Amendment or termination of the share scheme: is the consent of the works council required?

The works council has the right of consent when establishing, amending or withdrawing a remuneration system. Is an amendment to a share scheme an amendment to the remuneration system?

Under the Works Councils Act (hereinafter: WOR), the works council has the right of consent for certain decisions made by the employer. This right of consent means that a decision may only be taken after the works council has given its consent. The works council’s consent is required, among other things, for the establishment, amendment or abolition of a remuneration or job evaluation system.

But must the works council also be asked for its consent when changing or abolishing a share scheme? That depends on whether that change or abolition also constitutes a change or abolition of a remuneration system within the meaning of the WOR. If that is the case, the consent of the works council is required. We will use two court rulings to illustrate how judges deal with this issue.

Change to share scheme by American holding company: no right of consent

The Court of Appeal in The Hague ruled that the change to the share scheme by an American holding company did not constitute a change to the remuneration system. The consent of the works council was therefore not required. Under the old share scheme, all employees in job scale 8 and above received a guaranteed remuneration. Under the new share scheme, the award of a remuneration was no longer guaranteed, but depended on the individual performance of the employee and the available budget.

The court of appeal ruled that the core of the share scheme had not changed: the new share scheme still applied to the same job categories (employees in job scale 8 and above) and had the same objective (to reward employees in higher positions in the long term). The fact that the allocation of shares would henceforth depend on performance and the available budget did not make any difference to the remuneration system. The new scheme did only change the level of remuneration, a subject the right of consent of the works council does not apply to. The holding company was therefore entitled to amend the share scheme without the consent of the works council.

Termination of Performance Shares scheme by French parent company: right of consent does apply

In a case concerning the abolition of a share scheme, the Arnhem Subdistrict Court ruled that there had indeed been a change in the remuneration system. The consent of the works council was therefore required.

The case concerned a Dutch company whose employees were able to purchase shares in the French parent company through local share schemes. In addition, the so-called Performance Shares scheme applied: on the basis of this scheme, employees automatically received Performance Shares each year, provided they had purchased shares through a local share scheme.

At some point, the French parent company decided to abolish the Performance Shares. The works council of the Dutch subsidiary refused to give its consent to this proposed decision, but the company nevertheless decided to terminate the scheme. The works council then went to court and requested that the decision be declared void. During the proceedings, the Dutch subsidiary requested substitute consent from the court.

The subdistrict court ruled in favour of the works council. The explanatory notes to one of the local share schemes state that employees who purchase shares under this scheme are entitled to Performance Shares. The scheme is therefore an employment condition scheme. It can be inferred from the subdistrict court’s ruling that the decision to abolish the Performance Shares amounted to a change in the remuneration system and was therefore subject to the works council’s right of consent.

The fact that the decision was taken by the French parent company does not alter this: the decision of the parent company was attributed to the Dutch subsidiary. This ruling is therefore a good example of the principle that the works council’s right of consent also applies when a decision is taken at a higher level than the company itself. According to the court, any other ruling would undermine Dutch employee participation rights.

The subdistrict court did not grant the entrepreneur the requested substitute consent. Although the company had a sufficient interest in abolishing the share schemes, the judge ruled that the works council’s refusal was not unreasonable, partly because employees were not offered any compensation for the loss of the Performance Shares. If compensation had been offered, the works council’s decision to refuse its consent might have been unreasonable.

Conclusion

An entrepreneur may be obliged to seek the consent of the works council if they wish to introduce, amend or abolish a share scheme. If such a decision can be construed as an amendment or abolition of a remuneration system, the works council has the right of consent. If the entrepreneur does not request consent, they run the risk that the change or withdrawal will be declared null and void and the implementation of the decision will have to be reversed.

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