Employee Participation under Proposed Societas Europaea

The European Company Statute:
The Concept of Employee Participation under the Proposed Societas Europaea (European Company)
May 2001 Dr Maria Chetcuti Cauchi. All Rights Reserved.

The Problem Involved

The creation of a corporate entity solely governed by European Law instilled an indisputable fascination in European enterprises wishing to tune their structures to the transnational character of their activities, yet, discussions were held up by the particular Community nature of the rules which had to govern this new type of company. The chief obstacles were more often than not resolved by references to national law. However, this method did not prove feasible in the case of the principal element of discord, WP in the SE. This lack of agreement was caused, inter alia, by the diverse, distinct systems of employee participation in different MSs.

1. The notion defined

WP is a concept based on the belief that employees and managers have common interests and greater economic efficiency is achieved if these two sectors join their forces:

Co-determination may have a number of positive effects on the economy. It may lead to decision-making, both inside the board and in the collective bargaining context, based on more information, which results in better decisions. Efficiency of production and economic allocation may thereby be enhanced.

Involvement of employees in decision-making may include different levels of intensity. Mere information of decisions, after they have been adopted is the minimum level, whilst consultation prior to the taking of such decisions and participation in the decision-making itself is the highest level. Strictly speaking, participation in its pure form only includes the latter concept and this means that the entrepreneur is not authorised to take decisions without co-operating with workers representatives first.

The system whereby employee representatives participate in the decision-making process on the administrative or supervisory boards, is called co-determination. What is certain is that WP does not refer to participation in day-to-day decision-taking of the business, but involvement in the supervision and strategic development of the company. On the other hand, the day-to-day running of the business is to be undertaken by the management board.

2. National law covering employee representation

In many EU countries, BLER is an imperative means of employee involvement. Systems of BLER in different MSs vary widely. A number of countries provide a statutory right to such representation but others do not. In fact Belgium, Italy, the UK and Ireland have no general law granting BLER in several forms of companies. In the case of public companies in Belgium and Italy there are specific provisions for BLER, yet the UK and Ireland still stand on their own in having no legislative provisions on BLER, or noteworthy collectively agreed provisions.

In Greece, Ireland, Spain and Portugal, BLER affects those enterprises which are wholly or partially publicly-owned but in Portugal, the legislative provisions are not even implemented. In Austria, Denmark, Finland France, Germany, Luxembourg, the Netherlands, Norway and Sweden comprehensive and meticulous legislation provides for BLER. In the regulation of BLER, legislation plays the major role, but in Spain, some public sector arrangements are founded on agreements rather than legislation.

3. Workers participation vs. collective bargaining

Both WP and collective bargaining seek to get to the bottom of conflict situations or to avoid them in the first place. In the majority of  European countries they exist side by side, however, we also come across situations where one country resorts to collective bargaining mechanisms, whilst other countries resolve conflicts by means of participative institutions such as WCs. As a rule collective bargaining results in nationwide or local agreements between employers and employees or employee organizations, whilst WP occurs in the factory or in the company and deals with local management.

 Development of Employee Representation

1. The dawn of the concept

The proposed ECS forms part of the unique package of legislation characterized by social and employment implications. Yet, throughout the years, this quality has resulted in a large number of complications arising out of disagreements between MSs. The fact is that the early proposals for an SE provided for a compulsory two-tier board with employee representatives forming part of the supervisory board. In addition, there was also provision for a EWC with substantial information, consultation and participation rights

Under the 1975 proposal, one-third of the members of the board had to be elected by the shareholders, one-third had to be chosen by the employees and the remaining one-third had to be selected by the these two groups together, as long as the latter members were persons representing general interests and not directly dependable on one of the groups which chose them. The choice of the latter one-third is highly reminiscent of the Dutch co-option system.

This original Proposal sought to impose the German worker participation rules on the rest of the European Community. The British strongly refused to accept mandatory WP rules and preferred to leave such arrangements up to negotiations between management and labour. Thus, diverse company law traditions clashed and mutual agreement proved to be impossible. The mandatory two-tier board system with its enlarged role of labour, could not be accepted.

2. The 1989 Revised Proposal

The 1989 Draft Proposal removed all aspects of employee participation from the Regulation and instead placed them in a supplementary Directive. The latter was more flexible and provided a series of alternatives for management structure and employee participation. More than one model of employee participation was included, so that MSs would have a choice. The great diversity of rules and practises in MSs on employee participation required a less rigid set of laws where the specific characteristics of different legal traditions would be taken into account. This presentation of different models of participation was largely due to the move of the Commission towards greater emphasis on social policy: social dialogue had to be furthered, despite the implied difficulties.  Thus, in addition to a two-tier board, an Anglo-Saxon one-tier board system was also allowable, and the German-style co-determination system constituted merely one of the six possible participation models, some containing board representation and others presenting only information and consultation rights.

Notwithstanding this new flexibility, the ECS still did not attain the necessary qualified majority in Council and the employee participation proposals continued to be the main point of contention.

3. The 1991 Draft Directive

This version of the Proposal sought to improve equivalence between different WP models. MSs were still given the power to restrict the choice of model available for an SE within their territory to a model that best co-ordinated with their own national labour system. This would surely have resulted in different provisions on WP depending on the place of registration of the SE.

In previous texts of the Proposal, the third model presented a right to withhold information from representatives of employees. The 1991 Proposal removed such right, thus increasing the equivalence amongst the models even further. Article 6 of the Proposal  presented a standard model agreement which could be used by the parties in all circumstances or in case of disagreement. This Article also established minimum rights for employees by reference to WC rights. Under this Proposal, WRs had to be elected from each MS concerned, i.e., each State where the SE has an establishment and the number of such representatives had to be proportionate to the amount of employees they represented.

Disagreement at a political level stalled the Proposal for some years as Germany still hammered on the importance of mandatory rules on WP, whilst the UK reiterated that the Proposals WP provisions were too excessive. This disagreement blocked the  implementation of the Proposal once more.

4. The Commission communication on worker information and consultation

In an effort to break the deadlock on the ECS and other long-blocked proposals with employee participation provisions, the Commission published a Communication on Worker Information and Consultation in November 1995.  It endeavoured to initiate discussions among the EU institutions and seek advice from the European-level social partners. Its brief consisted in analyzing the misfortunes of precedent initiatives on employee participation; outlining the possible principles and objectives of a novel approach to the subject-matter and proposing a number of potential routes for Community action.

The Commission suggested several options to secure WR in European companies, including a new Community structure for information and consultation of workers at the level of the site and the utilization of the procedure supplied by the European Works Councils Directive to the new European entities.

The fact is that some MSs, particularly Germany, with a legal structure providing for strong WP on the companys board feared that if the ECS had inadequate provisions, companies operating on their territory would be given much more room to evade BLER legislation. On the other hand, other MSs without such strong provisions opposed the requirement of board-level involvement through EU rules.

However, the problem was that EWCs, bodies for supplying information and consultation, would not be enough to surmount the antagonism of a number of MSs to the adoption of the ECS, as the EWCs would not handle involvement. Consequently EWCs cannot be considered as alternatives for participation at company level. EWCs were portrayed by the Commission as some kind of philosophers stone, yet they still could never be regarded as alternates for employee participation at board level. Finally,  it became evident that a body tailored to deal with merely information and consultation could not negotiate on participation.

In a clear desperate attempt to get somewhere, in November 1996, the Commission set up a high level expert Group on worker involvement, chaired by Etienne Davignon, president of the Socit Gnrale de Belgique and former vice-president of the Commission to deliberate on possible solutions to break the deadlock.

5. The Davignon Group

 The problem as envisaged by the Group

The Group was instructed to study different MS structures of BLER and their equivalence with other forms of WR in the decision-making procedure; to evaluate the danger of circumventing the provisions of national systems by utilizing the SE without an appropriate social element and reflect on the type of involvement rules which should be used in the SE.

At the outset, the Davignon Group stressed that immediate attention was required towards the WP issue, in that, in this present day and age, more and more skilled, mobile, committed, responsible, workers are necessary and these cannot surely be expected simply to obey the employers’ instructions. On the contrary, workers must be closely and permanently involved in decision-making at all levels of the company.

The Group concluded that the blockage to the Proposal was being caused by the concerns of States, with highly developed WP systems, that the ECS could be resorted to in order to circumvent national legislation in this field. On the other hand, it also claimed that one is to prevent the imposition of foreign models of employee representation upon MSs which had no such system in their legislation.


After engaging in good six months of investigation to determine the reasons behind the deadlock of the ECS, the Group presented its Report to the Commission on May 1997 and recommended that the ECS should not prescribe models of worker involvement but should give priority to free negotiations between management and WRs on the system of worker involvement to be applied. The Group concluded that general harmonisation is remote and almost impossible, thus the search for an ideal system should not be sought anymore, as national systems are too diverse and differences far exceed similarities. Indeed, the Group concluded that there is no ideal system for WP, the best solution being the system most suited to the parties concerned.

Due to variety in national systems of worker involvement, there should be negotiation on an ad hoc basis between workers and management. This procedure should be compulsory and limited in time and if no consensus is reached by the end of the said period, a set of reference rules should be resorted to. The Group stressed the fact that priority should be given to negotiations between the parties and it is only in case of failure that a set of reference rules, covering both information and consultation and participation of workers, would apply.

Thus, the Group rightly insists that negotiations on worker involvement in the SE must commence at the earliest. Also, minimum rules should regulate negotiators as these should be free to agree what they deem best. The Special Negotiating Body would be the body to negotiate with participating companies regarding the system of involvement of workers within the SE and the representatives of employees should be chosen according to national criteria, i.e. , appointed according to national practices and procedures.

 Reference Rules

The Group has carefully examined the possibility of the failure of negotiations and has decided on the application of reference rules in such cases, so that the priority given to negotiations does not lead to legal insecurity or the possible blocking of the establishing of the European Company.

If no agreement is reached by the conclusion of the negotiating phase, a series of reference rules on worker involvement would apply. This, of course, does not prejudice the right of the negotiating parties to commence fresh negotiations after a certain length of time. However, it is important that a certain degree of certainty as to the system which is going to be applicable be ensured.

The reference rules provide that there should be information and consultation on specified matters as well as participation on the SEs board. Also 20% of the SEs board should be made up of workers representatives.

 Conclusions reached by the Group

The Group emphasises in its conclusions that the challenge of global competition can only be pursued through collaboration of all players concerned, namely, the social partners. The fate of the SE depends on ascertaining that workers are directly and permanently involved in the decision-making procedure, at all stages of the  formation of the undertaking. The principles adopted by the Group seem very reasonable, especially when one reflects on the words of the Group when its stressed how detrimental it is for the image of the EU, vis–vis the rest of the world, that no solution had yet been found and adopted regarding the issue of WP in the SE.

6. Potential gaps in the Davignon Report

 Industry federations on the SNB

The Group leaves it up to national legislation to define the role of national and European trade union organisations involved in negotiations.  However, it has been argued that this solution simply does not work and these bodies should be given a formal role in negotiations. The transnational nature of the negotiations and practical experience necessary call for a situation where European industry federations are given a formal role in the negotiations. The example of negotiations on EWCs substantiate this claim as in most voluntary arrangements on EWCs, the European industry federations have held a crucial position in initiating and organizing negotiations. These negotiations ran smoothly when industry federations where part of the game from the very start. Problems commenced where the federations were not engaged from the beginning.

 Even though practice has accentuated the essential function of ETUC and its industry federations, national laws have not acknowledged this role. The Davignon Report did not formally define the role of such organisations during the negotiation procedure and this was deemed to be a gap in the system created by the Group.

 Workers representatives in the representative body

Under the reference rules, it is proposed that one fifth of the seats on the administrative or supervisory board should be held by the workers, with a minimum of two members, and these representatives should be given equal status on the Board.

It is a fact that the principle of the equal status of representatives of workers on the boards is undoubtedly an extremely significant recommendation by the expert Group, however, the principle of equal status is not highly reflected in the restriction of 20% of the seats to WRs. Consequently, at least one-third workers involvement should be provided for in the supervisory and administrative boards.

Moreover, one should also keep in mind that WRs that hold extremely low competencies or no competencies at all, do not really serve their function. Hence, the Statute for an SE should comprise a listing of affairs for which the approval of the supervisory or administrative board would be indispensable.

 Risks presented by the SE created by way of merger

Post-Davignon, the formation of an SE by way of merger of two or more undertakings still presented risks and doubts, because as a result of the merger, the undertakings which participate in the merger, wholly disappear as legal persons. Thus, the collective agreements concluded by trade unions within the company would disappear too. The implications of this would be drastic. All that was previously negotiated collectively and could hence, only be altered through collective bargaining, could be changed on an individual basis, by means of  negotiations between management and individual workers. In addition, all the delegate bodies of workers which go beyond the level of the site would disappear and with them involvement at the undertaking level, i.e., on the supervisory board.

The only solution envisaged would be that collective agreements would remain and the central management of the SE would have a duty to carry out the obligations deriving from them. As soon as the collective agreement terminates, the new core  administration of the SE would be deemed to be the negotiating partner for its renewal. As regards BLER, the only solution would be to keep this in force, as WR at the level of the undertaking or the group is necessary to preserve smooth communication.

7. Reception of the Davignon Report

The response to the Davignon report has been generally positive. It was highly welcomed by the Commission, European Parliaments Legal Affairs Committee and the Internal Market Council as good foundation for relaunching the debate on the Statute. The Council supported the concept of promoting negotiations, backed with statutory reference rules, and deemed such concept to be the solution to the problem WP in the SE.

Even though there were still some fine details which had to be ironed out, yet after 27 year there seemed to be a distinct possibility that the ECS, with compulsory employee involvement provisions, would be adopted shortly.

8. Post-Davignon situation logjam

The Luxembourg EU Presidency presented a revised ECS Draft in 1997, yet this was, once more, blocked due to disagreement on the reference rules.  This text suggested that in the case of failure of negotiations, a set of reference rules would apply regarding information and consultation and also 20% of the supervisory or the administrative board had to be composed of employee representatives. This was not accepted by the MS.

In the first half of 1998, the UK EU Presidency presented a revised Proposal which amended the substance of the reference rules without diminishing the importance attributed to negotiations. It is important to note that under this Proposal the European-level Trade Unions were give an advisory role during negotiations. In case no agreement would be reached, the British Proposal also suggested that  information and consultation provisions  had to be applied, but it went a step and proposed that no minimum of WRs should be fixed but employee representation should be equivalent to the highest amount of WRs in any of the participating undertakings. Even though the British Proposal offered solutions to two of the problems remaining after the Davignon Report, yet it was still not successful in gaining adequate Council support as countries like France, Spain and Italy, which have systems differing from the German co-determination one, considered the UK Proposal to lean to much towards co-management.

In the second half of 1998, the Austrian Draft provided one major controversial change from the previous proposals. SEs could also be formed by the conversion of an existing company. The Austrian presidency, on taking into consideration the controversy arising on this matter, proposed that if the existing undertakings previously had BLER, but it was decided that the SE would not have such representation or would have such representation at an inferior degree, approval by a special two-thirds majority of the SNB would first be sought. In addition, the agreement on WP could not provide for a lower level of employee involvement than that already existing in the company which would be converting into an SE.

However, Spain objected to the Austrian Draft as it feared that a minority of workers could enforce a system on a majority of the employees and consequently, a system of BLER, improper to local needs, would be transposed, thus jeopardising the conservation of a cultural model of industrial relations.

A reaction of frustration to the decision adopted by the Spanish government was emitted by the exponents of the ECS. With a wave of industrial restructuring and mergers wafting across Europe, the need for the Statute, was felt to be greater than ever.

Although, the German Presidency further strengthened the compromise, it did not add much to it as it believed that that the text was ripe enough for a decision to be taken and that there was no room for further negotiations.

 The Present Proposed Directive on Employee Participation

On the 20 December, 2000, the Council reached an agreement on the Regulation to establish an SE and on the related Directive concerning worker involvement in European Companies. Subsequently, the texts were passed on to the EP and if the latter endorses the texts agreed by the Council, the European Company will become a reality after thirty years since it was first proposed. The text endorses much of the recommendations made by the Davignon Groups and provides solutions for the possible loopholes which where still present.

The present proposed Directive is deemed to be a marriage between the needs of business and those of workers and reflects the approach that good social policy is good economic policy where governments, business and workers are to face the challenge of industrial change by means of co-operation.

1. Legal basis

This Directive is based on Article 44 of the Treaty of Rome. Strangely enough, Article 44 is the Article more nearly concerned with company law than Article 95 on which the Regulation is based. Both Articles necessitate merely QMV in order to authorize the proposal to be adopted into Community law. This Article provides for measures to be taken by:

Article 44 (g) coordinating to the necessary extent the safeguards which, for the protection of the interests of members and others, are required by Member States of companies or firms within the meaning of the second paragraph of Article 48 with a view to making such safeguards equivalent throughout the Community.

It is believed by the UK that both the Council Regulation on the Statute for a European Company and the Council Directive dealing with the Involvement of Employees should be based upon Article 308 which requires unanimity.

The British Government claims that both the Regulation and the Directive are not measures for the approximation of laws but they create new rights superimposed on national rights. The Directive provides for the participation of employees in the SE and it is not intended to affect national law of practice on employee participation in forms of companies, other than the SE. Thus, the WP provisions in the Directive are not a measure for the coordination of safeguards under Article 44. Besides Article 2 (3) of the Social Policy Agreement provides that co-determination is to be decided by unanimity and this further suggests that QMV is not appropriate for a measure establishing WP procedures.

It has been suggested that this choice of legal basis is motivated by political reasons. The Statute is regarded as a method for introducing the WP models into company law by a straightforward route and this would make the adoption of the Draft Fifth Directive easier. If the latter Directive became law, it would require all public companies with more than 1,000 employees to have BLER. Only the UK and Ireland have no provision of BLER in their national law.

2. Models of Participation under the present Directive

Models of participation available under the present draft Directive are:

i.            a model in which the employees form part of the supervisory board or the administrative board, as the case may be;

ii.          a model in which the employees are represented by a separate body;

iii.        other models to be agreed between the management or administrative boards of the founder companies and the employees or their representatives in those companies, the level of information and consultation being the same as in the case of the second model.

3. Creation of a Special Negotiating Body (SNB)

As recommended under the Davignon Report, an SNB is to be established. This role of this body is to negotiate with the competent body of the participating companies regarding the establishment of arrangements for the involvement of employees within the SE.

Under the present proposal, negotiations are to start:

Article 3 Where the management or administrative organs of the participating companies draw up a plan for the formation of an SE () as soon as possible after publishing the draft terms of merger or creating a holding company or after agreeing a plan to form a subsidiary

This highly contrasts with the recommendations on expediency in the Davignon Report.  Under the present draft Directive, negotiations begin at a rather late stage, i.e., only after management has published the draft terms for the formation of the European Company. The Davignon Report had suggested starting negotiations once the plans for setting up a European Company have been discussed by the competent bodies of the companies participating in its creation. The ideal situation would be if negotiations really commenced earlier. Also, one cannot invoke confidentiality as the reason why negotiations are not commenced as the SNB will still be bound by confidentiality rules.

Members of the SNB are to be elected or appointed in proportion to the overall number of employees of the participating companies by allocating one seat per each portion of 10% of the overall number of employees, or a fraction thereof, employed in a single MS. This provision ensures that each MS is represented in the SNB, independent of the amount of employees are employed in each particular MS.

In the case of an SE formed by way of merger, each participating company which ceases to exist as a separate legal person following the registration of the SE will be entitled to have a seat. Thus, in case of SEs created by merger, the composition of the SNB shall not only be governed by geographical criteria (at least one representative per MS), but also by another condition: there must be at least one representative per company on the SNB. The number of such additional members shall not exceed 20% of the total number of members of the SNB. This provision shall in no case lead to double representation.

One further feature should be highlighted, in that the present draft presents an option to MSs to provide that the members of the SNB may include representatives of trade unions whether or not they are employees of a participating company. An enhanced role is given to industry federation, thus adding further safeguards to the rights of employees.

4. Standard principles in case of non-agreement

Under the present draft Directive, the emphasis is still on negotiations in WP issues, with the SNB representing all employees of the companies concerned. In case of non-agreement, a set of standard principles, laid down in an annexe to the Directive would be put into operation.

 Information and consultation

In essence these principles require SE managers to supply regular reports on which regular consultation of and information to a body representing the companies’ employees is to take place. Any business plans which would affect the workforce, management changes, mergers, divestments, potential closures and layoffs, are to be reported.

 Board-level employee participation

In case of formation of a holding SE or a subsidiary SE, where in the promoting companies 50% of the employees were previously covered by participation rules and during negotiations, managers and employee representatives were unable to negotiate a mutually-satisfactory agreement, the SE would be obliged to apply standard principles on participation of its workers.

In case of an SE created by way of merger, if at least 25 % of employees had the right to BLER before the merger, then the standard principles on participation contained in the Directive, would have to be applied. This was the element which caused disagreement on the ECS until the Nice Summit in December 2000.

On 20 December 2001, heads of State and Government struck a compromise. MSs are given the option of whether or not to transpose into their national law the Directive on participation in the case of SEs created by merger. If a MS chose not to implement such Directive in its national law, an SE could only be registered in that MS if an agreement to include BLER is concluded or in the case where no employees were covered by participation rules before the SE was created.

The standard rules for participation provide that in the case of an established by  transformation, the arrangements for WP applied by the national company prior to its transformation into an SE would to continue to apply. In all other cases of establishing an SE, the employees of the SE, its subsidiaries and establishments shall have the right to elect, appoint, recommend or oppose the appointment of, a number of members of the administrative/supervisory organ of the SE. This number shall be equal to the highest proportion in force in the participating countries concerned, before the registration of the SE.

5. Agreement on worker participation

Following the political accord reached by Council, the European Parliament has been consulted on the two amended texts. It has been many years since the EP has seen a formal draft of the text. The legislation is due to be formally adopted in 2001 and enter into force three years later in 2004. Agreement on the ECS is one of the ten priorities identified by  the Commission as vital to the creation of a fully integrated market in financial services. The present draft seems to have overcome the major obstacle faced by the SE: WP, but one still has to wait and see whether in practice, these cultural difference between MSs have been really surmounted.

May 2001 Dr Maria Chetcuti Cauchi. All Rights Reserved.