There is no right to employee representation at board level in UK companies and, other than in a tiny handful of companies, it does not exist in practice. The government produced a consultative document on the proposed legislation but there were few responses and no wider public debate.
There is no right to employee representation at board level in UK companies, and although there is nothing to prevent companies choosing to have employee representatives on boards, there are only a tiny handful of cases where this has occurred. These are companies which have substantial employee shareholdings, or companies fully-owned by municipalities – for example, some bus companies. The basic principle behind UK company law is that companies are operated for the benefit of shareholders and this leaves little room for employee involvement at board level.
The UK government published a single consultative document covering both the directive on employee involvement and the European company Regulation in October 2003. This emphasised that setting up as a European Company or SE “will be entirely voluntary”. The government indicated that it wanted to give “maximum flexibility in the way in which SEs are structured” and that it wanted to make as few changes as possible to the existing rules. There were only 22 responses to this consultation exercise, mostly from professional bodies, although the main employers’ body, the CBI, and the TUC union confederation both responded. There was, however, no formal separate consultation with unions and employers.
The implementation was achieved through a form of legislation, a Statutory Instrument, which does not require a parliamentary debate, and there was none. There was also almost no wider debate, as the issue was seen as being of little concern to the UK.
Directive was transposed by law in September 2004, a month before the October 2004 deadline.
The directive was implemented through regulations which were drawn up on 6 September 2004, laid before parliament on 13 September 2004, and which came into effect on 8 October 2004. The official title of the legislation is Statutory Instrument 2004 No. 2326 – The European Public Limited-Liability Company Regulations 2004. These regulations implement the directive in Great Britain. There are separate regulations which implement the directive in Northern Ireland. These are based on the regulations for Great Britain but have different enforcement bodies.
The same regulations also included the changes necessary to adapt UK company legislation to the Regulation on European companies.
Special negotiating body (SNB)
UK SNB members for a European company are elected by the employees, unless there is an existing consultative committee representing all employees.
SNB members from the UK are elected by employees unless there is an existing “consultative committee”, which meets certain conditions. These are that it represents all employees, that its normal functions include information and consultation, that it consists entirely of employees in the companies concerned and that it can carry out its functions without interference from management (regulations 23 and 25). If there is such a consultative committee, it can appoint the UK SNB members. In practice, most companies will not have a consultative committee which meets all these conditions – in particular one which represents all employees – and the SNB members will be elected.
If there is an election, it is the responsibility of company management to arrange it, although the company must appoint one or more independent ballot supervisors to supervise its conduct. Management should also, as far as reasonably practicable, consult with UK employees’ representatives on the conduct of the ballot and, as far as reasonably possible, let all employees know of the balloting arrangements. The legislation does not contain any rules on who can nominate candidates. Employees can bring complaints about the ballot to an independent body, the CAC, which has the power to make management modify its arrangements (regulation 23).
External union representatives from the UK can be members of the SNB but only if management agrees.
An external union representative from the UK can be a member of the SNB, but only “if the management of that participating company so permits”. This is the situation whether the SNB members are elected or appointed by the consultative committee (regulations 23 and 25).
Funding is limited to a single expert.
The UK legislation states that the companies involved should pay “any reasonable expenses” for the functioning of the SNB and negotiations with it. However, it makes it clear that, where the SNB is assisted by more than one expert, the company is not required to pay the expenses “of more than one” (regulation 29).
Standard rules under the fallback procedure
The legislation leaves the choice of members of the SE representative body to the SNB. There are no specific provisions for UK members.
The legislation does not lay down any detailed rules on the choice of members of the representative body – the phrase used in the regulations. It states only that “members of the representative body shall be elected or appointed by members of the special negotiating body, and the election or appointment shall be carried out by whatever method the special negotiating body decides” (Schedule 3 Part 1). There are no specific national arrangements for representative body members coming from the UK.
The funding of the representative body should enable it to perform its duties in an appropriate manner. But the funding is limited to a single expert.
The UK legislation states that the costs for the representative body should be borne by the SE and should be enough to enable it to perform its duties “in an appropriate manner”. This specifically includes the cost of organising meetings, interpretation, accommodation and travelling. However, the company is only obliged to pay the expenses of a single expert (Schedule 3 Part 2).
The legislation leaves the choice of employee representatives at board level to the SE representative body. There are no specific provisions for UK members.
The legislation does not lay down any detailed rules on the choice of employee board-level representatives. It leaves it entirely to the representative body, which “shall have the right to elect, appoint, recommend or oppose the appointment” of members of the board representing employees (Schedule 3 Part 3). There are no specific national arrangements for representative body members coming from the UK.
Misuse of procedures and structural change
Employee representatives can complain to an independent body if they consider that the company is misusing the European company procedures to deprive employees of their rights to be involved. The burden of proof is on the company in the first year. This independent body can require the company to take appropriate action to remedy the situation.
The legislation provides for an employee representative, or, if there is no representative, an employee to complain to an independent body, the CAC, if he or she believes that a company is misusing an SE to deprive employees of their rights to employee involvement or to withhold rights from them. Where the complaint is made before the SE has been registered, or in the first year after it has been set up, the burden of proof is on the company that it did not misuse or intend to misuse the procedures. The CAC can require the company to take appropriate action to ensure that employees are not being deprived of their rights or having their rights withheld (regulation 35).
There is no requirement in the UK legislation to renegotiate the agreement if there has been structural change, although this could occur where the procedures have been misused to deprive employees of their rights.
The legislation does not include a requirement to renegotiate the agreement if there have been major structural changes. In the consultative document, the government specifically stated that it favoured a voluntary approach on this issue. Changes which the CAC, an independent body, finds are designed to remove or curtail employees’ rights to be involved are not permitted, and the CAC could order a renegotiation (see section on misuse of procedures). But in other circumstances there is no requirement for the agreement to be renegotiated.
Both unions and employers responded to the government consultation, although neither group saw the issue as being of major concern. While employers were anxious to limit the impact of the employee involvement rules, the unions were concerned about the lack of facilities for employee representatives, the limits on union involvement, and the low level of penalties.
The main employers’ body, the CBI, and the TUC union confederation both submitted responses to the government consultation document.
The CBI had initially been opposed to the directive, because of the involvement of employees at board level. However, it welcomed the fact that the government had avoided adding additional requirements in implementing it. It expressed the hope that the SE model of employee involvement would not be used as a precedent for future EU legislation, and it opposed the decision to leave the enforcement of the employee involvement aspects of the legislation in the hands of the CAC.
The TUC’s main concerns on the directive were management’s veto over the choice of external union representatives as SNB members, the need for members of the SNB to have adequate time off and facilities and the low level of penalties on companies which fail to follow its provisions – this is capped at £75,000 (about €100,000). In contrast to the CBI, the TUC is supportive of the idea of greater employee involvement at board level and expressed the hope that, if SEs become more widespread, this might over time reduce the opposition of UK employers to greater employee involvement.
However, the issue was not of great concern for either the employers or the unions.
L. Fulton (2008) Anchoring the European Company in National Law - Country Overviews (online publication, prepared for worker-participation.eu)
Lionel Fulton (Labour Research Department)
Regulations to implement the European Company Statute in Great Britain were laid before Parliament on 13 September. They come into effect on 8 October 2004. The European Public Limited-Liability Company Regulations 2004 set out which of the various Member State options in the EU Regulation Britain has adopted. The Regulations also prescribe the documentation that will need to be filed at Companies House (the official institution with which companies must deposit information for public inspection) in order that a European Company can be registered. They also implement the EU Directive. The Regulations are little changed from the original proposals put forward by the government in October 2003. Their main aim is to implement the EU legislation, while making the fewest possible changes to the current UK situation.
In the press release announcing that the Regulations have been laid the Department of Trade and Industry (DTI), the sponsoring department, makes clear that the use of the new form of company "will be entirely voluntary". The release also indicates, why, in the view of the DTI a company might choose this form. It states:
"a GB company wishing to take over a company from another Member State, or wishing to establish a joint venture with a company in another Member State, might find it easier to reach agreement with the overseas company if it decided to form a joint holding company or joint subsidiary in the form of an SE.
A GB public company wishing to operate in several Member States simultaneously might consider that there were presentational advantages in adopting the SE status and form."
Explanatory document prepared by the DTI (pdf, 133 KB)
Lionel Fulton (Labour Research Department)
The UK is relatively well advanced in transposing the directive and making the necessary changes to domestic company law to allow the regulation to take effect. The official period of consultation on the issue is now over. The government’s aim is to give companies maximum flexibility and make as few changes as possible to existing company legislation, while limiting the employee participation provisions to those set out in the directive.
Responses from the employers and the unions suggest only limited changes to the government’s plans and final legislation, probably little changed from the initial proposals, is expected by summer 2004. The main question is how many companies will decide to make use of it. So far there is no evidence that the number of European Companies in the UK will be large.
The UK government produced a consultative document setting out its proposals on how the European Company Statute legislation should apply to the UK on 6 October 2003 (Implementation of the European Company Statute - the European Public Limited Liability Company Regulations 2004 – A Consultative Document). The consultation closed on 9 January 2004 with around a dozen organisations submitting comments. The government states that it hopes to publish its response and the final text of the implementing legislation before the summer. As elsewhere in the EU the regulation will come into force on 8 October 2004 and the directive should be incorporated into national law by the same date.
There is no intention that the domestic legislation necessary to introduce the European Company Statute should be the subject of negotiations between the unions and employers’ associations. Indeed such an intention would be entirely foreign to UK national practice, where collective agreements are not legally binding.
The contents of the proposed legislation
The bulk of the consultative document sets out the requirements of the regulation and the directive. However, it also indicates how the British government proposes to introduce them into UK law. The general aim on company law aspects is to give companies maximum flexibility and to make as few changes as possible to existing company law, while on employee participation the approach has been to follow the terms of the directive but do no more.
The government also makes it clear that it does not intend to make use of the effective opt-out from the European Company process contained in Article 7, paragraph 3 of the directive.
The government’s aim of making as few changes as possible to existing company law is indicated by its approach to the setting up two-tier boards. Despite the fact that the UK is generally taken to have a single-tier system, the British government believes that is no need to change the law to allow a two-tier management structure in the UK. It considers that there is no legal bar to companies setting up a two-tier structure if they wish to. In the view of the government, they only need to change their articles of association, the rules that they themselves agree.
The decision to allow a two-tier structure to be introduced through changes to a company’s own rules is in line with the UK government’s general approach of leaving as much as possible to companies themselves to determine. As the consultation document states the legislative framework should “provide for maximum flexibility in the way in which SEs are structured”.
Three examples make this clear.
The first deals with authorisation. In a two-tier SE structure the regulation provides that an SE's statutes should list the categories of transactions which require authorisation by the supervisory board. But it allows member states to influence how this works, either by permitting the supervisory board to decide which issues must be referred to it, or by the government itself listing the categories to be included in the statutes.
However, in SEs based in the UK there this will not occur. As the consultative document states: “It is not proposed that either of these options be adopted, as it is appropriate that the competence of the two organs to take decisions should be a matter for the company’s constitution as set out in its statutes”.
The second example deals with information, where the consultative document rejects the option that allows member states to give rights to each individual member of the supervisory board to require information necessary to carry out his or her duties. The document argues that this option is not necessary, that the supervisory board should take this decision collectively and that “provision could be made where appropriate, in the statutes”.
Finally on the size of the boards, supervisory, management or single-tier, the British government does not intend to move away from the current situation which gives almost a free rein to companies. (The exception is an SE with employee participation on a single-tier board, where the document accepts that the regulation requires that, the board must have at least three members.) Otherwise the current rules apply, which mean that the only requirement in terms of size will be that an SE should have at least two directors. In a two-tier board structure an SE could be set up where each board had only one member.
On the directive covering employee participation, the basic approach is to reproduce the what has been already agreed at EU level. However, the UK government has to decide on a number of practical issues to take account of the specifics of the UK’s industrial relations system.
On the formation of the SNB, the government favours election by employees or, where such a body exists, appointment by a representative body, described as a “consultative committee”. To be able to choose the SNB members the consultative committee must, in the words of the draft regulations, be a body,
- “whose normal functions include or comprise the carrying out of an information and consultation function;
- which is able to carry out its information and consultation function without interference from the management of the participating company;
- which, in carrying out its information and consultation function, represents all the employees of the participating company; and
- which consists wholly of persons who are employees of the participating company, its concerned subsidiaries or establishments.”
This arrangement is broadly similar to the arrangement for the selection of UK members of the SNB of European Works Councils. However, there is a significant difference on the question of elections. While the SE proposals simply say that the consultative committee must be made up of employees, the EWC legislation in the UK says that the consultative committee must consist “wholly of persons who were elected by a ballot (which may have consisted of a number of separate ballots) in which all the employees who, at the time, were UK employees were entitled to vote”. In other words the absolute requirement to have been elected is not present in the SE proposals.
On membership of the SNB, the draft regulations specifically propose that, as well as employees, full-time trade union officials will be entitled to be members, although this is subject to management agreement. The wording is “if the management of that participating company so permits”.
On experts, the draft regulations state that the SNB may be assisted by “experts of its choice” but that the company is only required to pay expenses for one expert.
On confidentiality, the draft regulations require those who are given material in confidence to keep it confidential. The employer could bring an action in the civil courts where he or she considered that confidential information had been disclosed. However, it is possible to ask the Central Arbitration Committee (CAC), the government appointed body that currently deals with issues like union recognition and information disclosure, to rule on whether this requirement is justified. If the CAC is satisfied that disclosure would not “prejudice or cause serious harm” to the company, it can allow it to be disclosed.
On renegotiations following significant changes to the SE after it has been set up, the government, while recognising that it could “specify the conditions under which employee involvement agreements must be renegotiated”, intends not to do so. It prefers a voluntary approach, in which the initial agreement itself specifies what should happen where there are significant changes after an SE has been set up and “what those significant changes may be”.
On compliance and enforcement, the draft regulations state that the CAC is the body to which complaints should be taken. The maximum penalty that can be imposed on companies which fail to comply with the rulings of the CAC is £75,000 (approximately €110,000), imposed by a higher court, the Employment Appeals Tribunal.
Responses from unions and employers
Both the TUC, the British union confederation and the CBI, the main employers association have responded to the consultation, although the CBI’s response was a letter rather than a formal document.
The main TUC concern is with the minimalist approach taken by the government in the planned changes to existing company law to accommodate a two-tier board structure. The TUC response states that the lack of specific provisions for a two-tier system “may … deter UK companies from becoming SEs” and that “this could put UK companies at a disadvantage in relation to their European competitors, who may find it more straightforward to set up as an SE”. In particular the TUC is concerned about the failure of the directive to be more prescriptive on the rights of supervisory boards, on the numbers of members of such boards, and on rights of individual supervisory board members to receive information.
In other areas the TUC is concerned about: the ability of employers to block the selection of a trade union official as a member of the Special Negotiating Body; the need for SNB members to have adequate resources; the limited penalties proposed in the draft regulations; and the failure of the draft regulations to require consultation with employee representatives before a company could convert into an SE.
The bulk of the CBI’s more limited comments are taken up with the concern that the employee participation rules proposed for SEs could be taken up in EU proposals on cross-border mergers and the transfer of company seats [head offices]. The CBI considers that these rules are “extremely onerous and overly complicated”.
The CBI reminds that government that it was “initially opposed to the adoption of the ECS”, but it points out that the measure is voluntary and it welcomes the government’s “avoidance of goldplating [adding additional requirements] in implementation of the directive”.
The CBI is also unhappy that enforcement of the employee involvement aspects of the legislation is left to the CAC. It would prefer enforcement in the first instance to be in the hands of Employment Tribunals.
The next steps
The government hopes to publish its response and final legislation by the summer, in good time for implementation on 8 October. After that the crucial question is how many companies will choose to make use of the legislation.
The CBI believes that the employee involvement rules will make setting up an SE “profoundly unattractive” for UK companies. The government too appears to consider that the numbers of UK companies setting up as SEs are likely to be “very small”. This is because of a lack of tax advantages and the future availability of other mechanisms for achieving a similar result, such as cross-border mergers and the transfer of seats. Peter Reid an HR consultant writing in the People Management, produced by the main UK HR body, the CIPD, backs this view. He said in February 2004 “a European company involving UK employees seems far off”.
It remains to be seen whether this forecast proves to be correct. The one thing that is clear is that so far no UK company has been identified as wishing to set up an SE.