Works Councils in International Matrix
Structures
The Five Must-dos and Frequently Asked Questions
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 (www.gesetze-im-internet.de)
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.
