The evolution of cross-border employee participation in Europe

What are cross-border reorganisations and why are employee participation rights at risk?

Driven by accelerating economic integration and the possibility to adapt more easily to shifting market conditions and regulatory landscapes across EU Member States, corporations are increasingly seeking to reorganise themselves across borders. Cross-border reorganisations in Europe come in three main forms: mergers, conversions and divisions. A cross-border merger takes place when companies from different Member States combine into one entity. A cross-border conversion allows a company to change its legal form and move its registered office to another Member State without dissolving or creating a new company. A cross-border division splits a company into two or more parts across different Member States, with each part becoming a separate legal entity.

These transactions pose certain risks for employee participation rights (e.g. representation on the supervisory board), as they involve not only a change in the registered office of the company but also a shift in the applicable law. Lower standards of employee participation in the national laws of the Member State in which the new company will be located could result in a reduction or even complete circumvention of employee participation. The EU was therefore called upon to act.

The long journey of employee participation rights in Europe

Since the outset of efforts to establish a European legal basis for cross-border reorganisations, the issue of employee participation has been a source of lengthy discussions and a central stumbling block in reaching an agreement.

For decades, there was no consensus on regulating employee participation in corporate decisions. It was not until the new millennium that a breakthrough was achieved. In December 2000, the idea of EU-wide harmonisation of employee participation rights was abandoned. Instead, it was agreed that such rights in cross-border reorganisations should be based on an agreement between the employees and the management of the involved companies. In 2005, a corresponding directive (the Cross-Border Mergers Directive, 2005/56/EC) was adopted, establishing a framework specifically for cross-border mergers.

According to later case law of the CJEU, the freedom of establishment also includes a right to perform cross-border conversions and divisions, but there was no European framework for these kinds of transactions. In response to the resulting legal uncertainty, the EU adopted the Mobility Directive in 2019, establishing a legal framework for cross-border conversions and divisions for the first time, including revised rules for cross-border mergers. Member States were required to transpose the Directive into national law by January 2023 and Austria did so by amending the Austrian Labour Constitutional Act in August 2023. The key features of the Directive are outlined below; however, the details of the national transposition laws may vary slightly.

How does the Directive protect employee participation?

Employee participation rights are usually determined by the national law of the Member State in which the company arising from the reorganisation has its registered office. In practice, this principle could lead to a reduction or even a complete circumvention of the participation rights of employees following a reorganisation.

The Directive therefore includes a broad list of exceptions where, instead of applying national laws on employee participation, the rules on employee participation in the SE (harmonised by EU Directive 2001/86/EC) apply. A cross-border reorganisation fulfils these exceptions if one of the participating companies is on the verge of establishing a system of employee participation or if the existing level of employee participation would be at risk in the new Member State.

In those cases, SE rules apply, and the employee participation rights in the new company are determined by an agreement between the "Special Negotiating Body" (SNB) – a transnational employee representative body – and the management bodies of the participating companies. The two negotiating parties should reach an agreement within six months (extendable to one year), specifying the number of employee representatives in the supervisory board and their rights.

If the negotiations fail, so-called "catch-all provisions" protect an already existing system of employee participation. The company arising from the reorganisation will have the same level of participation as the participating companies did. However, if the participating companies did not have an existing system of employee participation, there will also be no participation in the new company. The SNB could prevent these consequences by breaking off negotiations with the management bodies. In this case, the national laws of the headquarter state apply.

With the introduction of the Mobility Directive, the EU has marked a significant milestone in the development of employee participation rights following cross-border reorganisations. Companies must carefully navigate the new rules to ensure workers' rights are protected during mergers, conversions or divisions, particularly in preserving employee representation in decision-making processes. This imposes additional obligations on businesses, requiring meticulous planning and clear communication with employee representatives. However, it also strengthens the role of employees, promoting a more balanced approach to corporate restructuring in an increasingly integrated European market.

authors: Stefan Kühteubl, Florian Reichel