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Reasonable remuneration of works councils – gazing into a crystal ball?

Submitted by Firm:

Judgment of the Regional Court of Braunschweig of 28 September 2021 in Case No 16 KLs 85/19

The Regional Court of Braunschweig acquitted managers of VW in proceedings for a breach of trust concerning the payment of inappropriately high salaries to the works council members. This makes it clear: fixing a reasonable salary often proves to be a nearly impossible “gaze into the crystal ball”.

Facts of the case

In proceedings before the Regional Court in Braunschweig, two former board members and two upper-level HR Managers of VW AG were accused of approving the payment of inappropriately high salaries and bonuses to five high-level members of the works council. The accusation was breach of trust, partly in particularly serious cases. The prosecution estimated the damage to VW AG at more than five million euro. The public prosecutor argued that the four accused managers acted wilfully and knowingly in contravention of their duties by approving the payment of the inappropriate salaries to works council members. The main proceedings concerned in particular the salary of long-time works council chairman, Bernd Osterloh, who received 3.125 million euro. In the years where large bonuses were paid, his total salary even amounted to three-quarters of a million euro. Special proceedings are ongoing against the works council chairman for possibly aiding and abetting this breach of trust due to his high salaries.

The judgment

The LG Braunschweig acquitted all four defendants of the accusation of breach of trust. The Court could not see any criminal conduct that the defendant had to answer for and found that there was no evidence that the managers had acted with intent. The judges did not follow the line taken by the public prosecutor, who had argued for suspended sentences and fines in their pleadings.

Practical consequences

Again and again, there have been discussions about reasonable salaries for works council members, especially when particularly sensational cases have been made public. Allegations quickly arise, that the company is trying to get the works council on their side by paying members high salaries and that the salaries make the works council much too close to the “Mighty”. Salaries of works council members are regulated under the Works Constitution Act (Betriebsverfassungsgesetz). According to Act, being a member of the works council is primarily an honorary office. The principle of no loss of pay applies, according to which works council members continue to receive their previous salary while performing their functions as members of the works council. The salary should also be adjusted to the level of comparable career development within the establishment. This is supposed to offset any possible economic disadvantages of taking up the office.

Yet therein lies the difficulty. The prohibition against discrimination and favouritism of works councils applies. The Works Constitution Act even provides for a separate offence, punishable with a term of imprisonment of up to a year or fines. Setting the “right” salary level is therefore a fine line because if the salary is too high, it might be considered favouritism and if it is too low, it might constitute prejudice. The necessary salary adjustment causes serious difficulties in practice. The salary that the relevant member of the works council would have received, had they not taken up a post on the works council, must be determined. That’s like looking into a crystal ball. If someone has been the chairperson of the works council for 30 years, it is almost impossible to determine how their career would have developed within the company without their position on the works council. Qualifications and skills acquired through the office may generally not be considered for the determination. Yet it is often argued when discussing an appropriate level of salary for the works council that the chairperson of the works council of a large company negotiates with the management “as an equal” and even exercises management functions.

Due to the difficulties and uncertainties when determining the salaries of the members of the works council and the simultaneous imminent (penal) consequences, the current legal provisions have long been considered inadequate and vague. One point of dispute in the proceedings before the LG Braunschweig was also whether there were sufficiently precise rules for the setting of salaries for members of the works council at all.

Practical tip

Companies are well-advised to clearly document the determination and adjustment of the salaries of members of the works council and to demonstrably define the group of comparable employees for each member of the works council. Moreover, no additional payments such as bonuses or benefits in kind should be paid solely to works councils if the same payments are not normally made to the comparable employees within the establishment.

By: Dr Martina Schlamp