Company rehabilitation agreement signed at Philipp Holzmann AG

In November 1999, it became public that Germany's second-largest construction group, Philipp Holzmann AG, had immense debts which put the company on the brink of insolvency. As part of a comprehensive rescue package, the Holzmann group works council has agreed on an employees' contribution to the costs of the company's reorganisation. An initial agreement between the group works council and the Holzmann executive board, however, was sharply criticised by both the IG BAU construction workers' trade union and the construction employers' associations for contravening collective agreements. In January 2000, IG BAU and Holzmann management finally signed a "company rehabilitation agreement", under which all employees would work five additional hours per week for a period of 18 months without extra payments. Whether or not this agreement will come into force remains unclear, since the construction employers' associations have so far not supported it.

On 14 November 1999, the German construction group Philipp Holzmann AG disclosed that it had amassed DEM 2.4 billion in potential losses from past property deals, putting it on the brink of insolvency. The insolvency of Germany's second-largest construction group would have threatened the jobs of about 16,000 Holzmann employees in Germany and another 11,000 in Holzmann's foreign subsidiaries. Taking into account another 40,000 employees working in supplier companies dependent on Holzmann orders, a total of up to 70,000 jobs was at stake in the event of possible bankruptcy.

After discussions with the main creditor banks on a rescue plan for Holzmann had failed, the German Chancellor, Gerhard Schröder, took a further initiative and finally convinced the banks to support a restructuring plan in order to avert insolvency. On 24 November 1999, all parties involved reached an agreement on a rescue package of DEM 4.3 billion including new state credits and loan securities of DEM 275 million. The latter, however, has still to be examined by the European Commission as to whether or not it meets the requirements of EU guidelines on state aid.

The agreed reorganisation plan for Holzmann aims at a rationalisation of the firm's overall structure and a focus on core business activities and units, including a reduction of about 3,500 Holzmann jobs in Germany. In addition, another 2,000 employees are planned to leave the Holzmann group as a result of the divestment of shareholdings. All German employees affected by the internal workforce reduction have been offered places in a "temporary employment and qualification company" (Beschäftigungsgesellschaft) where they can receive further training for a period of up to 12 months while receiving 80% of their former pay.

Employees' contribution to the restructuring plan

Under the threat of possible mass redundancies as a result of bankruptcy, the Holzmann group works council supported a significant employees' contribution to the rescue plan. During the negotiations with the creditor banks, the works councillors agreed on a package involving a 15% labour cost reduction, which was to be achieved by a 6% cut in remuneration and an unpaid working time extension from the collectively agreed 39-hour week to a 43-hour week.

On 2 December 1999, the Holzmann executive board and the group works council signed a "basic agreement" (Rahmenvereinbarung), according to which personnel expenses would be reduced by about DEM 245 million between 1 January 2000 and 30 June 2001. All companies within the Holzmann group should conclude their own company-level agreements in order to choose their preferred mixture of the following labour cost-cutting measures:

• unpaid working time extension of up to 17 hours per month;

• reduction of monthly wages and salaries, up to a maximum of 6%;

• reduction of performance-related payments;

• further flexibilisation of working time;

• reduction of Christmas bonuses and/or holiday bonuses;

• abolition and/or reduction of other company-related bonuses.

On the basis of this framework agreement, a first company-level agreement was signed between the management and the works council of the Holzmann AG on 10 December 1999 covering about 3,000 employees of the largest construction company within the Philipp Holzmann group. Under this agreement, the works council supported a 6% reduction of payments and an unpaid extension of 17 hours working time per month from 1 January 2000 for a period of 18 months. This would lead to a total employees' contribution of DEM 85 million to the reorganisation of Holzmann.

Furthermore, the agreement contained a provision that .if Holzmann were able to pay a dividend of more than 4% of the capital stock in 2002, the management and the works council would start negotiations on possible compensation for the employees' contribution to reorganisation. The president of the Holzmann works council, Jürgen Mahneke, therefore called the agreement an "employees' loan" to the company, which might be paid back after successful reorganisation.

Strong criticism from employers' associations and unions

The Holzmann agreement on the employees' contribution to the reorganisation received strong criticism from both employers' associations and trade unions in the construction industry. Both parties agreed that the Holzmann deal openly contravenes branch-level collective agreements, since article 19 of the current construction industry agreement explicitly states that "both collective bargaining parties commit themselves to conclude no agreements with other organisations or single employers which depart from the current collective agreement". Furthermore, the construction industry agreement states that if "one collective bargaining party concludes an agreement which diverges from collectively agreed standards, the other collective bargaining party has the right to demand that the diverging provision becomes part of the industry agreement."

In addition, the Holzmann deal was seen as a works agreement (Betriebsvereinbarung) which according to Article 77, Para 3 of the Works Constitution Act (Betriebsverfassungsgesetz) "shall not deal with remuneration and other conditions of employment that have been fixed, or are normally fixed, by collective agreement".

Criticism from employers' associations

The two employers' associations in the construction industry, the Hauptverband der Deutschen Bauindustrie (HDB) and the Zentralverband des Deutschen Baugewerbes (ZDB), firmly rejected the Holzmann deal on wage cuts and working time extensions because it would lead to a major distortion of competition in the construction industry. Since the Holzmann deal would lead to a competitive cost advantages of more than 15%, the reorganisation of the company might be at the expense of other construction companies. The jobs which might be safeguarded at Holzmann might be lost in other companies.

In order to refute such accusations, Holzmann management put a special clause into its agreement with the works council, according to which "Holzmann commits itself to make sure that the reduction of the personnel expenses will not be used for a basis for price calculation in a way that the market will be affected." The employers' associations, however, have replied that it is almost impossible to control such a declaration of intent. The scepticism of the employers' associations has been endorsed by the fact that Holzmann has long had the image of following a strong policy of "price dumping" in German construction. In the event that the Holzmann deal would come into force, the construction employers' associations threatened also to start negotiations on wage cuts and longer working time in other companies which would ultimately lead to the destruction of branch-level collective agreements in construction.

According to the construction employers' associations, the Holzmann crisis has shown that the "rigid structures of Germany's collective bargaining system have reached its limits." In order stop the creeping erosion of the German bargaining system, the construction employers have called for more flexibilisation and decentralisation of collective bargaining. As a first step, the employers have demanded the introduction of an "unconditional opening clause" (unkonditionierte Öffnungsklausel) into the west German construction industry agreement, as has already been agreed in the east German agreement. Against the background of a sharp economic downturn in the east German construction industry, since July 1997 collective agreements for east German construction companies have contained an opening clause on wages which, under certain circumstances, allows companies to reduce the collectively agreed wage by up to 10% (DE9707126N). In contrast to, for example, the "hardship clauses" in east German metalworking (DE9703205F), the opening clause in east German construction is relatively "unconditional", since it is not strictly linked to the prevention of a possible bankruptcy but could be used in a much broader manner.

The construction employers' associations have been supported by the Confederation of German Employers' Associations (Bundesvereinigung der deutschen Arbeitgeberverbände, BDA) which proposed introducing retroactively an opening clause in the construction industry agreement in order to enable a solution for Holzmann which would not contravene the collective agreement. Moreover, BDA used the Holzmann crisis to repeat its demand for a legal redefinition of the "favourability principle" (Günstigkeitsprinzip). In summer 1999, BDA had strongly criticised a ruling of the German Federal Labour Court (Bundesarbeitsgericht) according to which companies cannot refer to the "favourability principle" when they undermine collectively agreed standards in exchange for job security (DE9908214F).

Criticism from trade unions

Before the Holzmann deal was concluded, the German construction workers' union (IG Bauen-Agrar-Umwelt, IG BAU) declared that it would not sign any agreement which contravenes collective agreements, but that it would be ready to negotiate an employees' contribution to the Holzmann reorganisation plan which could be acceptable to the collective bargaining parties. After the announcement of the Holzmann deal, however, IG BAU accused the company of putting enormous pressure on the works council to sign the agreement without any consultation with the union. Since a legal expert commissioned by the union came to the conclusion that the Holzmann agreement had been illegal in many respects, IG BAU demanded that the construction company not implement the agreement - otherwise the union would have to take it to court.

In contrast, the Holzmann works council argued that a failure of the agreement on the employees' contribution could threaten the whole reorganisation, since it could be used by banks as an excuse for them possibly to opt out of the rescue plan. Initially, Holzmann management also rejected the criticism of its framework agreement. Later on, however, the management agreed to new negotiations with IG BAU, which finally started on 19 December 1999.

At the same time IG BAU sharply rejected the employers' demand for the introduction of a general opening clause into the west German construction industry agreement. The president of IG BAU, Klaus Wiesehügel, declared that the experience of opening clauses in east Germany had not been very positive, since they had decreased wage levels but were not at all able to prevent growing unemployment. Under the current economic conditions of growing overcapacities in the construction industry, the introduction of a general opening clause would necessarily lead to the final destruction of branch-level collective agreements.

New company rehabilitation agreement

On 21 January 2000, after five rounds of negotiations, Philipp Holzmann management and IG BAU reached a final agreement on the "financial contribution of the company's employees to the rehabilitation plan for the construction group." According to this "company rehabilitation agreement" (Sanierungstarifvertrag), all Holzmann employees will work five additional hours per week for a period of 18 months (from 1 January 2000 to 31 July 2001). The extra working time will not be paid, but every employee will bank this time in an individual working time account. In the event of successful reorganisation, when Holzmann is no longer in the red, the working time credit will be compensated in principle by extra leisure time and – in exceptional cases where this is not possible - by extra payments. The compensation should start at the earliest in mid-2002 and should be finalised at the latest in 2007. IG BAU has the right to name an independent accountant in order to examine the company's balance sheet. The agreement will be applicable to all employees at Philipp Holzmann with the exception of the executive staff, who have already promised to make their own contribution to the rehabilitation of the company. Holzmann management commits itself within the agreement not to use the employees' contribution for price reductions which would distort competition.

After the conclusion of the agreement, both parties expressed their satisfaction that they had finally been able to find a solution which conformed with existing collective agreements and was impeccable regarding competition policy. The draft of the agreement has been submitted to the construction industry employers' associations who now have also been asked to sign the new Holzmann deal. Against the background of article 19 of the construction industry agreement (see above), the rehabilitation agreement cannot come into force without consent of the employers' association.

In first statements, both employers' associations, ZDB and HDB, declared that they would not be ready to sign the agreement in the "current form", since it gives an exclusive competitive advantage to Holzmann against its competitors. HDB called for new negotiations with IG BAU in order to find a solution which guarantees equal treatment of all construction companies.

Commentary

The Holzmann crisis is a classic example of the fundamental problems of a branch-level collective bargaining system in times of high unemployment. A large company which is on the brink of insolvency enters into a period of reorganisation, aiming for overall cost reductions including significant cuts in labour costs. In order to safeguard their jobs, the employees are ready to accept all kind of social concessions irrespective of collectively agreed standards.

However, "contravening collective agreements for a good purpose" in this way does not fit in with the fundamental function of branch-level collective agreements, which is to take wages and working conditions out of competition. The latter is of particular importance in branches such as the construction industry which is often affected by ruinous price competition.

After the conclusion of the rehabilitation agreement, Holzmann might now be able to safeguard jobs as a result of employees' concessions. However, there is a strong fear among employers and employees in other construction companies that the Holzmann deal could succeed at their expense. The introduction of a general opening clause in the construction industry agreement, as proposed by the employers' associations, cannot be seen as a real solution to this dilemma, since it might even accelerate the erosion of branch-level agreements.

The trade unions are perhaps in the most difficult situation, since they have to walk a tightrope between helping the Holzmann employees on the one hand and representing the interests of all construction workers on the other hand. IG BAU has shown that it is not ready to accept a fundamental breach of the collective agreements, as was originally supported by the Holzmann employees' representatives, but the union has shouldered its responsibility by negotiating an acceptable compromise. (Thorsten Schulten, Institute for Economic and Social Research, WSI)