75 years of the Works Councils Act: the development of the works council

A historic view: from meeting rooms to the courtroom

When the WCA was introduced in 1950, the works council started as a ‘mere’ institutionalised sounding board chaired by the director himself, under the guise of cooperation towards the ‘mutual interest in the proper functioning of the working community’. However, the WCA already contained a number of important aspects that are still relevant today: the works council had a right to be consulted, a right to put forward proposals for certain measures that contribute towards the improvement of technical and economic affairs within the company, and a right to be informed of the general course of affairs within the company.

Over time, it became increasingly clear that the interests of the works council and the company did not always align. This led to a number of legislative changes. In 1971, it was established that the works council represented both the interests of the employees within the company as well as the interests of the company itself and a right to be consulted on certain socio-economic decisions was introduced (which we still see today in the WCA). In 1979, a full-fledged legal framework for co-determination was put in place: directors were no longer part of the works council and entrepreneurs were required to seek advice or consent for important decisions. It soon became clear that this was no empty suit.

Why employee co-determination matters

An important ruling in 1980 (the Linge Hospital ruling, NJ 1981, 271) made it clear that if you, as an entrepreneur, make a decision without consulting the works council in good time, you not only run the risk of being overruled by the court, but you also miss out on valuable input from a different perspective. The ruling made clear that employee co-determination had to be taken seriously. These considerations were reiterated in similar fashion in the Estro ruling of 2023 (JOR 2023/207), in which the Enterprise Chamber considered that employee co-determination provides the opportunity for feedback and reflection, which may benefit the company. Employee co-determination could therefore lead to improved decision-making which can count on broader support within the company.

The right to render advice: substantial influence and timely involvement of the works council

Two of the most important aspects of the WCA concern the right to render advice (under Section 25 of the WCA) and the right of consent (under Section 27 of the WCA). Initially (in 1950), the right to render advice was limited to measures that could contribute to improving the technical and economic affairs of the company. Gradually, the right to render advice was expanded, first to include measures that could significantly influence labour, working conditions and employment terms within the company (1971), and then to include the transfer of control over another company (1979). 

At first glance, the WCA appears to have a straightforward system for the right to render advice. If an entrepreneur intends to make a decision that falls within one of the categories listed in Section 25 of the WCA, the entrepreneur must submit this intention in writing to the works council before such decision can be made. This must be done at such a time that the works council’s advice can have a substantial influence on the decision to be taken.

Although the right to render advice seems simple, it is a lot more complicated in practice. Over the years, businesses and organisations have become larger and more international, which means that decisions within such business and organisations are becoming increasingly complex and are taken across multiple layers (or even in multiple countries). It is therefore becoming increasingly difficult to determine exactly how and when to involve the works council in the decision-making process. It shouldn’t then come as a surprise that most disputes involving works councils relate to the right to render advice. Case law shows that two aspects are particularly important: the substantial influence and the timely involvement of the works council.

The WCA stipulates that advice must be sought at a time when it can still have a substantial influence on the decision to be made. Case law shows that the interpretation of the term 'substantial influence' is highly case-specific, but certain guidelines can be distilled. For example, it is generally accepted that a works council can no longer have a substantial influence on the proposed decision if there is no longer any room to consider alternatives proposed by the works council or if an entrepreneur makes a final decision before the works council is able to render its advice (for example, because the entrepreneur considers that it is taking too long).

With regard to the timely involvement of the works council, it follows from case law that it is important that the entrepreneur does not make any irreversible decisions. Specifically with regard to the sale or purchase of companies, there is a debate among legal experts as to a decision to sell / purchase a company is irreversible parties have signed a 'letter of intent' (e.g., a 'memorandum of understanding' or a 'signing protocol'), only after which the works council is asked for advice (partly as a result of the Uniface ruling in 2017, TRA 2017/103). Despite this debate, letters of intent are frequently used in practice (and often are accepted by works councils).

The works council's right to consent: to consent or not to consent?

Next to the right to render advice, there is the works council’s right of consent under Section 27 of the WCA. While the first WCA in 1950 did not yet include such a right to consent, the works council did have a right to render advice on certain topics that would later fall under scope of the right to consent, such as determining holiday periods, working schedules, shift work and meal breaks. The right to consent was eventually formally included in the WCA in 1971, giving the works council consent rights with regard to employment regulations, pensions, profit-sharing schemes, working time or holiday arrangements and measures relating to health and safety within the company. Over time, more topics were covered by the right to consent until it reached the list now included in Section 27 of the WCA.

Just like the right to render advice, the WCA’s system of the right to consent is more complicated in practice than the law suggests. Over the years, numerous proceedings have been conducted with regard to the right to consent, concerning the question of when exactly a decision requires the works council’s consent. The Supreme Court has issued two rulings regarding this topic that are still relevant today:

• In 1987, the Supreme Court ruled in the AMRO decision that the nature and scope of a particular regulation must be considered in order to determine whether it falls under one of the topics mentioned in Section 27 of the WCA (NJ 1988, 93);
   
• In 2002, the Supreme Court added in the Holland Casino ruling that if it is unclear whether a particular regulation falls within the scope of Section 27 of the WCA, the entrepreneur's motives for and the purpose of the proposed regulation are decisive (NJ 2003, 141). If the purpose of the regulation is to regulate one of the topics mentioned in Section 27 of the WCA, the regulation falls within the scope of the right to consent, and vice versa.

Despite these rulings, it may still be difficult to determine whether the works council has a right to consent. The topics listed in Section 27 of the WCA relate to or affect employment terms and conditions. At the same time, Section 27 of the WCA stipulates that a works council has no say in so-called 'primary employment terms and conditions', such as salary levels or number of holidays. This is an ongoing discussion in case law.

The 'tailor-made' works council: the introduction of the works council covenant

Initially, in 1950, the works council was seen as a kind of sounding board. With the various legislative changes that followed, the works council's influence on decision-making within the organisation grew. In practice, this meant that entrepreneurs and works councils increasingly made agreements on how consultation processes should be structured. This also lead to agreements on whether certain decisions or regulations should be submitted to the works council (for advice or consent).

This practice eventually found its way into the WCA. In 1998, the possibility of concluding a so-called works council covenant was adopted in Section 32  of the WCA. The WCA provided for a number of 'basic provisions' for employee co-determination, but the works council covenant allowed entrepreneurs and works councils to flesh out those basic provisions in order to ensure that employee co-determination could work efficiently. In the words of the Dutch legislator, employee co-determination could be 'tailor-made' (Parliamentary Papers II 1995/96, 24615, no. 3, p. 25).

The works council covenant also ensures that the works council has a stronger legal position, since the works council could enforce compliance with the covenant before the courts, either via the appeals procedure of Section 26 of the WCA (where it relates to the right to render advice) or via the general procedure of Section 36(2) of the WCA. In short, the works council covenant offers some important advantages.

Group structures: employee co-determination does not end within the legal entity

In more recent times, another important development has taken place in employee co-determination. As mentioned, companies have become increasingly larger and more international, and companies make more use of group structures. This means that employee co-determination no longer takes place within a single legal entity, within the same enterprise or even within the same national borders. This can conflict with the terminology used in the WCA, which aims to regulate employee co-determination within the 'enterprise'. How should decisions at shareholder level be dealt with within the organisation?

In practice (and case law), this has led to the development of the concepts of attribution and co-entrepreneurship. Attribution means that the decision of another enterprise is attributed to the enterprise in which the works council has been established. This gives a works council co-determination rights vis-à-vis its own entrepreneur. The concept of 'attribution' was introduced in employee co-determination in the Howson Algraphy ruling of 1984 (NJ 1985/212), although the Enterprise Chamber was initially cautious to assume attribution. Attribution was linked to corporate law decision-making: decisions can only be taken by the corporate law body that is authorised to do so. This means that no attribution could take place if no decision was made a an authorised corporate body. Gradually, this starting point was let go. For example, in the Shell Research ruling of 1987, the Enterprise Chamber ruled that decisions made by a parent company can be attributed to a subsidiary if the subsidiary is actually involved (‘substantial contribution') in the decision-making process of the parent company (NJ 1988, 382). An actual decision by the subsidiary was therefore no longer required. In the PUEM ruling of 1989, the Enterprise Chamber went even further in ruling that corporate law decision-making no longer decisive (NJ 1990, 734). In the years that followed, the criteria for attribution were further clarified and attribution is now assumed if (i) the decision made at a higher level directly affects the company for which the works council was established, and (ii) the entrepreneur at which the works council is established was involved in the decision-making process.

The concept of 'co-entrepreneurship' provides for an even further extension of co-determination rights than the concept of 'attribution'. Whereas with attribution the works council only has rights vis-à-vis its 'own' entrepreneur, the works council can exercise its participation rights vis-à-vis 'another' entrepreneur (e.g. the parent company itself) in the case of co-entrepreneurship. The concept of co-entrepreneurship was first mentioned in the Heuga ruling of 1994 (albeit referred to as ‘unification’, see NJ 1994, 545). In this ruling, the Supreme Court ruled that a parent company and a subsidiary should be regarded as 'co-entrepreneurs' with regard to a decision to terminate a voluntarily applied (mitigated) large company regime. In this case, the parent company was both the 100% shareholder and the (sole) statutory director of the subsidiary. In 2000, the criteria to assume co-entrepreneurship was further clarified in the Grenscorrecties Den Haag ruling (JAR 2000/30) by requiring a 'systematic influence' of the parent company on the day-to-day affairs of the subsidiary. Co-entrepreneurship therefore only applies if (i) the nature and scope of the proposed decision directly affect the enterprise for which the works council has been established, and (ii) the parent company exercises – or is able to exercise – such systematic influence on the day-to-day affairs of the subsidiary that it is deemed to also be (jointly) upholding the subsidiary.

Although attribution or co-entrepreneurship is not easily assumed, it has become clear that the works council cannot simply be ignored, even if decisions are made at a different level (or even in a different country) within a group. For more information on employee co-determination in national or international groups, please read our previous blog.

75 years of WCA: old, but certainly not forgotten!

A lot has changed in the 75-year tenure of the WCA. Whereas the works council started out as a 'simple' sounding board, it is now an indispensable part of any large organisation. The works council plays an important role in corporate governance and its involvement can contribute to better decision-making. Although the WCA has been in place for 75 years, employee co-determination continues to evolve.

Do you have any questions about this topic or any other issue relating to works councils? As specialists in the field of employee co-determination, we are happy to assist you with:

• Guiding consultation processes (both advice and consent);
• Strategic consultation with the works council or directors;
• Conflict mediation or legal proceedings;
• Drafting regulations and/or covenants;
• Training and legal support for works council members.

Please feel free to contact one of the specialists from our Employment Law team. You can also subscribe to our newsletter to stay informed of all developments in this area.