The joint establishment - news from the German Federal Labour Court

Joint establishments (“Gemeinschaftsbetrieb”) have experienced a 'revival' since the reform of the German Temporary Employment Act [Arbeitsüberlassungsgesetz, AÜG] in 2017. It is often cited as a possible alternative to the restrictive provision of temporary workers. A recent decision of the Federal Labour Court [Bundesarbeitsgericht, BAG] dated 24 May 2022 (docket No.: 9 AZR 337/21) clarifies that employment in a joint establishment does not constitute a provision of temporary workers. In addition, joint establishments are a perennial topic in unfair dismissal proceedings in cases where plaintiffs wish to challenge the social selection or show possibilities of their further employment.

In light of current decisions over the past few months, the following Q&A focus on the formation, implementation and dissolution of joint establishments as well as the advantages and entrepreneurial structuring options.

The joint establishment

A joint establishment as defined in Sec. 1 (1) sentence 2 of the German Shop Constitution Act [Betriebsverfassungsgesetz, BetrVG] is characterised by the fact that two or more companies - usually on the basis of an explicit managementagreement - set up a uniform management apparatus in personnel and social matters which coordinates a cross-company deployment of employees and equipment for the pursuit of work-related objectives. The cross-company deployment of employees in a joint establishment means that the employment relationships of the deployed employees are affected not only by the decisions of their respective contractual employer, but also by the other company or companies participating in the joint establishment.

The cross-company effect not only has an impact on employees but also on works councils in various ways and is a recurring guest in labour court disputes. This is irrespective of the regular holding of works council elections and, as clarified in a recent decision of the Regional Labour Court [Landesarbeitsgericht, LAG] of Lower Saxony (decision dated 04 April 2022 - 16 TaBV 135/21), can already affect the legally secure formation of a joint establishment. The adjudicating court once again emphasised the overriding importance of a reciprocal use of personnel and operating resources for the existence of a joint establishment.

establishment - important questions

1. Is an actual collaboration between companies sufficient to set up a joint establishment?

The mere fact that two or more companies actually collaborate is not sufficient to set up a joint establishment within the meaning of Sec. 1 (1) sentence 2 BetrVG. Rather, this requires the conclusion of a management agreement on the uniform organisation and management of a business. The conclusion of a written management agreement is not mandatory. Rather, the uniform exercise of the employer's functions in personnel and social matters already suffices. The merely formal exercise of employer powers by the respective contractual employer does not oppose this.

In practice, the question frequently arises, especially in corporate group constellations, as to whether service companies to which central areas such as HR and finance are assigned form a joint establishment with operating companies. As a rule, however, this specifically is not what is wanted and overhead services are procured via intra-group service contracts.

2. Is the formation of a joint establishment an alternative to the provision of temporary workers?

A provision of temporary workers is when employees of the lending company are leased to the hiring company so that the hirer can deploy the temporary workers in it business organisation and subordinate to its right of direction. Hence, this is exclusively about providing personnel. A joint establishment, as demonstrated, goes well beyond this. The Federal Labour Court recently confirmed the above distinction between the provision of temporary workers and a joint establishment in an instructive and practical manner, pointedly expressing this in a nutshell as: “The provision of temporary workers and a joint establishment are mutually exclusive” (BAG, judgement dated 24 May 2022 - 9 AZR 337/21).

Furthermore, in the same decision, the Federal Labour Court specified the significance of a joint works council of a joint establishment pursuant to Sec. 1 (1) sentence 2 BetrVG. As before, the establishment of a joint works council according to the wording of the law pursuant to Sec. 1 (1) sentence. 2 BetrVG is characteristic of a joint establishment. Conversely, however, one cannot necessarily negate a joint establishment and assume a provision of temporary workers in cases where, on the basis of collective agreements, a business has several works councils that exercise the participation rights in a divided manner vis-à-vis several companies acting as contractual employers at the business. In order to be able to take advantage of the benefits of a joint establishment with legal certainty and without a rude awakening, companies should always take these finer points into account in their planning when setting up a joint establishment.

The formation of a joint establishment is a conceivable option especially for companies that wish to cooperate on a longer-term basis within the framework of a joint venture, for example by bringing together different sources of know-how in order to develop new technologies. However, a joint establishment is also an advantageous mode of implementation for companies that set up cross-functional teams in order to occupy positions with employees of different skill sets from multiple employers. This is frequently an issue, especially in project development.

Cooperation in the form of a joint establishment means that this is not limited in time, whereas the provision of temporary workers is permitted for a maximum of 18 months (Sec. 1 (1b) AÜG). At the same time, companies benefit from sharing work equipment and office space, which means that running a joint establishment can lead to cost savings.

Whether the formation of a joint establishment is more advantageous in an individual case than the provision of temporary workers depends - as is so often the case - on the specific case at hand. The main argument in favour of setting up a joint establishment is the avoidance of the liability risk that cross-company collaborations and cooperations might be perceived as covert provisions of temporary workers.

3. What are the co-determination requirements in a joint establishment?

A works council can also be elected in a joint establishment of several companies. If one or more local works councils already exist when the joint establishment is formed, existing works council mandates lapse if the formation of the joint establishment leads to a loss of the corporate identity. In such cases, Sec. 21a (2) BetrVG ensures that new elections are initiated for the entire joint establishment within the scope of a transitional mandate. The details concerning the determination of the corporate identity are controversial and depend on the circumstances of the individual case.

Representation of works council members of the joint establishment in the participating companies is achieved by delegating members to central and group works councils. In this context, the Federal Labour Court clarified in a recent decision (decision dated 01 June 2022 - 7 ABR 41/20) the previously open question of whether the works council of a joint establishment can also delegate employees from outside the company to the central works council of a participating company. In the Federal Labour Court’s opinion, this is permissible. The works council of a joint establishment is not obliged to only delegate works council members belonging to the respective company to the central works council of the participating companies. The same applies in the event that representatives of a central works council are delegated to a group works council.

4. Do the shop agreements concluded prior to the formation of the joint establishment continue to apply?

The cases in which shop agreements continue to apply in the event of several companies combining to form a joint establishment and for which employees they apply are not regulated by law and have also not been comprehensively clarified by case law. In principle, shop agreements continue to apply after the formation of a joint establishment insofar as the previously existing corporate identity is preserved, i.e. the original organisational unit must continue to exist as the reference point under shop constitution law. If the corporate identity is lost through the formation of the joint establishment, which is regularly likely to be the case, previously existing shop agreements often lose their scope of application.

A continued validity of shop agreements, central shop agreements and group shop agreements becomes virulent if the original business continues to exist as a definable organisational unit, e.g. as a business unit, the shop agreement relates to specific employees and its continued validity is still reasonably possible as a result of the new management structure and a new work process. The question of whether its continued validity is still reasonably possible depends on the content of the provisions of the shop agreement. For example, a shop agreement whose continued validity would lead to different working time regulations for employees of the joint establishment can regularly no longer be implemented for organisational reasons.

In the event of the formation of a joint establishment by way of integration, the following applies: the shop agreements applicable to the absorbing business indisputably continue to apply under collective bargaining law. Whether these shop agreements apply to the employees of the integrated business depends on whether the relevant shop agreement solely requires integration into the relevant business (e.g. matters concerning organisation in the business) or requires the existence of an employment relationship with the relevant company (e.g. shop agreement on remuneration or company pension scheme). In the latter case, its application to newly integrated employees is ruled out, as such shop agreements can only bind those companies that have concluded the shop agreement.

Companies intending to set up a joint establishment should already take stock of their current shop agreements at the planning stage. In this way, the organisation of the joint establishment can be managed efficiently from the outset, and time-consuming and costly disputes with works councils and employees can be avoided.

5. Does an economic committee have to be formed in a joint establishment?

Whether or not an economic committee must be formed is generally assessed on the basis of the company as opposed to the (joint) business. An economic committee must be formed in companies “with, as a rule, more than one hundred permanently employed employees” in which there is a works council. Thus, if only one of the companies participating in the joint establishment employs more than 100 employees, an economic committee only has to be formed in this company.

The assessment is different in cases where two companies - that separately do not regularly employ more than 100 employees - form a joint establishment with a total of more than 100 employees.

Prior to the reform of the BetrVG, according to the case law of the Federal Labour Court an economic committee had to be formed by way of exception for the joint establishment, which could exercise competences of the BetrVG vis-à-vis both companies of the joint establishment. However, a supreme court decision by the Federal Labour Court that takes the reform of the BetrVG into account is still pending.

6. How does the operation of a joint establishment affect the determination of threshold values in the context of protection against dismissal?

The threshold value of Sec. 23 German Unfair Dismissals Act [Kündigungsschutzgesetz, KSchG] with regard to the scope of application of the KSchG must be determined on a cross-company basis, which means that all employees of the companies participating in the joint establishment have to be taken into account.

The same also applies to the question of whether a mass dismissal notification must be made in accordance with Sec. 17 KSchG. When determining the number of dismissals to be made in accordance with Sec. 17 KSchG, the number of employees to be dismissed at the joint establishment must be taken into account in relation to the number of employees regularly employed by all of the companies in the joint establishment.

7. What are the possibilities of continued employment and the requirements for implementing a social selection in the case of terminations for operational reasons?

As a matter of principle, possibilities of continued employment must be examined throughout the entire company before declaring a termination for operational reasons. In the case of a joint establishment, the potential possibility of continued employment extends to the jointly managed business as a whole and additionally to other businesses of the contractual employer - but not to other businesses of the other companies participating in the joint establishment.

In the event of a termination for operational reasons, any social selection to be carried out extends to all comparable employees of the joint establishment and must also be carried out on a cross-company basis. The terminating employer may not limit the social selection to employees of the joint establishment who are in an employment relationship with it. In the event of the need to declare a large number of terminations for operational reasons in a joint establishment, companies should consider the prior termination of the joint establishment as an option.

8. Does the general principle of equal treatment apply on a cross-company basis?

The principle of equal treatment under labour law was previously limited to the business. According to the current case law of the Federal Labour Court, it fundamentally extends to all businesses of a company.

The principle of equal treatment does not oblige an employer in a joint establishment to extend the working conditions of another contractual employer to cover its own employees. The general principle of equal treatment binds only the contractual employer itself.

9. What needs to be considered when dissolving a joint establishment?

As is the case when setting up a joint establishment, when terminating a joint establishment an agreement between the participating companies in itself is not sufficient. Rather, the joint establishment’s joint management apparatus in personnel and social matters must be dissolved. If the entrepreneurial cooperation is continued without a unified management, the risk exists of a covert provision of temporary workers. 

Conclusion:

Even though complex legal issues may arise from the formation of a joint establishment, collaborations with one or more companies provide the possibility of flexibility. This can be particularly worthwhile in terms of cross-company personnel deployment and the associated recourse to resources and know-how. In addition, arrangement as a joint establishment offers other advantages such as the joint use of operating resources and equipment, which can save on finances.

To determine whether and to what extent the formation of a joint establishment is advantageous for a company or whether an already existing joint establishment should be dissolved, a differentiated consideration of the individual case is fundamentally required.

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