Employee involvement in the European Company - latest rulings of the European Court of Justice and the Federal Labor Court

If a European Company (Societas Europea - SE) is established, a so-called negotiation procedure must generally be carried out with regard to the involvement of employees in this company in accordance with the provisions of the SE Participation Act (SEBG, i.e. the German implementing act to the Council Directive 2001/86/EC). At the end of this procedure, an agreement on arrangements for the involvement of the employees within the SE can be concluded, e.g. with the establishment of an SE works council or employee involvement in the supervisory body of the SE. In the absence of an agreement, however, depending on the constellation, employee involvement already existing at company level can also “pass through” to the new SE.

The case law of the German courts makes an exception to this principle in cases in which an employee-less “shelf SE” was founded. However, if the negotiation procedure was not carried out at the formation stage, it was widely held that it had to be carried out when the shelf SE became active - for example by taking over the holding function in a group.

The ECJ has now contradicted this legal opinion in its ruling of May 16, 2024 - C-706/22 in preliminary ruling proceedings initiated by the German Federal Labor Court (BAG).

Facts of the case (abridged)

An SE was founded in 2013 with its registered office in London and entered in the relevant register for England and Wales. As the founding companies had no employees, a negotiation procedure was not carried out. The SE later became the sole shareholder of a German GmbH with one-third employee involvement, which subsequently changed its legal form to a limited partnership (KG). As a result, within the KG no employee involvement existed any further. The KG employed around 800 employees, while its numerous subsidiaries in several EU member states employed a total of around 2,000 more employees. Due to Brexit, the SE relocated its registered office to Hamburg. In proceedings initiated by the Group Works Council, it wanted to ensure the negotiation procedure - which was not carried out when the SE was established – to be carried out retrospectively with the possible consequence that a form of co-determination would be installed even without an agreement in this negotiation process.

After the Hamburg Labor Court and the Hamburg Regional Labor Court had rejected the corresponding application by the Group Works Council, the BAG suspended the proceedings. It referred the question to the European Court of Justice (ECJ) for a ruling as to whether a negotiation procedure needed to be carried out retrospectively if an SE established without such procedure becomes controlling company of subsidiaries employing employees in several member states of the European Union.

The ECJ ruling of May 16, 2024 - Ref.: C-706/22

The ECJ rejected a general obligation to catch up on the participation procedure. The existing statutory provisions only provide for the implementation of a negotiation procedure in the formation stage of the SE. A catch-up of this procedure is not generally regulated and this is not a legislative oversight that can be remedied by analogous application of statutory provisions.

However, the ECJ concedes that it may be necessary to catch up on the negotiation procedure in cases of abuse.

The BAG followed suit and rejected the group works council's appeal on points of law in its decision of November 26, 2024 (case reference: 1 ABR 37/20) and thus ruled that there was no obligation to catch up on the negotiation procedure in the specific case. So far, only the wording of the judgment has been published; the reasons for the decision are still pending.

Practical note

The ruling of the ECJ is likely to lead to a situation at national level where the widely held view to date, which requires the negotiation procedure to be carried out at a later date in order to avoid circumvention of employee involvement rights when establishing an SE without employees - justifying this with an analogous application of the statutory provisions - cannot be upheld in this way.

Rather, the question of what requirements are placed on an “abusive arrangement” and whether the prohibition of abuse requires the participation procedure to be carried out at a later date could become of crucial importance in the future. National case law is required here.

In practice, the ruling of the ECJ is likely to make the SE even more interesting as a means of limiting corporate employee involvement.