Works Council consent not required for temporary suspension of profit-sharing scheme

An employer (“Employer”) with its registered office in the Netherlands has about 650 employees. The employer is a subsidiary of a listed company (“Parent Company”) that has its registered office in the United Kingdom. The employment contracts between the Employer and its employees are not subject to a collective bargaining agreement. In 2002 the Employer introduced an “All-share scheme”, a bonus scheme whereby employees acquire shares on the attainment of performance goals (operational result/profit) by the Parent Company. From 2002 to 2011, the Employer annually granted its employees a claim based on the All-share scheme. In 2007 the scheme was cancelled for employees in the UK. In June 2011 the Employer followed the decision of the Parent Company, announcing to its employees that in recent years the performance goals had not been attained, which had led to the decision to stop granting the claims under the scheme until further notice. The Works Council disagreed with the Employer and, following mediation by the company committee, submitted the matter to the Subdistrict Court of Amsterdam.

The Works Council’s position

The Works Council took the position that the All-share scheme should be considered as a profit-sharing scheme. Granting a claim based on the All-share scheme would be dependent on the group’s results as a whole. If the performance goals were attained, the claims granted to all employees would be identical, and the ensuing profit would be distributed equally among all employees. This payment would not, therefore, depend on individual performance. On the contrary, it would depend entirely on the performance of the company itself. That is why profit was distributed. Since the Employer had announced that profit would not be distributed until further notice, the actual profit-sharing system had changed, according to the Works Council.

Pursuant to the Works Councils Act [Wet op de ondernemingsraden (WOR)], before taking a decision not to award any bonus under the All-share scheme, the Employer should have submitted its intended resolution to the Works Council for approval. Since the Employer had not done so, the Works Council considered the resolution to be invalid.

The Employer’s position

The Employer disputed the submission that the All-share scheme could be classified as a profit-sharing scheme within the meaning of the Works Councils Act, because the employees had not been granted a right to a share in the company profit. According to the Employer, there was no obligation to attribute part of the profit to this free share scheme. It was a discretionary power of the Employer/Parent Company whether to issue shares under the All-share scheme. Suspension of the scheme until further notice did not constitute a change or withdrawal within the meaning of the Works Councils Act, according to the Employer.

The Subdistrict Court’s assessment

The Subdistrict Court held that only if a positive result were attained would part of it be attributed to the All-share scheme in order to allocate “free” shares to the employees, or, in all countries outside the UK, to make a sum of money available to them free of charge. The Court held that the purpose or purport of the All-share scheme was to provide a scheme, independent of individual performance, whereby the employees would share in part of the profit to be determined every year. Thus, according to the Subdistrict Court, it was indeed a profit-sharing scheme within the meaning of the Works Councils Act.

The All-share scheme was intended to apply for several years, with the management deciding how much profit would be allocated. The fact that the Parent Company had cancelled the scheme (for the UK employees) did not mean that the Dutch Works Council had no right of consent. However, the decision not to make any payment for 2011 was not, however, subject to the Works Council’s consent, since the annual decision whether to allocate profit to the All-share scheme was itself not subject to that body’s consent. If, however, payment under the scheme was not made for two or three years, it would have been justified to assume that the scheme had been cancelled. According to the Subdistrict Court, the Works Council’s consent would be required in that case.

Conclusion

In a nutshell, this decision makes it clear that the annual decision whether to allocate profit to a profit-sharing scheme is not subject to the Works Council’s consent. However, the full cancellation of such a scheme does require its consent. In previous case law, however, a change to a profit-sharing scheme was indeed considered by law to be subject to the Works Council’s consent.

Tips

Given the foregoing, it is important to find out in good time whether a possible change to a profit-sharing scheme requires the Works Council’s consent, particularly if, as in the case outlined above, arrangements have previously been made with it.