Are three-party restructuring agreements still legal in Germany?

By Dr. Jan Tibor Lelley, LLM, Dr. Julia Bruck and Brooke Carrington

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Companies are constantly realizing the need for structural change. These restructurings can be implemented by the instruments of works agreements or collective agreements. Also, a combination of collective bargaining and works constitutional instruments is feasible: Multi-unit collective agreements completed by trade unions and works councils on the one hand and employers on the other. But even without the involvement of trade unions, a three-party restructuring agreement between different levels of works councils and the company is possible.

In practice, determining the source of the various parts of these agreements, which are often combined in one document for convenience, can be quite challenging. The agreements are often not easily classifiable as collective or works agreements, and their wording is typically not particularly helpful with designations such as “location job saving agreement” or “pact for the future “. Previously this was not precarious, but now the agreement must fulfill a requirement that is regularly overlooked in order to be valid: The requirement of legal source transparency, i.e., the reader must be able to identify unequivocally the author of the legal standard that is contained in the document. Failure to comply with this requirement can nullify the whole agreement. This leads to major legal uncertainty concerning both already concluded and yet to be concluded multi-­unit agreements – not only for the employer but for the employees as well.

From uniformity to distinction

If restructuring is planned, different parties can or have to be involved. The employer can complete an agreement with a trade union, the works council, the central works council (Konzernbetriebsrat), or, for instance, the combined works council (Gesamtbetriebsrat), depending on who is affected and who is responsible. The requirements of ’normal’ two-party agreements can already be very intricate and complex but it can get even more complicated if the employer is compelled to conclude agreements with three, four or more parties. Such mixed multi-unit agreements can be roughly categorized into two groups:

  • Agreements between the employer, the trade union and the works council (multi-unit collective agreement)
  • Agreements between the employer and at least two different works councils (multi-unit works agreement)

Originally, the Federal Labor Court treated multi-unit agreements sympathetically in its case law. It was implied that the parties always favored a valid agreement. So, in the case of doubt, the court assumed the multi-unit agreement to be entirely of a collective nature in accordance with § 77 paragraph 3 BetrVG (German Works Constitution Act). Accordingly, three-party agreements were often presented in a unanimous document that did not indicate the source and had only addendums such as “as far as competent”, for example. But recently, due to a change in court precedent, stricter requirements apply.

Multi-unit collective agreements

In 2008, the Federal Labor Court (file no. 1 AZR 86/07) had to address once more the quality of standards and authorship required when examining a multi-unit collective agreement. And this time – for the first time – the court established the requirement of legal source transparency for such collective agreements.

The case under dispute concerned a collective agreement between IG Metall (a powerful German union), a works council, and a combined works council, entitled “Location Safeguard Agreement”. The agreement could neither be clearly classified as a collective agreement nor as a works agreement. There were segments that seemed to be more of one nature or the other but could also be both. Overall, the contract was a confusing mixture. The source of a significant portion of the document could also not be determined by a legal interpretation pursuant to §§ 133,157 BGB, so the Court ruled that the agreement was invalid.

The Federal Labor Court pointed out that it is basically admissible to shape the restructuring process by combining both collective agreements and works agreements. Nevertheless, the many significant differences between them must be addressed. For instance, due to Article 9 paragraph 3 GG (German constitution), a stricter standard of assessment applies to works agreements than to collective agreements. Also, according to § 4 paragraph 1 TVG (German act on collective agreements), the standards of a collective agreement only apply directly to the employees who are collectively bound, whereas works agreements are mandatory for all employees of a business pursuant to § 77 paragraph 4 sentence 1 BetrVG. Works agreements can be replaced by a ruling of the conciliation committee among other things, while company agreements need to be replaced by new company agreements and so on. Different legal consequences may also arise in the case of a transfer of a business. While works agreements continue to be normative if the establishment’s identity is maintained, collective agreements are transformed into an individual contract in accordance with § 613a paragraph 1 sentence 2 BGB (German civil code) insofar as the acquirer of the establishment is not bound by a collective agreement. Because of these differences, it is crucial that the affected employees must always be able to recognize the source of each component of the agreement.

According to the Federal Labor Court, the requirement of legal source transparency is also indicated by the requirement of written form under § 1 paragraph 2 TVG, § 77 paragraph 2 sentence 1 and 2 BetrVG. This prerequisite of written form not only requires a written document, but also that the agreement is signed by hand pursuant to § 126 paragraph 1 BGB. If agreements are signed only by parties which are competent for every aspect of the contract, there can be no uncertainty regarding the legal source and its jurisdiction. However, problems arise if agreements are also signed by parties whose competence does not extend to all matters found in the agreement.

Multi-unit works agreements

Considering the differences between works agreements and collective agreements, the significance of the concept of legal source transparency concerning multi-unit collective agreements is not surprising. It was mostly assumed that the requirement of transparency was not applicable for three-party works agreements without the involvement of a trade union because of the works council-related nature of such agreements. This notion has recently been rejected by the Federal Labor Court (file no. 1 AZR 717/15). This also ended the discussion about whether the first ruling in 2008 was just a one-time occurrence that did not necessarily indicate a new precedent on the matter. The Court has now determined that the requirement of legal source transparency applies to multi-unit works agreements as well.

The underlying case involved a Munich-based company that carried out a restructuring consisting of dismissals and job relocations. Without the involvement of a trade union, the restructuring went forward with central and local works councils completing several, sometimes interrelated, reconciliations of interests, social compensation plans and other arrangements. The only hint of the legal source of the individual agreements was the addendum “as far as competent” for each council. The Federal Labor Court ruled that the agreement was invalid. The Court declared the agreements to be ineffective because of a breach of the requirement for legal source transparency.

Admittedly, there is no uncertainty regarding the works council-related nature of the agreement and its direct applicability to the employees. But according to the Court, a question remained as to whether the parties acted within their competence in relation to each other and to their mandatory contractual partners. Also, the requirement of written form under § 77 paragraph 2 sentence 1 and 2 BetrVG applies in this case as well. It must therefore be transparent which regulations are agreed to by which works council within the framework of its legal competence.

Practical consequences – how to get it right

To summarize, the requirement of legal source transparency not only involves transparency on what was agreed, but also on the legal source. It ensures that authorship corresponds unequivocally to the content of the agreement. Therefore, three-party restructuring agreements are still legal in Germany, even after the latest ruling of the Federal Labor Court and even if they are combined in one document. The recent – and well-founded – court ruling just makes life more difficult in the future. The charm of the traditional single-document multi-unit contract was the apparent transparency of concurrence of all signing parties concerning the outcome of negotiations. From now on, the apparent transparency must also encompass the source of the respective components of the agreements.

There must be no uncertainty concerning the question: Who has agreed to what for whom?

To quote the Federal Labor Court: “Agreements between collective bargaining parties are not works agreements and those of operating parties are not collective bargaining agreements due to lack of regulatory competence.” The same principle applies to agreements involving various works constitution parties.

In conclusion, three-party agreements are still legal but only if it is easy to say:

  • which provisions make up a respective part of an agreement,
  • how the respective parts of the agreement relate to each other, and
  • who acts within which framework of legal competence.

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