More on the Ramifications of Recent German Court Decision on an Employer's Code of Ethics

More on the Ramifications of Recent German Court Decision on an Employer's Code of Ethics


Somewhat wild press speculation following the recent decision of a German labor court concerning Wal-Mart's code of ethics led many companies to the conclusion that such codes may now be unlawful in Germany. In our email alert of July 18, 2005, prepared before the judgment of the Local Labor Court of Wuppertal was published, we suggested that this was not the point at issue in the case. The judgment, which is now publicly available, confirms our analysis.

As we suspected, the real issue in the case is the ability of an employer to implement a US-style code of ethics in Germany without first consulting with its works council--a process known as "co-determination". Under German law, all general rules governing the conduct of employees in the workplace (Ordnungsverhalten) must first be agreed upon by the works council. By contrast, employers are free to impose rules about work performance (Arbeitsverhalten) without prior consent by the works council.

The decision in the Wal-Mart case is something of a mixed bag for US employers. The court established that many typical provisions contained within US codes can be introduced without the consent of the works council. In Wal-Mart's case, these include code provisions on financial integrity and accounting, insider trading, confidentiality and trade secrets, supplier/customer relationships, antidiscrimination and the use of the employer's property. However, several other typical provisions need to receive the consent of a company's works council before they become binding on employees--such as code provisions on whistleblowing, anonymous telephone hotlines, acceptance of donations and gifts, press releases and statements to the media, sexual harassment, inappropriate behaviour and romantic relationships, access to employee files, and alcohol and drug abuse. In addition, US companies should be aware that some of these provisions--such as whistleblowing obligations and rules on private and romantic relationships with fellow workers, behavior outside the workplace or disclosure of family members' occupation and financial investments etc.--may infringe German employees' "personality rights" and therefore be unenforceable even if the works council consents.

The decision of the local German labor court is certainly open to question, and both parties to the Wal-Mart case have the right to appeal to the Labor Court of Appeals. Such an appeal could take six months or more to determine. In the meantime, companies wishing to introduce codes of ethics in their EU operations need to be highly attuned to local law and practice. For example, the French Data Protection Authority has also recently come out against the use of anonymous employee hotlines, although the UK Information Commissioner has taken a much more relaxed approach.

Codes of ethics are a fact of life for US companies after the Sarbanes-Oxley Act. The employment lawyers in our European offices have extensive experience advising on the implementation of these codes and can help companies steer a path through the minefield of regulation, identify those areas where prior consultation will be required, and develop negotiation strategies to try to secure works council consent where needed.