Germany: Powerful Works Councils & Balanced Efforts

Hello again. I’m Alan Wild and welcome to the Wild side podcast Managing international employee relations in modern times … 10 minutes at a time. Today I’m going to take the brave step – as a non-German - of attempting to decode the land of the Betriebsrat and Mitbestimmung.  For my German listeners, this episode is not for you. You are unlikely to gain new insights into your country’s employee relations … unless, that is, you want to hear how someone whose roots are somewhere between the US and the UK with a Globish perspective thrown in, sees your country.  If you are a German working in an international company – a glimpse of your country as seen from outside may be useful to you … but don’t expect an epiphany in how to manage your works council.   For everyone else … this is of course a 10 minute or so whistle stop tour of Germany … designed to give you enough knowledge to ask the right questions of your German colleagues.

An interesting question is how a global employee relations leader can feel more confident in explaining China, India, Brazil or Mexico than he or she does in explaining Germany?  Throughout my career the German operations of the companies I have worked with have employed true employee relations experts on the ground. Understanding employee relation is a rite of passage for every German HR leader and most line managers … and they, by and large, do it very well.  My role has tended to be throwing in ideas from left field to test whether and how they might work in Germany. Occasionally it involved sniffing out pushback on plans local management were less keen on than HQ.  I probably learned more about employee relations in Germany in my role getting corporate leaders to give German specialists the space they needed to do their job.   

The question I often ask my American colleagues when they recoil at the idea of German style codetermination, is “I wonder how Germany became the world’s most successful exporting nation if they are so held back by works council bureaucracy.  Whilst French multinational companies are amongst some of the most successful in the world … they owe much of their success to overseas earnings.  Germany however is a hugely successful EXPORTING nation due to domestic efficiency.  It helps that German managers and employee representatives have had 100 years to get managing works councils right. They came into being in Germany in 1919 - the same time as the ILO was founded. 

More of that in a moment …  … as you know, I’mAlan Wild, the senior adviser on Global employee relations for the HR Policy Association … the leading voice of CHRO’s today.

Going back to 1919, German employers were strongly in favour of the establishment of works councils. After the country lost World War I in 1918, it was in the throes of revolution. Workers and soldiers rebelled, and the Kaiser abdicated. To avoid the fate of Russia, socialist trade unions and capitalist employers compromised on a series of reforms. They introduced works councils in companies and gave employees the right to nominate one or two members to the existing Supervisory Boards.  After Germany’s next defeat in another world war, in 1945, labor unions in the western zones of occupied Germany pressed for even more control. The American and British overlords welcomed this movement, wishing to balance management of the old industrial conglomerates that had been at the heart of Germany’s effective war machine.  In the late 1960s and 70s, supervisory board laws were revised to give a half of the non-executive directorships in all public limited companies with more than 2,000 employees come from the works councils and unions. History and context matter.

Let’s move on with a short economic, political and social profile. 

Germany is Europe's largest economy and second most populous nation … after Russia … with a population of just over 83 million. European power struggles immersed Germany in two devastating world wars in the first half of the 20th century and left the country occupied by the Allied powers of the US, UK, France, and the Soviet Union in 1945. As the allies carved the country up and two German states were formed in 1949: the Western Federal Republic of Germany (West Germany) and the Eastern German Democratic Republic (East Germany). West Germany embedded itself in key western economic and security organizations, the European Union and NATO.  East Germany was on the front line of the Soviet-led Warsaw Pact and played a central role in the cold war. Germany was unified in 1990 after the fall of the Berlin wall in 1989 that began a move that shifted the shape and economics of the whole of Europe.

The government of West Germany, invested enormous funds to bring eastern productivity and wages up to western standards ina “soft landing”. Unlike Poland and other Central and Eastern European countries, East Germany was effectively bankrolled into the West … and missed much of the economic and social trauma suffered by these countries in the 1990s. After the second world war, West German political leaders played a major role in reshaping Europe … Chancellor Adenauer played a central role in the formation of what became the European Union and the architect of Germany reunification and a supporter of EU expansion was Chancellor Kohl.  Germany’s current political leader, the Social Democrat Chancellor Olaf Scholz, replaced Angela Merkel, in December 2021. Merkel had been in power for fifteen years and was one of Europe’s most influential leaders.

Germany is split into 16 states or Lander … eleven in the old west and five in the old east. There are strong cultural differences between the Lander broadly based on north/south and east/west divisions.  The country is well placed for international trade with national 9 borders to the East and the West.  The country is an industrial powerhouse with 25% of the country’s 46 million workers producing a third of its GDP and hosts one of the world’s financial centers in Frankfurt.  The country is famed for motor vehicles, machinery, chemicals, computer and electronic products, electrical equipment and pharmaceuticals. It holds a top 10 major company list that includes Siemens, BMW, Daimler, Bayer, Deutsche Post, Allianz, Bosch, BASF and SAP.

Now let’s get back to the centerpiece of employee relations management in Germany - works councils and supervisory boards. Indeed, managing employee relations in Germany is synonymous with managing the Aufsichtsrat and Betriebsrat.  Let’s start with works councils or Betriebsratter. The vast majority of German companies have works councils. That’s not surprising. if just three employees request a Works Council to be formed then the company must arrange an election.  The landmark case here is SAP, where three members of the union IGMetal requested the establishment of a works council in 2006. Although 91% of SAP’s 22,000 workers voted against the establishment of a works council, the Manheim court ruled that an electoral board must be established.  Here is probably the best time to remind everyone of something I’ve said a number of times. In power-based countries, trade unions rely on employee support for a seat at the table. In rights-based countries, like Germany, the questions is not whether there is a table, but who sits around it. In the case of SAP a works council was indeed set up, but the union IG Metal won just three of the 37 seats on the works council. Managing employee relations in Germany is about establishing and managing positive relationships with powerful works councils. 

There is little to be gained by adversarial stances as Works Councils have rights to information, consultation and codetermination … in German Mitbestimmung. As in much of Europe, information and consultation of the works council is required where change impacts employee interests.  In addition in Germany, codetermination rights apply to most HR decisions … like performance management, shift changes, changes in working practices, the allocation of overtime etc. In the absence of agreement, the company may not implement new processes or change existing ones.  As a result, employers seek to maintain good working relationships and produce consensus decisions.  I this respect, Germany differs with countries like France for two reasons.  

First, and by law, both sides of the works council must apply the spirit of “Balance of Interest” – Interessenausgleich - solutions with both sides obliged to work in the interests of the company and employees.  Where arbitration is allowed for, decisions are judged on this basis.  

Second Germany has a so-called dual system of employee relations.   Works Councils cannot negotiate with employers on issues covered by collective bargaining agreements and cannot call strikes.  Pay negotiations are undertaken by trade unions and normally include a “strike clause” which means that strikes in Germany tend only to occur during, or often prior to, the renegotiation of agreements. I’ll come to this in a moment.

Unlike works councils in France and Spain, trade unions in Germany have no preferential treatment in works council elections. It is estimated that a half of German works councilors are not trade union members. This mean that employers can influence the membership of works councils by encouraging employees to stand and also encouraging employees to vote in the periodic elections. Employers who discourage interest in works council membership and the election process run the risk of having works councils that do not represent the views of employees and more the interests of activist individuals and unions. Let me take a topical example. Until recently there were few works councils in foreign IT and tech companies, but recent job losses in the sector and calls for return to the office have led to call for works councils in places where HR and line management have little experience of dealing with them. Taking an active interest in the design of the election process and encouraging moderate candidates, high election participation and training of representatives are particularly important.

Let’s turn now to collective bargaining. Collective bargaining is undertaken not by works councils but by trade unions. The majority of unions belong to the main union confederation, the DGB, but union power rests with industry unions like IG Metall and Ver.di.  IG Metall is the largest German union, with more than 2 million members.  Most of its members are still in the metalworking sector, but it merged with the textile union in 1997 and the wood and plastics union in 1999. It also has members in the information and communications sector.  Ver.di was created in 2001 from a merger of five unions, covering transport and a range of public services, retail and finance, post and telecommunications, the graphical and media sector. Ver.di seeks to organise service workers in both the private and public sector.

The centerpiece of bargaining in Germany is its sectoral bargaining system at the industry and regional level. The agreements are notable for their strong peace clauses, which mean effectively that strikes in participating companies are limited to the time when negotiations are under way. Over recent years trade union membership has fallen from around 35% in 1985 to less than 20% today.  Bargaining coverage has fallen from around 85% to 51% over the same period.  Whilst membership and coverage have fallen across the board, much of the dramatic shift is associated with German reunification and much lower levels of membership and bargaining coverage in the East. Whilst sectoral bargaining coverage may have fallen, many German companies that do not belong to the employers’ association use the sectoral tariff as an important reference point. In recent years sectoral agreements have become more flexible with the introduction of so-called opening clauses that allow companies, with the agreement of works councils, to deviate from their terms. 

Put succinctly, the dual system means that there is little notion of real concession bargaining. Trade union leaders and employers’ organizations reach agreements on pay and conditions outside of the confines of companies and strike activity is limited. Company HR people are responsible for negotiating change at the company level and with works councils. Who are not permitted to call for strike action.  

If there is a lesson to be drawn, it is that works council are not bodies to be feared or marginalized. Their powers mean that poor relationships can delay or halt major operational changes. This means working hard to assure works council elections result in a group that the company can do business with, and then treating them with respect.  Maybe Germany’s success as an economy is perhaps a result of enforced cooperation and not despite it.   

If you want to learn more about what we do or participate in one of our formal programs you can get me on awild@chro.org or on Linked In.

I’m Alan Wild and you have been listening to “a walk on the wild side”.