BEERG Perspective - Brexit And European Works Councils

INTRODUCTION

On June 23^rd, 2016, the UK voted to leave the European Union. As things stand, it will do so on March 29^th, 2019. However, as things also stand, the EU and the UK have provisionally agreed a “transition period” from March 29^th, 2019 to December 31^st, 2020, during which the UK will remain subject to all EU laws and procedures, including new laws, if any. In effect, nothing will change until January 1, 2021. 

But during the transition the UK will have no involvement in EU governance structures. 

However, this “transition period” is subject to the EU and the UK agreeing a legally binding “Withdrawal Agreement” (WA) covering issues such as citizens’ rights, financial obligations and the non-return of a border on the island of Ireland. The parties also need to agree a non-legally binding “Political Declaration” (PD) on the “Framework” for the future relationship between the UK and the EU. Whether both can be agreed is open to question.

If there is a WA/PD then, during the transition period, the EU and the UK will negotiate the details of their future relationship. At this time, it is impossible to state what this relationship might look like. It could run anywhere from a minimalist free trade agreement to an agreement on a comprehensive joint economic area to which certain EU laws, including employment laws, would apply.  

However, if there is no WA/PD then the UK will leave the EU at midnight, Brussels time, next March 29^th, in what is known as a “No-Deal Brexit”. All rights currently enjoyed by the UK and its citizens under EU legislation would immediately cease to apply, in the absence of emergency legislation introduced by the EU to rollover these rights. 

For example, the right to use “EU only” channels at airport passport control, to drive in Europe on a UK licence or to benefit from the European Health Insurance Card scheme, could come to a sudden end.  To say that a “No-Deal Brexit” would create enormous difficulties for citizens and businesses is an understatement. 

So, as of today, we are faced with a range of “unknown unknowns” when it comes to Brexit.

The purpose of this paper is to focus on what happens to European Works Councils (EWCs) in the worst-case scenario: The UK leaving the EU next March in a “No-Deal Brexit”. It is about contingency planning. We estimate that there could be anywhere between 150 to 200 EWCs legally based in the UK. This number is made up of UK-based companies and US, Japanese and other non-EU headquartered companies.

A caveat: no country has ever left the EU before. What the UK is doing is trying to unpick over 40 years of deep economic and social integration with other European countries. How this will play out cannot be predicted. It will not be easy, no matter how it goes.

BOTTOM LINE: Be ready, but don’t do anything until you know you must.

QUESTIONS:

There are a number of questions that arise in relation to EWCs in the “No-Deal Brexit” situation:

• What does the law say about the legal location of EWCs?
• Can EWCs continue to be legally based in the UK?
• Which country is best for us?
• Can UK employees continue to be members of EWCs?
• Can UK nationals, trade union officials or consultants, continue to act as “experts” to EWCs?

What does the law say about the legal location of EWCs?

Article 3 (6) of the 2009 EWC Directive reads:

Where the law governing that undertaking is not that of a Member State, the law applicable shall be the law of the Member State within whose territory the representative of the undertaking or, in the absence of such a representative, the central management of the group undertaking which employs the greatest number of employees is situated.

In short, non-EEA headquartered companies have a choice where they locate their "representative".  If, and only if, the company fail to exercise its choice, will central management be deemed to be in the EU state where the facility with the largest number of employees is located.  This is an important factor which is often overlooked by businesses who simply abdicate the choice of location to the business in the country with the most employees (or where lawyers with little knowledge of EWCs tell them their “EU Headquarters” is located).

The only requirement generally regarded to be applicable for non-EEA parent companies (which will include UK-based companies after a No-Deal Brexit) in the selection of the location of the “representative agent”.  The company must be a legal entity based in an EU Member State and be capable of being taken to court.  This requirement ensures that the designated representative complies with the business’ obligations under the Directive if the designated central management fails to honour with its obligations under the EWC Directive. 

For example, in addition to Article 3(6) of the Directive, quoted above, which is transposed into the Irish legislation, The Transnational Information and Consultation of Employees Act 1996, Revised, at 5(9), the Irish legislation further says at 9(2)

Subject to subsection (3), where the central management is not located in a Member State, the central management’s representative agent in the State, which must be the management of an establishment or part-undertaking of the undertaking or group of undertakings and nominated in writing for that purpose by the central management if not otherwise appointed, shall assume the responsibility referred to in subsection (1).

[9(1) reads: The central management shall be responsible for creating the conditions and means necessary for the setting up of an arrangement for the information and consultation of employees, as required by section 8 (1), in a Community-scale undertaking and a Community-scale group of undertakings.]

Note, there are no numerical criteria as regards numbers of employees for an undertaking to be designated as the “representative agent”, though, presumably, there has to be at least one manager. The only determinable factor is that the undertaking must have a legal personality which can be held to account to ensure compliance with the 2009 Directive. 

If the representative fails to provide the appropriate information, then accordingly to Article 11 (1) of the EWC Directive the Special Negotiating Body or the EWC can apply for a change of the designated representative (as per the case of Gesantbetribast der Kühne v Najel AG & KG).  Therefore, so long as designated central management complies with its obligations there does not appear to be any grounds for challenging the non-EEA parent company’s business decision for the location of its representative agent.

Further, there are several court cases from different jurisdictions which confirm management’s right to decide on the location of its “representative agent”:

UK: CEMEX [EWC/3/2006], in which the Central Arbitration Committee (CAC) upheld at: 

 i. [63] the need to “keep pace with [an] evolving workforce and European border issues”; and 

 ii. [53] to [55] that there are no formal requirements for designating a representative agent and that a letter of designation from central management is sufficient; and 

France: ManpowerGroup [14/56017], in which the Tribunal de grand instance de Paris upheld that an email from American central management designating an undertaking in another member state as its representative agent denied the French courts jurisdiction; and 

Germany:  DXC [11 BVGa 5/18], in which the Labour Court of Wiesbaden upheld the right of an American undertaking to relocate responsibility for the purposes of the EWC Directive from a German undertaking to an undertaking in the Republic of Ireland on the basis that it would not thwart employees’ rights as the Republic of Ireland is subject to the application of the EWC Directive and rights under transnational mandates are enforceable under its Transnational Information and Consultation of Employees Act 1996 (“TICEA”).

More generally, the CJEU in 2017 in Polbud (C-106/16) reaffirmed the right of a company to relocate its registered offices, in this case from Poland to Luxembourg. For a discussion of this case see: http://conflictoflaws.net/2017/freedom-of-establishment-after-polbud-free-transfer-of-the-registered-office/ 

Normally, once an EWC is established and subject to a particular jurisdiction, that tends not to change, though there are examples of companies that have switched jurisdictions. 

Some agreements have language which states that a change of jurisdiction is subject to agreement between the parties. But such “agreement clauses” assume that if one or other party wishes to dispute a proposed switch they can go to the court to which they are currently subject and ask the court to block the switch.

Further, such language is generally designed to cover situations other than a country leaving the European Union. Brexit creates circumstances which such jurisdictional language was never designed to deal with. 

Brexit is a unique, unprecedented situation. EWC agreements currently subject to UK law will become incompatible with the Directive if they do not move to an EU jurisdiction once the UK falls out of the EU. It seems to us that, in such circumstances, only central management can decide on the jurisdiction to which to relocate. Why? Because UK courts will no longer have any authority to intervene and there are no criteria in the EWC legislation which allows any other court in any other county to decide. 

As stated, if management had originally decided to locate its “representative agent” in the UK and if, as a result of Brexit, the UK is no longer a legally valid location, then the decision as to where to relocate its representative falls exclusively to management. It is not a matter for negotiation. How else can it be decided? The force majeure of Brexit trumps agreement clauses in EWC agreements on jurisdictional relocation. 

The same logic holds true for UK companies when Brexit finally happens.

If management fails to make a decision then, as we explain below, the EWC would automatically relocate to the country in which the business’s facility with the greatest number of employees is located. 

Can EWCs continue to be legally based in the UK?

The clear and unequivocal answer is: NO. 

After a “No-Deal Brexit” the UK will no longer be a Member State and will instead be a “third country” similar to, for example, the US. 

While the UK government has said that it will incorporate all exiting EU laws into UK law after Brexit, such laws will have no transnational effect. The UK parliament can pass any law it wants, even a law that claims to have transnational effect. But no other sovereign jurisdiction including the EU is required to implement that law. 

So, the UK could, in theory, adopt a European Works Council law requiring all companies based in the UK with more than 1,000 employees and more than 150 in two different countries to set up an EWC but no EU member state would be legally obliged to adopt domestic law to support it. Without supportive domestic law in other EU member states such UK “EWCs” simply would not work in practice.  Even if UK-based companies tried to organise selection procedures in other countries it would be hard to do so and national authorities might move to block them.

All EU laws are subject to the ultimate jurisdiction of the Court of Justice of the European Union (CJEU). After a “No-Deal Brexit” UK law would be like that of every other “third party country” and not subject to the jurisdiction of the CJEU in so far as it relates to EWC matters. EWCs based in the UK would, therefore, be outside the jurisdiction of the CJEU.

 There are two types of EWCs based in the UK: 

1. those where central management as based in the UK, i.e., UK registered companies;
2. EWCs where the UK legal entity is the representative agent of companies headquartered outside the UK, e.g., US companies. 

Businesses where the controlling undertaking is based in the UK must wait until the final position on Brexit is know because, as long as the UK remains governed by EU law then they are obliged to operate their EWC under UK law.

Those EWCs where the UK business is the representative agent have greater flexibility and have the freedom to move their representative agent in anticipation of Brexit.

Irrespective of why EWCs are based in the UK, once the UK fall outside the jurisdiction of the CJEU then EWCs based in the UK will no longer be compliant with the 2009 EWC Directive. We believe that this is not a situation that EWC members would accept. 

EWCs based in the UK will have to be relocated to other country within the EU to remain legally valid. 

Which county is best for us?

The first point to be made is that this decision should be based on what is in the best long-term interests of the business and not in response to pressure from employees’ representatives or demands from experts, trade union or otherwise.

You may well be subject to strident criticism and allegations when you announce your decision. But it is better to take a short-term “verbal hit” that to relocate to a jurisdiction that disadvantages management because of court systems that may be inclined to limit management decision making.

Back in the 1990s, when many EWCs were established, the country in which the EWC was located was not an issue of any great concern. Little thought was given to the matter. However, as EWC disputes began to hit the courts companies came to realise that in some jurisdictions the courts were disposed to award EWCs/unions injunctions to limit management decision making as regards restructuring or closure decisions where the courts though that management may not properly follow their information and consultation obligations. In some instances, the courts ordered management to unravel decisions already made and implemented and to reopen closed plants.

The Renault case in Belgium and Gaz-de-France in France come to mind. The latter saw an €80b merger blocked for close on four years.

Courts in France, Belgium, the Netherlands and Spain fall into this “injunctive” category.

While courts in Germany are limited to fining companies a maximum of €15,000 where EWC obligations are found to be breached, management has an unlimited obligation to fund legal actions run by an EWC, often leading to recurring, significant costs. We know of one company whose EWC has taken management to court over 30 times.

In other jurisdictions, the penalties for infringement are much less severe. In the UK the law makes it explicit that management decisions may not be rendered "void" and that the company will be fined for breach. In the UK the current maximum fine is £100,000.

While the law as it stands in Ireland is not so explicit general legal practice in such matters would be very much in line with those in the UK and there is no example of courts in Ireland ever ordering the cancellation of a management decision, other than in cases of individual dismissals. In cases of collective dismissals the Irish courts can only award compensation if management if found to be at fault.

However, penalties for non-compliance are not the only reasons companies may prefer one country over another.  A number of non-European businesses come from “common law” countries and find the concept of codified systems of law contrary to their culture.  But perhaps the most important consideration is language. If you are an English-language company then it is rational that you want to work in an English language legal environment. If you find yourself in court you want the papers to be in English so you can read them and you want to be able to consult with your lawyers and follow proceedings without the need for translation and interpretation. Why impose a language penalty on yourself by deciding to put your EWC in, say, France or Germany?

Given the choice, many US companies would prefer to be subject to Irish law than some other European jurisdictions. As noted, the only criteria that has to be met is to have an establishment with at least one manager.

Can UK employees continue to be members of EWCs?

In an “No-Deal Brexit” situation UK employees will lose all legal rights to be represented by an EWC and to be members of an EWC. However, depending on the wording of your agreement, they may have contractual rights to remain as members, in the short term at any rate. So, there is no clear cut answer to this question. You need to check the language in your agreement.

As we have previously commented, most existing agreements were never written to cater for a situation where a country leaves the EU. The circumstances created by Brexit generally trumps the language in agreements. But always best to be careful.

But let us assume that there is no language in your EWC agreement that requires you to allow continuing UK representation after Brexit. What should you do?

This is a difficult question to answer. Firstly, there may be personal attachments to the individuals concerned. They may have been members of your EWC for a long time, and constructive members at that. These things matter. 

Secondly, you may also have a significant proportion of your EU workforce based in the UK. Cutting them out of your EWC might be something you are reluctant to do.  However, remember that some small businesses may in fact fall outside the remit of the Directive if they have significant number of employees based in the UK and no longer qualify as a relevant undertaking employing more than 1000 employees in the EEA. 

However, in in the absence of any language in your agreement requiring continuing UK involvement, whether representatives from non-EEA countries can join the EWC has to be a joint management-EWC decision. Management does not have the right to decide that employees’ representatives from outside the EEA can be members of an EWC. Only employees’ representatives from EEA countries have the right to be involved. Extending membership beyond the EEA has to be by mutual agreement.

You will also need to consider the longer-term implications of letting UK representatives remain on your EWC. Remember, the situation we are discussing is one where the UK has left the EU without an agreement. If you have representatives from a country that has left the EU on your EWC how do you justify non-membership to employees representatives from a country that may have applied to join the EU, such as Turkey. Or, to put it at its most extreme, any other country outside the European Union? For it is not “European” or “non-European” that is the question. It is: “Inside the EU legal order” or outside it? 

After a “No-Deal Brexit” the UK will be as much outside the EU’s legal order as, say, the US. Would you consider allowing US employees’ representatives on your EWC? Deciding on whether or not to keep UK representatives on your EWC is not a short-term decision. It may have long-term consequences. It needs careful thought.

Pragmatic, temporary transitional solutions may need to be found. 

Can UK nationals, trade union officials or consultants, continue to act as “experts” to EWCs?

This is also an issue that also needs careful thought. While some companies may have had very unhappy experiences with some UK experts, many others have found them to be pragmatic and constructive. This is particularly the case with trade union experts who have “skin in the game” with the company through collective bargaining arrangements and not just as EWC experts. 

Further, they may be difficult to replace. 

However, in the case of a “No-Deal Brexit” these experts will no longer themselves be subject to EU law. How do you hold them to account if, for example, they were to breach confidentiality provisions that caused the company serious damage? In what court in what country? 

Also, for how long will the members of the EWC want to have a non-EU citizen act as their expert. After all, it is their choice. If and when the UK diverges away from EU social and employment laws what value-added do UK experts continue to bring?

Again, if you accept a non-EU national as the EWCs expert, why not an US-based expert, perhaps from a US union?

It is our own view that in the longer-term, whatever the immediate circumstances, management should insist that that any experts involved with their EWCs should be EU citizens, fully subject to EU law. 

CONCLUSION

As we said at the outset, Brexit is unprecedented, creating a whole new set of problems for businesses to deal with. Quite frankly, managing EWCs is a minor matter compared to, for example, dealing with the issues that may arise out of whether or not EU/UK citizens will continue to have the right to work in each other’s jurisdictions and on what basis.

There are also wider issues with potentially business destroying unknowns such as legal barriers to data transfers from the EU to the UK or catastrophic delays in time sensitive supply chains.

EWCs are one Brexit issue that can be dealt quickly, if companies are prepared. One less Brexit problem to deal with.

Acknowledgement:  I wish to acknowledge the assistance and advice given by Vince Toman of Lewis Silkin LLP in preparing this paper. 

Tom Hayes, BEERG, November, 2018