German Limited Liability Companies with 500 to 2,000 Employees are Subject to Employee Co-determination and a Women’s Quota

Pursuant to the German One-Third Participation Act (Drittelbeteiligungsgesetz – “DrittelbG”), medium-sized companies with the legal form of a German Limited Liability Company (Gesellschaft mit beschränkter Haftung – “GmbH”) or a Public Limited Company (Aktiengesellschaft – “AG”) with 500 employees or more are obligated to form a supervisory board in which at least one third of the members must be employee representatives. To date, this requirement has been ignored by approximately 56% of the companies concerned. In view of the new gender quota legislation, the subject has become relevant again.

Statutory and actual initial position

The most common legal form for medium-sized companies in Germany is the GmbH. As a rule, GmbHs with 500 or more employees are obligated to grant their employees certain rights of co-determination by establishing a supervisory board (Section 1(1)(3) of the DrittelbG). In this case, “as a rule” means that not a certain date is decisive, but projected changes in the future number of employees of the company have to be taken into account. Merely temporary fluctuations in the number of employees are irrelevant.

Each person who is obligated pursuant to a private law employment contract “to perform otherwise-directed work on the basis of a relationship of personal dependency” in the service of the GmbH will be deemed an “employee”. The figures are counted on a full per capita basis and not at a pro rata working hours basis. Consequently, part-time employees, temporary staff and trainees are also deemed full employees, as well as, pursuant to the most recent case law of the labor courts, temporary agency workers, to the extent that they have fixed positions and are not merely employed for the purposes of meeting temporary peaks in demand for staff.

Neither the law pertaining to GmbHs nor the law pertaining to co-determination provides for the imposition of penalties in the event that a company fails to establish a supervisory board with employee co-determination, despite being obligated to do so. This is probably the reason why 56% of the approximately 3,500 companies concerned in Germany do not have a supervisory board. To date, the only conceivable penalty for this omission was that auditors might have made a note of the transgression in their auditor’s report pursuant to Section 321 of the German Commercial Code (Handelsgesetzbuch – “HGB”).

New developments in connection with the women’s quota

Changes could now arise as a result of the “Act on the Equal Participation of Women and Men in Leadership Positions in the Private Sector and the Public Sector” (Gesetz für die gleichberechtigte Teilhabe von Frauen und Männern an Führungspositionen in der Privatwirtschaft und im öffentlichen Dienst), which was passed in the spring of 2015. Pursuant thereto, companies that are either listed on a stock exchange or subject to co-determination obligations are required to implement flexible gender quotas for their board of directors or management board, their supervisory board and upper or mid-level management, and to report on their progress in this regard.

Individual commentators have expressed the view that these obligations only apply to companies that have established a supervisory board pursuant to the German One-Third Participation Act. However, this contradicts the wording of the Act, pursuant to which the relevant issue is not whether employee co-determination practices are actually in place, rather solely whether a company is subject to employee co-determination obligations. The vast majority of commentators are therefore of the opinion that whether or not a supervisory board established pursuant to the German One-Third Participation Act is actually in place is irrelevant for the setting of quota targets.

Pursuant to Section 52(2) of the German Limited Liability Companies Act (Gesetz betreffend die Gesellschaften mit beschränkter Haftung – “GmbH-Gesetz”) as most recently amended, the shareholders’ meeting of the companies concerned is obligated to set targets for the number of women among their supervisory board members and managing directors. The question arises as to the course of action to be taken by companies that — in breach of their obligations — have failed to establish a supervisory board. One would imagine that where no such executive body exists, no gender quota targets can be set for the supervisory board.

The GmbH-Gesetz does not provide any guidance in this regard. However, a penalty for this omission could be introduced using “back-door” tactics, i.e. via a company’s management report. Pursuant to Section 289a(4) of the HGB, details of the quota targets and the status of their implementation must be given in the management report. If no such targets are disclosed, the management report is deemed to be incomplete, which will in turn trigger the imposition of penalties pursuant to Section 334 et seq. of the HGB. The managing directors of the company are deemed to have acted improperly and a fine of up to €50,000 may be imposed. It remains to be seen whether the German Federal Office of Justice (Bundesamt für Justiz) will go as far as to impose fines for non-disclosure in a company’s management report of quota targets relating to a non-existent supervisory board.

A decision of the German Federal Constitutional Court (Bundesverfassungsgericht) of 9 January 2014, which relates to a rather different scenario, argues against the possibility of such an outcome. Pursuant to Section 325(1)(2) of the HGB, medium-sized corporate entities are obligated to disclose their “Report of the Supervisory Board”. Until 2014, the German Federal Office of Justice would impose administrative fines on companies failing to include such a report, even where no supervisory board had been established. The German Federal Constitutional Court declared this practice to be inadmissible, ruling that the threat of the imposition of administrative fines pursuant to commercial law cannot be used to compel companies to establish a supervisory board; the status determination procedure pursuant to company law is the sole means of enforcement in this regard. Time will tell whether this opinion will also take hold in the gender quota context.

Conclusion

GmbHs with more than 500 employees but without a supervisory board
established pursuant to the German One-Third Participation Act are now exposed to greater risk, namely the risk of their management report being deemed to be incomplete if it does not contain information relating to the attainment of targets for the promotion of women in the workplace, including on the supervisory board. One possible means of avoiding such an outcome could be a change of legal form. The German One-Third Participation Act only applies to corporate entities and not to partnerships (i.e. not to GmbH & Co. KGs (limited (commercial) partnerships with a GmbH as general partner)). If the KG (Kommanditgesellschaft – limited partnership) has 500 to 2,000 employees, these will not be attributed to the GmbH (contrary to the position pursuant to the German Co-Determination Act (Mitbestimmungsgesetz) in cases of more than 2,000 employees). The closer the number of the company’s employees is to 2,000, the more difficult it will be for it to avoid the application of the employee co-determination requirements, in which case it would be advised to change its legal form to that of a societas Europaea (SE) or to take on a foreign company as the KG’s personally liable shareholder, for example “plc & Co. KG”, “B.V. & Co. KG” or “GmbH & Co. KG” (involving an Austrian GmbH).

Dr Barbara Mayer
Holger Hiss