Corporate adoption of Ethics Codes of Conduct has become increasingly common over the years. One question that has arisen in connection with these Codes of Conduct, however, is whether a works council has the right to be involved with the preparation and implementation of such a Code. This question becomes even more complicated when a foreign parent company wishes to implement a uniform, global Code of Conduct; subsidiaries in other countries do not want to be placed in the unenviable position of deviating from the parent company's instructions or guidelines because of local law requirements.

Purpose of a Code of Conduct

An Ethics Code of Conduct is a document that sets forth a company's policies, particularly with respect to how employees and management are to behave or proceed with regard to such matters as competition, the protection of company assets, conflicts of interest, and legal issues. The essence of an Ethics Code of Conduct is to ensure that the company operates responsibly and with integrity. The purpose is for the company to be able to minimize its risks and ensure that it benefits from its positive reputation. A relatively recent trend has been for multinational corporations to have a uniform Ethics Code of Conduct for all affiliated entities; this stems in large part from the Sarbanes-Oxley Act, which requires U.S. publicly held companies to have Ethics Codes of Conduct in place.

Introduction of an Ethics Code of Conduct

In a recent case before the Federal Labor Court, a German subsidiary of Honeywell introduced a "Code of Business Conduct" at its facility. This Code of Conduct included provisions for dealing with employee behavior in various areas, specifically equal treatment in the workplace, avoiding discrimination and conflicts of interest, and protecting corporate assets. It also introduced a whistleblower procedure.

The court held that Honeywell's works council in Germany had a general right of codetermination if Honeywell's management intended to introduce measures concerning rules in the workplace. However, the court added, the fact that a Code of Conduct is subject to a works council's general right of codetermination does not mean the right of codetermination applies to the Code of Conduct in its entirety. Instead, each specific provision of the Code of Conduct must be reviewed to determine whether it is subject to a right of codetermination. Though the employer will need to take time at the outset to determinine which provisions must be discussed with the works council, the employer benefits overall, since the Code provides it with the opportunity to separate the provisions that are subject to codetermination from those that are not.

Codetermination vs. No Codetermination

The Federal Labor Court emphasized that provisions that merely substantiate the performance of employees or deal with matters already governed by legal provisions are not subject to a right of codetermination. Accordingly, Code of Conduct provisions intended to prevent discrimination in the workplace within the meaning of Germany's General Equal Treatment Act are not subject to the works council's right of codetermination.

Not surprisingly, there is often a fine line between provisions that constitute workplace procedures—subject to a works council's right of codetermination—and provisions that merely affirm the General Equal Treatment Act.

But Sarbanes-Oxley Requires Codes of Conduct (and Wh istleblower Provisions)

In the case at hand, the court reasoned that only German and EU law are to be taken into consideration, as only these laws are binding in Germany. As a result, the fact that foreign laws may require the introduction of an Ethics Code of Conduct, as does Sarbanes-Oxley for U.S. publicly held corporations as well as their U.S. and foreign subsidiaries, does not mean the works council in Germany has no right of codetermination with respect to particular provisions of the Code of Conduct as they are to be implemented at the German subsidiary. This means, for example, that management's argument that a non-U.S. corporation will be subject to U.S. sanctions if the Code of Conduct is not implemented as directed by the U.S. parent corporation will not hold water in Germany.

This recent Federal Labor Court decision is actually in line with a few earlier whistleblower cases. In those cases, the Federal Labor Court also held that the works council has a right of codetermination even though Sarbanes-Oxley requires U.S. publicly held corporations—and their German subsidiaries—to introduce whistleblower procedures. The Federal Labor Court's decision means that each clause of an Ethics Code of Conduct must be reviewed as to whether it is subject to the works council's right of codetermination. So to facilitate discussion with the works council, employers should separate those provisions that are subject to codetermination rights from the provisions that are not. This will hopefully cause the works council to focus only on those provisions, rather than on the entire Code of Conduct.

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