Co-determination Under Threat: Blocking Social Europe

The EU’s highest court, the Court of Justice of the EU (CJEU), is due to rule this year on whether German supervisory board co-determination is compatible with EU law. The case was brought by a small shareholder in TUI who claims that statutory co-determination at supervisory board level discriminates against nationals of other EU countries because the employees of foreign subsidiaries cannot vote in the supervisory board elections of the parent company. Much to everyone’s surprise, in autumn 2015 the Court of Appeal in Berlin referred the case to the CJEU, requesting a ruling on whether German supervisory board co-determination in transnational companies constitutes an infringement of the non-discrimination principle and employees’ freedom of movement. The Court of Appeal thinks that this may indeed be the case. This summer, the European Commission published an opinion that supports and even reinforces this view. It states that current co-determination law may hinder employees’ freedom of movement or make it less attractive. This prompted DGB president Reiner Hoffmann and BDA President Ingo Kramer to write a joint article in the Handelsblatt newspaper at the end of September dismissing these arguments as absurd and out of touch and making it clear that any changes to co-determination are entirely a matter for the Federal Republic of Germany. The case’s implications are debated here by political scientist Martin Höpner and labour law expert Manfred Weiss.

Martin Höpner, you describe the TUI case currently being heard by the CJEU as a declaration of war on German co-determination. Why are you so worried about it?

I am worried that it could have far-reaching repercussions. If the court rules against co-determination, then although this would not mean an instant ban, the CJEU would be saying that the alleged discrimination and restriction of freedom of movement do exist and must be brought to a halt. This would then beg the question of whether the problem can be solved by holding elections for the employee supervisory board seats at company locations outside of Germany. Legal expert Florian Rödl has serious reservations about whether this would be feasible, since German law lacks the instruments to legally enforce it.

Would this mean that supervisory board co-determination no longer enjoyed legal certainty?

Yes, it would. Because their jurisdiction is confined to Germany, the German courts would be powerless to ensure that elections held abroad were properly conducted. In the end, this would probably lead to the disappearance of employee representatives from supervisory boards. That would be the worst-case scenario.

Manfred Weiss, you are much more relaxed about the outcome of the CJEU case and its repercussions for German supervisory board co-determination. Why?

If the CJEU ruling goes the way that Höpner fears, then I agree completely with him about the consequences. I also see it as a declaration of war, I just wonder who exactly is fighting whom? I wouldn’t immediately cast Europe as the enemy, I think we need to take a good look at what is going on in Germany. There are people out there with a targeted strategy of stirring up the question of employee co-determination at supervisory board level in the courts.

These attacks on supervisory board co-determination are a recurring theme. Just think back to early 2000, when employers used the European harmonisation argument to try and do away with parity as provided for by the statute.

It’s not the first time they’ve tried something like this. Once again the academics, particularly the corporate law experts, are getting involved. The ruling referring the case to the CJEU is one of the worst I have ever read in my professional life. According to the Court of Appeal the fact that employees of subsidiaries in other Member States are not entitled to vote for the employees’ representatives of the mother company’s supervisory board might constitute an infringement of employees’ freedom of movement and of the ban on discrimination. The reasons they put forward are pitiful. What sources do they cite in their ruling? A succession of corporate law academics who have never liked co-determination and who are the chief proponents of the view expressed in the ruling. Fundamentally, what we have in Germany is a conflict between corporate law and labour law. Most labour lawyers see this matter very differently, as demonstrated by the brilliant report written by my colleague from Göttingen, Rüdiger Krause.

Did the Court of Appeal have no choice but to refer the case to the CJEU because the matter was too complex for it to deal with itself?

It was completely unnecessary. The findings of the court of first instance were spot on. They acknowledged that there are no grounds whatsoever to refer to EU law on this issue. But the Court of Appeal was determined to do just that. And that’s the real problem. Now the CJEU has no choice but to decide on the case. It cannot refuse to give a verdict.

(MH): What’s happening with co-determination is an example of a far wider trend that can be observed throughout much of the history of European integration. Private interests find something in EU law that can be used to help them win battles that they have been fighting without success for decades in their own countries. Co-determination has always had its opponents. But they were never able to get their way because it had never previously occurred to them that they could use EU law to do away with it. This has now changed, however, because the Commission and the CJEU are interpreting the four freedoms and the non-discrimination principle ever more widely. EU law is wading into a long-standing conflict and altering the balance of power when nobody forced the Commission to issue an opinion questioning whether German co-determination is compatible with EU law.

(MW): We should remember that EU law has also frequently been used as a means to an end in other countries. The trade unions and my labour law colleagues in the UK have successfully used CJEU rulings to prevent the Tories from having it all their own way. To just give another example: When Ninon Colneric was judge of a German Labour Court she referred all cases that had anything to do with direct or indirect discrimination against women to the CJEU. As such, she was responsible for the CJEU “inventing”, as it were, the fundamental right to gender equality. So we shouldn’t forget that the CJEU has also been used by progressive forces.

Let’s turn the question around: could the CJEU have opted to reject the Court of Appeals of Berlin’s referral on the grounds that it was manifestly ill-founded?

(MW): No. The CJEU is required to answer the questions that are put to it. That’s why it’s unfair to attack the CJEU for doing its job.

Let’s get back to the legal crux of the matter: what is your view of the arguments that supervisory board co-determination constitutes an infringement of employees’ freedom of movement and discriminates against employees in other countries?

(MW): Neither argument makes any sense. How can you say that co-determination discriminates on the grounds of nationality? Any employee who works for a company on German soil, whatever his or her nationality, can vote and stand as a candidate in the supervisory board elections. The principle is that foreign and German workers should receive the same treatment. Nothing more, nothing less. And they do.

But isn’t the EU model based on the principle that the national legislator is responsible for labour law and that the regulations may vary from one country to another?

Of course. If somebody goes to another country where the protection against wrongful dismissal or the minimum wage regulations is weaker, does it constitute an infringement of their freedom of movement as an employee? I haven’t yet heard anyone try to suggest such a ridiculous idea. That’s why I’m relatively optimistic about the TUI case. And, ultimately, we mustn’t forget that German lawmakers can only legislate for Germany. It’s not as if we’re saying we want to rule the rest of the world, too.

All the same, in its opinion of summer 2016, the European Commission was clearly receptive to the arguments put forward by the party bringing the case. Did that surprise you?

(MH): The Commission’s opinion is politically motivated and its content is frankly outrageous. So in that sense, yes, it is surprising. It is a political declaration of war and it must therefore be countered not only legally, but also politically. The whole issue is so sensitive because the Court of Justice of the EU often follows the Commission’s opinions. So the Commission’s opinion increases the chances of the CJEU ruling against co-determination.

(MW): I’m afraid I have to disagree with you on that point. Statistically, this happens relatively rarely. As a rule – and it will be interesting to see what happens this time round – the CJEU follows the opinion of the Advocates General in Luxembourg. Their opinions – which often extend to around 100 pages – are much longer than the final judgements which tend to be very brief and short on detailed reasoning.

(MH): Objection! A study by Michael Malecki published in 2012 shows that in around three in four preliminary rulings the CJEU follows the Commission’s opinion.

What strategy would you now recommend to the trade unions and everyone else who wishes to protect co-determination as part of our social market economy?

(MW): We need to find allies who can make sure that the Advocate General – who, incidentally, cannot come from Germany, because it is the country bringing the case – is properly informed. The member states have an important role in this regard. Luxembourg’s Minister of Labour has already clearly signalled his support, as have Austria and the German government. We are hopeful that France and other member states will follow. Germany’s trade unions need to mobilise and get other governments to show their support. Thereby influence can be exerted, trying to put aside the opinion of the neoliberal-leaning European Commission. We certainly can’t expect much from this body, whatever Mr Juncker may say in his pretty speeches.

(MH): The CJEU heeds signals. The court carefully considers how much opposition its rulings are likely to encounter. Definitely, the Commission, which supposedly wants to create a European Social Pillar, can be put under pressure. We must not be afraid to do so.

How?

It would send the wrong signal to the EU institutions to suggest that the whole thing can be dealt with by making more changes to the law. That would be a mistake in both practical and strategic terms. We need to make the Commission understand that the German trade unions are among its most loyal allies and that it will lose them if it fails to formally retract its opinion during the oral hearing in January.

(MW): I think it’s a bit far-fetched to imagine that the Commission would ever retract anything, it wouldn’t want to lose face like that. However, one thing that MH is absolutely right about is that the Commission is an institution with a rather worrying tendency to pander to all sorts of different interests. It is more than a year since Juncker announced a new Pillar of Social Rights. At the time, the labour law community took this to mean that there would be binding legislation. And then we had a Commission opinion in March that failed to make a single mention of it. It is clear that the Commission itself is deeply divided. And I suspect that more and more often its hardline neoliberal members are the ones who have the last word.

Manfred Weiss, you are an expert on the workings of the CJEU. What is it important to do in the run-up to the hearing and as far as the Advocate General is concerned?

We need to keep focusing on the issues. And to influence the key players in the CJEU case, i.e. the governments. Unfortunately, the social partners aren’t among the key players because the original Treaty was only concerned with the single market and no thought was given to the social dimension. The inclusion of the social partners is absolutely crucial. Especially in the wake of Brexit and Trump’s election victory, what we now need is a European Union with which the people of Europe can identify again. And that will only be possible if it focuses on social issues.

(MH): I agree that it is possible to create a more social Europe. But always saying yes to more Europe hasn’t created a social Europe at all, it has just paved the way for unfettered capitalism. A social Europe is being blocked on two fronts: the EU is blocking social advances in certain areas at member state level and the member states are blocking social progress at European level. We are faced with the difficult task of removing both of these blocks. The EU must acquire the ability to act more effectively in the field of social policy and provide better protection of social welfare at member state level.

Since 1999, the CJEU’s judgements on freedom of establishment, for example the Centros and Überseering rulings, have paved the way for companies based in Germany to use other countries’ legal structures to circumvent supervisory board co-determination. Some 15 years on, the consequences are there for all to see: in the retail trade, it is now very rare to find employee representatives on a company’s supervisory board. Does this surprise you?

(MH): Where it is an established practice, co-determination at supervisory board level enjoys a high level of acceptance. The problems appear when new companies enter the picture. They are increasingly finding ways to circumvent. This is indeed due to the wider interpretation of freedom of establishment first seen in the rulings that you refer to. Now they are landing their next blow with the TUI case. And you can be sure that before long someone or other will claim that co-determination restricts the free movement of capital. It’s like tidal waves crashing onto the same quayside over and over. Sooner or later it will start letting the water through. It is absolutely key that legislators should ensure enforcement of German co-determination even when a company uses other countries’ legal structures. The longer we wait, the harder it will be to push this reform through.

What would the consequences be for European policy?

While the TUI case is cause for concern in its own right, it is also symptomatic of a wider issue. We need a debate about the normative meaning and scope of the fundamental freedoms and European competition regime. Were the four freedoms really intended as regulations that would ultimately erode employee co-determination and the right to strike? Was competition law really intended to transform the public banking sector which, lest we forget, is not solely capital-driven? All of these things are an attack on the social market economies of Europe. We have too much Europe in these areas and not enough protection of our national law and democracy.

There has certainly been plenty of criticism of the democratic deficit in the EU and of Brussels technocrats. Why is a court like the CJEU perceived to be so out of touch with our reality, with our values and traditions?

(MW): We mustn’t always see everything through a German lens. The CJEU has to make judgements for all the member states. As former CJEU President Vasilios Skouris recently explained to me, that’s no easy task. According to him: “It’s very hard for the CJEU to predict the consequences of its decisions. How are we supposed to predict what consequences a ruling will have in 28 countries that are nationally and culturally so different?” He’s got a point. So, of course, every time the CJEU is called on to make a judgement – and that includes the ruling on supervisory board co-determination – it finds itself in a much more difficult position than a national constitutional court, for example.

(MH): On the other hand, you could argue that it has it easy because it can always dismiss any opposition as national protectionism.

If common sense prevails and the CJEU doesn’t challenge German co-determination, what can be done to address the legitimacy issues in companies like TUI where three-quarters of the workforce work abroad?

(MW): We discussed this very issue at the German Jurists’ Forum. If only the German subsidiaries can take part in a group’s supervisory board elections, this does give them only partial legitimacy. One proposal made at the time was to introduce an opening clause that would require the parent company to offer its foreign subsidiaries the chance to participate in the election of representatives to the group’s supervisory board. It’s an extremely complicated issue. Where does this leave the trade unions? Is it something they would be allowed to strike for? And how many German corporations have subsidiaries in Brazil, China or South Africa? If we really want to address a lack of legitimacy, then employees in these countries should also have the chance to participate, not just the Europeans. There are so many different interests at stake and, in the end, as MH quite rightly says, there wouldn’t be many supervisory board seats left for the German trade unions. The most important thing as far as I’m concerned is to make it clear that it will be virtually impossible to solve this dilemma if the CJEU rules against the current co-determination arrangements.

What are your predictions? What is going to happen?

(MH): The argument that co-determination would restrict the four freedoms is pretty absurd, so I think it is rather unlikely that the worst-case scenario will occur. But we have to be prepared. And given the over-interpretation of the fundamental freedoms, we face a general problem that deserves more attention than in the past.

(MW): I agree completely. What’s more, in recent years it has in general become easier for the CJEU to ensure a fairer balance between market and social considerations in its rulings. The Treaty of Lisbon talks of a social market economy rather than just a market economy and contains a horizontal clause requiring social concerns to be taken into account in all decisions. Finally, we also now have the Charter of Fundamental Rights of the EU which, although it doesn’t talk about co-determination, does refer to employee information and consultation. So there is plenty of cause for optimism.

The TUI case is one of the issues addressed in the Hans Böckler Foundation’s Digital Info File  “Bessere Unternehmensführung dank Mitbestimmung” (“Better Corporate Governance through Co-Determination”), as well as in a critical commentary “Acid Test European Court of Justice” by Rüdiger Krause.

The oral hearing in the TUI case will take place at the CJEU in Luxembourg on 24 January 2017.

The interview was conducted by Cornelia Girndt and Margarate Hasel, editors of “Mitbestimmung”, Magazine of the Hans Böckler Foundation.