Wednesday, June 20, 2012

Germany - Works Councils in International Matrix Structures

Works Councils in International Matrix Structures

The Five Must-dos and Frequently Asked Questions

By Bernd Weller, Lawyer, Certified Specialist Lawyer in Employment Law, Heuking Kühn
Lüer Wojtek, Frankfurt am Main

Matrix is the magic formula when it comes to a group management structure, especially when a corporation's top management is in another country (USA, UK).

Matrix structure - what is it?

A matrix structure is a term used in a corporation's / group's organizational structure in which two reporting lines intersect. Each and every employee is integrated into two reporting or instruction channels.

As relates to an employee's responsibilities, the departments (Finance, Controlling, Marketing, HR, Service, Manufacturing, IT, etc.) are typically arranged on a vertical line. Here, the employee faces his disciplinary supervisor, meaning the person in charge of human resources issues. The reporting channel in place between the employee and his disciplinary supervisor is referred to as a "solid line". This reporting channel is the responsible authority for written warnings, terminations and salary increases as well as any topics relating to bonuses.

On a horizontal level, the employee is positioned face to face with a supervisor on the "dotted line" who is responsible for a product or a region for several departments.

It is not our intention to review the objectives behind an organizational form of this kind. The fact remains that each employee reports to two different supervisors. In international matrix structures, generally one of the supervisors is in another country, and in some cases both of them are. The special circumstances that arise from these kinds of structures for the enterprise and for the works councils are the subject matter of this report.

It is the nature of international structures that there are many managers who are responsible for employees from different cultural circles and different jurisdictions. Not only does this lead to the many known and often discussed cultural misunderstandings, but many times also to serious disputes with works councils.

Works councils insist, and rightly so, that when foreign supervisors exercise their rights to issue instructions to "German" employees that they must fully observe the works council's rights to be informed, consulted and involved. If this does not happen once, or even repeatedly, the situation will escalate. Despite how often the foreign supervisors may argue they simply cannot be expected to know each and every law of a specific country and that they would treat all of their employees equally or that their actions would be common day-to-day practice in the USA, the UK or elsewhere: Arguing in this manner is simply wrong.

1st Must-do: Train executives and translate works council agreements

When foreign executives supervise "German" employees, it should go without saying that they must observe German law, the working hour limitations (despite problems with time zones) as well as works constitution and employee termination laws. This includes not only the mandatory German laws, but also company internal agreements with the works council (works council agreements) that define the daily interactions among the staff and the works council's rights to be informed, consulted and involved in the operation. German executives observe these (at least as best practice) as a matter of course when issuing instructions (e.g., with regard to overtime).
Translations of the most important German laws can be found online ( and in several books. At most, there may be some internal policies why these translations would not be made available to executive overseas (especially after problems have occurred). Where works council agreements are concerned, what needs to be considered is that the content of these agreements must either be explained to foreign executives in English as to their core clauses, or these works council agreements should be composed in a bilingual version from the start. In the process, it is certainly possible to differentiate between separate operations and works council agreements for economic reasons - depending on the international relevance. Of course, the works council does not have a right to have the agreement translated; it can "only" demand the German version.

At the very least, however, those executives with a notable number of "German" employees should not be left alone with the complex array of subjects that play a role in German law. In addition to the - in part obligatory - cultural awareness training, they should also be given a crash course in German labor laws. After all, in most of the larger German companies it is customary that German executives receive this kind of training - and for good reason.

2nd Must-do: Distance creates a void with no works council involvement

When foreign executives are trained, the works council only has a right to be consulted and involved if the supervisor in question is in fact integrated in the German operation. He is not automatically so just because he can issue instructions to the German employees. In order to be employed in an operation within the meaning of Section 99 German Works Constitution Act, and therefore to be considered an operation employee with (active and passive) voting rights in the works council elections, there is one more thing that needs to apply: the supervisor must be in the operation on site on a regular basis and he must remain there. A regular (monthly, for example) visit is not sufficient. One full day of work a week at the German location, however, does come with its own set of opportunities and risks of being integrated into the operation.

Warning: Frequently working on location will make a foreign executive an employee of the German operation (irrespective of the contractual employer)!

Once a "foreigner's" presence in a German operation is as frequent as this and he is thus considered employed there, then he will at the same time be fully subject to the German employee co-determination rules. "Fully" in this example means that the works council must not only be consulted and involved on matters of relocation or hiring (or replacement), but that its co-determination rights would also apply to the foreign supervisor with regard to his "foreign" activities. In practice, this has only rarely been a problem because German works councils do not feel responsible for the foreign supervisor - according to the principle of no plaintiff, no judge. There have, however, been examples when works councils have used this knowledge as leverage to push through their interests in Germany.

Keeping a healthy distance from the German operation, therefore, not only keeps the foreign executive from having to deal with complex tax-related issues, it also limits the extent of the works council's rights to be informed and involved. With regard to employees – regardless of whether they supervise thousands of "German" employees – that are not integrated in the German operation, there are in fact no rights to information, to be consulted or to be involved. These rights are limited to the German operation and the employees working there. Thus, it is only logical that the rights of the works council only apply to the effects of "foreign" decisions relating to German operations.

3rd Must-do: Bundle communication - create one central point of contact

One of the greatest challenges facing those trying to make a matrix structure work properly - and one issue that is known to be the greatest weakness of the matrix concept - is communication between the horizontal and vertical supervisors. As regards works constitution issues, there is yet another matter that complicates communication: just as in purely "German" operations, the Human Resources Department should always be firmly integrated in the flow of information and remain solely responsible for communicating with the works council. This is already quite difficult when it comes to German operations. The degree of complexity increases manifold in an international matrix structure. After all, how is a foreign executive expected to reliably know, even after training, whether and to what extent his decisions affect works constitution issues? How should someone who is only responsible for a specific product line in a diversified group be expected to know that his decisions might have legal consequences in operations and for other product lines? The employer side often wears "blinders" of its own making in this regard. Oftentimes only the works council sees the whole picture and keeps various bits of information bundled on its own desk.

If the employer on the one hand demands to negotiate with the works council and on the other hand wants to avoid actions that violate the works constitution, then it simply needs to accept the high degree of expense and effort required to communicate properly. There is no other way. There must be at least one office where information is bundled. Even if this does to a certain extent contradict the matrix structure, it is highly recommended that "social partner contacts" be installed at a central position. Only this office should communicate with the works council. To the extent possible, this office should be informed about all plans.

4th Must-do: Consult and involve the German HR Managers in matters relating to bonus negotiations

The more people are involved in decisions about compensation, the more difficult it becomes to pay fair compensation. If not only German, but also foreign executives are involved in setting target objectives, in defining which targets should be achieved and the bonus sums to be paid, this is one lesson that most definitely holds true. Typically, the compensation schemes, including the target agreement components, are governed with the involvement of the works council in works council agreements. In order to assure they are complied with, it is recommended that a foreign supervisor has a German HR manager at his side - at least as needed - who can provide support in the decision making process.

5th Must-do: Make use of the limits within an operation and within an enterprise

The usual differences between an enterprise ("legal entity") and an operation as defined under German law have in the past at times created huge problems for matrix organizations. Their organization almost always exceeds traditional limits as found in Germany. On the other hand, though, it is these limitations that can be of great benefit to a matrix organization. A works council's limits end within the operation, those of the joint works council (“Gesamtbetriebsrat”) and the economic committee end in the enterprise. Only the corporate works council (“Konzernbetriebsrat”), provided there is a separate corporation in Germany within the meaning of the German Stock Corporation Act, may in fact exceed these limits. According to mandatory provisions in the German Works Constitution Act, in cases of doubt the employee representation that is regionally the closest is always the responsible authority, thus more often than not the works council as opposed to the joint works council.

Matrix structures can, and in fact should, take advantage of this.
Frequently Asked Questions

Most of the time, the questions asked about matrix structures are more or less the same.

1. Can a works council insist on traveling to a foreign country in order to meet there with foreign executives who bear responsibility for German employees? Works council expenses - which include travel expenses - would in such cases only be reimbursed if they are necessary for the work of the works council in accordance with Section 40 German Works Constitution Act. Typically, this does not include travel to a foreign country. After all, the works council can make use of telephone conference calls or it can wait until the executive visits the operation in Germany.

2. May the works council / economic committee request information about foreign business issues? A works council's rights to information end within the operation, those of the economic committee end in the enterprise. As such, all rights to information and for the works council to be consulted are limited per se. So the joint works council / economic committee only has a right to information about activities or financial data in a foreign company if an enterprise (thus the legal entity) comprises both German and foreign business activities. Moreover, in these cases any corporate success (or lack thereof) in another country or investments in the foreign business activities would obviously also be of significance to the German business activities. Consequently, the (joint) works council and the economic committee may then also demand information about foreign activities - in some cases in an arbitration committee (“Einigungsstelle”). If the company is limited to German business activities, however, these rights do not apply. This is because the German Works Constitution Act does not recognize a "corporate economic committee." At most, the European works council would need to be notified of information of this nature.

3. Must the works council be consulted and involved when a foreign executive is being replaced? Generally, the works council does not have a right to be consulted, informed and involved according to Section 99 or Section 105 German Works Constitution Act. If, however, the foreign executive does work in the German operation on a regular basis so that one would assume he had been integrated into the German operation, then neither his nationality nor the contractual employer or the foreign focus of the activity will have any limiting effect on the works council's responsibility.

4. To what extent does the works council need to be consulted and involved in "re-hanging" various departments? In matrix structures especially, often there is a "musical chairs" type game being played. The game typically involves entire departments being "re-hung" from division 1 to division 2. Alternatively, German executives are replaced with foreign executives as a result of a regional decision or a decision to consolidate that concerns a business division. The works council is only involved if this means any changes to the activities and the jobs of the German employees concerned. If they stay intact as a team and their activities remain (for the most part) unchanged, the works council does not have a right to be consulted and to be involved.

5. May the works council take legal action against activities by foreign decision makers? Naturally, the works council does not need to tolerate a violation against its rights to be consulted, informed and involved only because such violations occurred in a foreign country. The works council cannot sue foreign employees or a corporation's holding company in a foreign country directly. The German business management / executive board must, however, allow claims to be asserted against it. For example, if the foreign office conducts an employer survey that violates the works council’s co-determination rights, then the right to cease and desist is directed against the German executive board. The fact that, from the standpoint of the matrix, the board itself had neither been informed nor consulted is irrelevant. In this case, the German CEO represents the international group.