Best Practices: How Employers Can Design Legally Compliant and Practical Works Council Compensation

In the first four articles of our publication series, we addressed specific legal questions regarding works council compensation – particularly the formation of comparison groups, the determination and adjustment of compensation, the treatment of performance-based pay, and the handling of overtime. We now turn to the practical implementation within the company.

The statutory requirements for works council compensation are clearly formulated in their basic principles. In practice, however, their application is often associated with considerable uncertainties. This is especially true in light of recent case law and the associated civil and criminal law risks for decision-makers within the company. 

Employers therefore face the challenge of making compensation decisions that comply with both the voluntary service principle (in conjunction with the principle of compensation for lost earnings) and the prohibition against preferential or disadvantageous treatment. Below, we present some proven practices that have been established in advisory work as suitable for supporting a legally compliant approach to works council compensation. 

I. Early and Structured Determination of the Relevant Comparison Group

A key starting point for a legally compliant compensation structure is the accurate determination of the comparison group. As discussed in the first two articles of this series, this group serves as the relevant reference framework for the development of compensation under Section 37(4) of the German Works Constitution Act (Betriebsverfassungsgesetz). 

In practice, it is advisable to systematically establish the comparison group at the time the works council member takes office and to document the relevant considerations in a traceable manner. This includes, in particular, a brief description of the selected comparison persons, their roles, and their relevant qualifications (both professional and personal). 

Such documentation not only facilitates subsequent adjustment decisions but also helps to present the reasoning clearly in the event of later inquiries or reviews. Particularly in cases of long-standing works council mandates, it can otherwise be difficult to reliably reconstruct the original considerations regarding comparability. 

At the same time, employers should be aware that a comparison group, once established, may not be changed without due cause. A new comparison group may only be formed if there is an objective reason for doing so. 

It should also be noted that under Section 37(4) sentences 4 and 5 of the German Works Constitution Act, a procedure for determining comparable employees may be established through a works agreement (Betriebsvereinbarung). Such an arrangement can help make the selection of comparison persons more transparent and traceable, thereby avoiding future disputes. However, this does not relieve the employer of the duty to carefully assess in each individual case which employees are actually comparable. 

II. Regular Review of Compensation Development

The compensation of works council members is not a static matter. Section 37(4) of the German Works Constitution Act provides for a dynamic approach, under which works council members participate in the customary development of compensation within the company for comparable employees. 

Employers are therefore well advised to regularly review whether the compensation within the relevant comparison group has changed and whether adjustments are necessary. In practice, it is helpful to link this review to existing HR processes, such as annual compensation rounds or other regular salary reviews. 

In addition, attention should be paid to whether specific development opportunities have arisen within the company that could be relevant to the hypothetical career progression of the works council member. As outlined in the second article of this series, the prohibition against disadvantageous treatment under Section 78 sentence 2 of the German Works Constitution Act, in conjunction with Section 611a(2) of the German Civil Code (Bürgerliches Gesetzbuch), may give rise to an independent entitlement to compensation adjustment if the works council member would have attained a certain position had they not taken on their role. 

A regular review of relevant developments helps to identify emerging adjustment issues at an early stage and address them appropriately. 

III. Transparent Decision-Making Processes and Careful Documentation

A recurring risk in connection with works council compensation often lies less in the substantive decision itself than in inadequate documentation and traceability. Employers should therefore ensure that key decisions regarding works council member compensation are made transparently and documented thoroughly. 

This applies in particular to:

• the formation and, where applicable, adjustment of comparison groups 
• the customary compensation development within the comparison group 
• the hypothetical career development of the works council member, particularly with regard to hypothetical promotion decisions 
• decisions regarding variable compensation components and their derivation 
• the treatment of overtime and compensatory time off 

The documentation does not need to be particularly extensive. What matters is that the key substantive considerations are recorded and that the documents show the basis on which a particular compensation decision was made. 

Such documentation can be especially important if compensation decisions are reviewed at a later date or if questions arise about possible preferential or disadvantageous treatment. 

IV. Clear Internal Responsibilities and Structured Decision-Making Processes

In many companies, uncertainties regarding works council compensation arise not primarily due to unclear legal requirements, but rather due to a lack of internal structures. It is therefore advisable to define clear responsibilities for matters relating to works council compensation. 

In practice, it is often helpful to centralize these matters within the HR department and to involve employment law expertise early on when needed. 

Furthermore, it may be useful to develop standardized internal procedures for typical situations, such as documenting established comparison groups, regularly reviewing compensation developments, or handling overtime worked by works council members. 

Structured processes help to ensure that compensation decisions are made consistently and reduce the risk of individual errors. 

V. Raising Awareness Among Decision-Makers in the Company

Another key aspect is raising awareness among those individuals in the company who are involved in compensation decisions. The compensation of works council members is subject to specific legal requirements. Unlike with other employees, the voluntary service principle under Section 37(1) of the German Works Constitution Act and the prohibition against preferential or disadvantageous treatment under Section 78 sentence 2 of the German Works Constitution Act must be strictly observed. 

Against this background, it is advisable to regularly raise awareness among managers and HR staff regarding these specific considerations. This can be achieved through internal guidelines, training sessions, or early involvement of the relevant specialist department. 

Such awareness-raising helps to identify and avoid potential risks in advance. 

VI. Particular Caution with Individual Special Arrangements

Finally, practice shows that individually tailored special arrangements in connection with works council member compensation can be associated with heightened risks. 

These include individually agreed compensation components, flat-rate bonuses, or other arrangements that cannot be readily derived from the development of the comparison group or from the general compensation structures of the company. 

Such arrangements can quickly give the impression of impermissible preferential treatment within the meaning of Section 78 sentence 2 of the German Works Constitution Act. Employers should therefore generally ensure that compensation decisions are aligned with objective and traceable criteria. 

This applies not only in the context of employment court proceedings but also in view of potential civil or criminal law issues (e. g., breach of fiduciary duty under Section 266 of the German Criminal Code [Strafgesetzbuch]). 

Conclusion

The legally compliant design of works council compensation does not require a complex special framework, but it does require structured and transparent decision-making processes. 

Employers are well advised to carefully establish comparison groups, regularly review compensation developments, and document key decisions in a traceable manner. Clear responsibilities and awareness among the relevant decision-makers also contribute to reducing legal risks. 

Those who follow these principles create a solid foundation for a compensation structure that meets both the legal requirements and the practical needs of the company. 

This concludes our publication series on legally compliant works council compensation. We hope that the legal principles and practical guidance presented have provided you with helpful orientation for dealing with this complex topic. 

Should you have any questions or require advice on specific cases, we are of course always happy to assist.