompanying documentation ("Paper Trail") as needed and, to this end, comprehensively record in particular the concrete activity and qualification profile of the individual works council/staff council member at the time of taking office and of all employees eligible for the respective comparison group.

The further development of the remuneration system can be flanked with an agreement with the works council/staff council on the remuneration system, which refers to the further development of remuneration in accordance with the professional development customary in the company and - for the members who are not (fully) exempted - to the continued payment of remuneration during the term of office.

^{Published: February 2023}