Issue: November 2018

GERMANY - Right of Co-determination of the German Works Council on Stock Options of U.S. Parent?

By: André Zimmermann

The German Federal Labor Court (judgment of March 20, 2018 – 1 ABR 15/17) has recently clarified a matter of considerable practical relevance for U.S. companies offering stock options to employees of their Germany-based subsidiaries: Does the German subsidiary’s works council have a right to be involved when it comes to offering stock options?

In its judgment, the German Federal Labor Court held that it was not necessary for the information to be provided.  The works council had not explained which of its specific responsibilities under the BetrVG required the provision of this information. The required information related to the grant of stock options etc. by the group parent as well as their number. Moreover, the Federal Labor Court held that the legal principle of equal treatment under labor law was only directed at the employer.

The Case

The German group company belongs to an international group headquartered in the U.S. Each year, the parent company allocates, among other things, stock options to the employees of the German subsidiary based on a long-term incentive program, for instance a stock option plan. The German company is neither involved in the structuring of the program nor the specific allocations. The stock options are not mentioned in the employment contracts of the employees of the German subsidiary, but regulated by a spate agreement between the U.S. parent and the employees.

The works council elected at the German subsidiary would like to be involved in the procedure to select the employees and the allocation of the number of stock options in accordance with section 87(1) no. 10 of the German Works Constitution Act (Betriebsverfassungsgesetz, “BetrVG”).

Inconsistent Case Law of Regional Labor Courts

There is considerable debate among employment law scholars whether there is a right of co-determination in such constellations. The case law of the Regional Labor Courts (Landesarbeitsgericht, “LAG”) is not yet consistent either.

LAG of Hesse: No Right of Co-determination

If the German subsidiary in its capacity as the employer does not have its own decision-making right and no say in which employees will participate in the option program and to what extent, there is nothing for the works council to have a right of co-determination about, as the LAG of Hesse recently found in its judgment of August 3, 2017 (5 TaBV 23/17).

LAG of Baden-Württemberg: No Right of Co-determination, but Right to Information

While the LAG of Baden-Württemberg (judgment of 17 January 2017 – 19 TaBV 3/16) agreed in principle, it did however hold that the German works council had a right to be informed by the Germany subsidiary as to which employees were granted stock options and the scope of such grant in order to allow the works council to fulfill the responsibilities incumbent upon it pursuant to section 75(1) BetrVG to monitor compliance with the principles of good faith and, in particular, non-discriminatory treatment. The LAG Baden-Württemberg held that, if necessary, the employer was obligated to obtain this information from the parent company if it was not aware of the details of the allocation.

But in the view of the LAG, too, the works council did not have a right of co-determination in accordance with section 87(1) no. 10 BetrVG. It is not an act of wage-setting if an employee enters into an agreement on the grant of stock options with another group company rather than with his or her employer; such claims do not become part of the employment relationship. Instead a legally independent contract has been entered into between the employee and the parent company; this does not involve any remuneration paid by the employer and, according to the LAG, therefore, there is no right of co-determination of the works council. A possible link between the granting of stock options and the employment relationship did not suffice in the view of the LAG; these only constitute remuneration if the third party (i.e. the parent company) granted the options in accordance with the provisions of the employment contract either instead of or in addition to the agreed remuneration for the employment. The LAG held that there is no room for maneuver since the standards set out by the group’s parent company were mandatory and thus constituted the limit of co-determination. A different conclusion could only be reached if representatives of the subsidiary had played a part in the decision on the allocation of the options and had their own scope for deciding how the stock option plan should be structured in detail.

German Subsidiary Ordered to Provide Information to Works Council

The LAG Baden-Württemberg, however, held that the conditions for a right to information pursuant to sections 80 and 75 BetrVG of the German subsidiary were met. The court ordered the German subsidiary to provide information to the works council as to which employees were granted how many stock options by the U.S. parent company in a particular period of time.

The LAG said that only if this information were provided would the works council be able to carry out its general obligation of monitoring that all people working in the company were treated in accordance with the principles of good faith, that there was no discriminatory treatment and that the principle of equal treatment was complied with.

Federal Labor Court: No Right to Information of the Works Council

The Federal Labor Court quashed the judgment of the LAG. This means that the employer did not engage in any conduct which could be assessed on the basis of the standards of the general principle of equal treatment and in relation to which the requested information would be required. The court found that section 75(1) BetrVG did not contain a more extensive, comprehensive monitoring obligation of the employer, which included measures taken by the parent company regarding any allocations in the context of contracts entered into between the parent and the employees.

Good Practice Advice

If an application of co-determination rights is to be avoided, the involvement of the German subsidiary in the allocation and distribution of stock options should be avoided at all cost. There must be no involvement beyond a mere right to make recommendations; notably, the German company may not include any information on the stock option package in the employment contract.

Offer letters, if they are to be signed by the German company, should not make any mention of such packages either. Instead, the U.S. parent company and the employee should enter into a separate agreement. The employer is well advised to point out vis-à-vis works council and employees that it did not take the decisions in question but that it, too, had merely requested to be provided with the information.

André Zimmermann

Orrick, Herrington & Sutcliffe LLP