Matrix Structures and the German Works Constitution Act

By Marks Künzel and Dr. Dominik Sorber

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The number of German enterprises integrated in European or international matrix organizations is steadily increasing. Quite frequently, group headquarters are not located in Germany but rather abroad in other European countries, America or Asia, from where significant decisions are taken, also for their business establishments in Germany.

Corporate structures used to be characterized by pyramid structures and a cross-divisional overall hierarchy whereas in matrix structures, central functions are bundled into one or more group-affiliated entities. Unlike before, nowadays the business is structured according to product segments or functional areas across corporate entities.

This leads to a situation where managers in a matrix structure are not responsible for the results of a legal entity in one country but rather for a specific business division which, organizationally speaking, is part of several legal entities in different countries. The legal limits for such legal entities no longer play a role in day-to-day operations as the managers assume responsibility and perform managerial functions beyond corporate boundaries. For instance, the manager is employed by the parent company and vested with corresponding powers there yet working to the fullest extent in subsidiaries of the group and controlling cross-company teams working at different locations. In these scenarios, the actual presence of the manager at the business establishments may vary enormously, ranging from a mere virtual presence via modern means of communication to a permanent physical presence. This is the case in particular if managers assume responsibilities not only for tasks in Germany but also in other countries. Communication will mostly take place by telephone or via video conference so that there is no need for a permanent presence on-site. Nevertheless, here too technical instructions are issued to employees working in Germany. Besides tasks that need to be attended to, it has become quite customary to establish cross-company project teams that are composed of employees from different legal entities and from a large variety of countries. The respective team members continue to work on-site at their business establishments and are linked with each other via modern communication networks.

This kind of matrix organization, often found in international groups, raises questions under labor law in Germany that so far remain largely unresolved and that cannot always be addressed and dealt with by traditional approaches.

As various current decisions of regional labor courts show, German works constitution law reaches its limits here as it is based on a rather classical concept of a business establishment.

Disjunction of an employer’s functions

Matrix structures are usually characterized by the fact that an employer’s functions are separated rather than bundled. While on the one hand the technical superiors are the aforementioned matrix managers (dotted lines) who frequently work with another legal entity either within Germany or are employed by a parent company abroad, the disciplinary employer function, the contractual employer, remains with the respective business establishment where the employee conducts his or her activities. This affects, for instance, requests for holidays, notification of illness, assignment of workplace, provisions on working hours, contractual issues, warning notices and accounting and payment of remuneration (solid lines).

Managing directors or other superiors are often not given technical employer functions, such as instructions regarding the tasks at hand or project implementation in the respective business establishment. Instead, these functions are performed exclusively by the matrix managers. Depending on the type of activity, such performance requires actual presence in the business establishment to a greater or lesser extent.

Integration of the manager in the matrix of a business establishment

The application of matrix structures in German business establishments raises some extremely complex legal issues. It is indeed questionable whether matrix managers are really integrated in the business establishment where they are managing staff with regard to technical aspects.

Pursuant to the German Works Constitution Act, the works council has a right of codetermination if employees are integrated in the business establishment and perform tasks there (Section 99 Works Constitution Act).

To date, various decisions have been rendered by regional labor courts (e.g., LAG Dusseldorf of December 20, 2017 – 12 TaBV 66/17) according to which a matrix manager in such a business establishment is considered integrated with the effect that the works council responsible for this operation is entitled to a substantial number of rights. And this although the matrix manager is not engaged in any contractual relationship with the employer.

With reference to established case law of the Federal Labor Court, the regional labor courts take the view that an employment under the terms of the German works constitution law (Section 99 (1) sentence 1 Works Constitution Act) exists if persons are integrated in the business establishment in order to achieve its operational purposes by carrying out activities subject to instructions together with the staff already working there. Thus, a person is integrated if he or she carries out the type of activity which is subject to instructions organized by the employer.

Although the matrix managers were personally present on-site at the business operation and spending time there, sometimes only in a secondary capacity, and partially giving instructions to one person only in the cases in question, the courts came to the conclusion that an employment as defined by German law already exists if the matrix manager has been organizationally scheduled and assigned to achieving the operational purposes of the respective business establishment. Integration in the organization of the business establishment was not subject to the condition that the activities were performed on the premises. The concept of business establishment was not to be interpreted in the geographical sense that the operating range of the business was to end at the borders of the business property or the business premises. It was decisive, though, whether the employer pursued the operational purposes of its business establishment with the help of the staff. Minimum periods of presence at the business establishment were not a prerequisite to achieve this purpose.

This legal position would lead to a situation where German works councils would have codetermination rights not only with regard to employment but also in numerous other respects if such matrix managers were somehow involved in or contributing to achieving the operational purposes of the respective business operation. This was already given because of their right of technical instruction vis-à-vis employees of a unit while they themselves were in an employment relationship with another employer of the business group and were not subject to any instructions, not even from the managing director. In these cases, the limits of the classical concept of a business establishment in relation to the modern matrix structure become quite visible.

For those in global undertakings, the appetite of the works councils of German companies often remains incomprehensible. The contradiction becomes even more blatant regarding the fact, that the matrix manager as defined by German law is considered an executive employee (“Leitender Angestellter”) and as such is in a contractual relationship with the company. Therefore the matrix manager is often authorized to independently recruit and dismiss staff or holds full power of attorney (e.g. German Prokura). As a result, this implies that the works council would not be responsible for the matrix manager. However, in the operations of a subsidiary, this manager would usually not be granted such rights so that, viewed in isolation, the manager would not be considered an executive employee in this company.

If the parent company is also a German company (e.g., a holding), this would lead to a situation where the manager would be qualified as an executive officer in the one and as a regular employee in the other. Under certain circumstances, this manager would fall within the scope of different works council agreements that would not apply in the company where he or she is actually employed. The regional labor courts’ legal practice also gives rise to contradictory evaluations because it allows for the matrix manager to be simultaneously integrated in the organization of different business establishments in Germany insofar as he or she is responsible for employees and gives technical instructions. But even if one was to assume integration in the above sense, it would be natural to grant the central works council a codetermination right in the context of employment, but not a local works council. Some regional labor courts have made it clear that this idea could be discussed. Ultimately, however, it was decided that the mere introduction of a matrix structure would not make the central works council responsible. An extreme case might therefore bring about a duplication or even multiplication of codetermination rights of the works council.

In the meantime, the Federal Labor Court has apparently rendered a decision on a judgement of the Regional Labor Court of Dusseldorf of February 10, 2016 which has yet to be published. Here the Federal Labor Court has obviously, at least in part, come to another finding but it remains unclear on which legal grounds or considerations the findings are based. Hence, it will be interesting to see how all the aforementioned cases will be assessed by the highest German courts.

Possible solutions

Even if many works councils are not interested in a confrontation with their employers and shareholders in relation to the integration of matrix managers in their business establishment, some of them do, in fact, feel obliged to take their rights pursuant to the works constitution law seriously and to assume responsibility for external employees. Therefore, even works councils with no intention of pursuing legal disputes regarding the issue of integrating a matrix manager often request to ensure compliance with information obligations and codetermination rights in respect of such matrix managers. So, in practice, works councils and companies currently conclude agreements granting works councils certain rights in respect of the matrix managers acting in their business establishment. This includes information obligations and codetermination rights, voting right issues and eligibility at works council elections as well as implications for thresholds stipulated in works constitution law.

By concluding such agreements, it is possible to sufficiently take account of the interests of all parties concerned, the group companies involved, the local works council and also the matrix manager. This way it can be ensured that the advantages of a matrix structure are not affected by the codetermination rights of works councils.

Should the Federal Labor Court take account of the particularities of the matrix structure in relation to the classical German concept of a business establishment and come to different findings than the regional labor courts, this would positively influence the conclusion of such agreements.

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