Agreements on cost-cutting and job security signed at Volkswagen

In November 2004, after six rounds of negotiations and a number of warning strikes involving about 100,000 employees, the bargaining parties at Volkswagen (VW) signed a new package of agreements on pay and job security. The compromise, which ended the 2004 bargaining round at Germany's biggest car manufacturer, includes a number of concessions by the IG Metall trade union, in particular a pay freeze until 2007, in exchange for a company promise to safeguard employment until 2011 and make further investments to secure the future of German VW plants. It is estimated that the deal will save the company EUR 1 billion per year in labour costs.

On 3 November 2004, the German Metalworkers Union (Industriegewerkschaft Metall, IG Metall) and representatives of Volkswagen AG (VW) signed a new package of agreements on pay and job security. This compromise, which followed six rounds of negotiations and a number of warning strikes involving about 100,000 Volkswagen employees, ended the 2004 bargaining round at Germany's largest car manufacturer. It is estimated that the deal, which includes a pay freeze in exchange for a company promise to safeguard employment, will save the company EUR 1 billion a year in labour costs.

IG Metall had originally demanded a 4% wage increase and a long-term guarantee to safeguard employment. In response, the company threatened to relocate employment from Germany to other countries if an agreement was not reached that would lead to substantial savings in annual labour costs. Amongst other points, management demanded a substantial pay freeze and more working time flexibility. Volkswagen AG is one of the very few major companies in German metalworking that is not covered by branch-level collective bargaining, but negotiates its own company-level collective agreements.

Contents of the deal

The main points of the package of agreements concluded in November 2004 are set out below.

Pay agreement

There will be no pay increases for the 28-month duration of the new pay agreement (1 October 2004 to 31 January 2007). In March 2005, full-time employees will receive a lump-sum payment of EUR 1,000 (part-time employees are entitled to a partial payment proportional to their working time) as partial compensation for the lack of a pay increase in the previous 28 months. Apprentices will not receive this payment.

In a separate declaration, the VW board of directors announced that its members would also forgo any increase in their remuneration until 2007.

New bonus system

The bargaining parties agreed on a new bonus system that will come into force in 2005. The annual bonus will in future be related to the company's performance and will be negotiated every year between management and the company works council. It will be split into: an advance payment of EUR 1,191 (for full-time employees) to be made in November each year, which represents a minimum bonus to be paid regardless of company financial performance; and a second payment to be made in May of the following year, accounting for the difference between the advance payment and the finally agreed annual bonus.

The new guaranteed minimum payment of EUR 1,191 a year will be considerably lower than the current annual minimum bonus under the old bonus system, which amounts to more than EUR 2,000.

The first advance payment under the new agreement will be made in November 2005 (for the 2005 annual bonus) and the first May payment (if there is any) will be in May 2006.

New pay framework agreement

The bargaining parties agreed to negotiate a new pay framework agreement that will merge blue- and white-collar job categories into a single grading system. This system will apply to all employees who are employed before 31 December 2004.

Additionally there will be a new pay grading system for all employees and apprentices who enter employment with the company after 31 December 2004. The bargaining parties agreed that, compared with current levels, the future pay grades for new employees will be lowered - the exact level of pay is still to be negotiated, but it is assumed that it might well be between 10% and 20% below current wage levels.

The remuneration for new apprentices will also be cut. In exchange for this reduction, VW will provide 185 additional apprenticeship places at its subsidiary Autovision GmbH.

Working time flexibility

Existing individual working time accounts have been extended. The new maximum hours debit and credit is to be fixed at 400 hours (currently 200 hours) which allows for a 'time corridor' of 800 hours.

Overtime rates are paid if weekly working time exceeds 40 hours. If overtime is demanded from employees who have already saved 400 hours in their working time account, then the overtime rate has to be paid for every hour worked above 35 a week.

Up to 66 overtime hours a year can be saved up by employees in an individual long-time working time account, which is aimed at allowing employees to retire earlier. The company promises further to enable about 4,200 employees to take partial retirement (Altersteilzeit).

Safeguarding employment

In order to safeguard employment at the six German Volkswagen plants, the bargaining parties have concluded a 'collective agreement for the future' (Zukunftstarifvertrag). In this agreement, Volkswagen AG commits itself to safeguarding a level of 99,000 jobs plus the agreed number of apprenticeships at its German sites until 31 December 2011. In order to maintain this employment level, employees might be 'leased' to other companies within VW and within the whole Volkswagen group.

The company is also committed to making a number of investments at the six German sites in the forthcoming years. Details on these investments are laid down in separate works agreement s to be concluded, in parallel with the collective agreement, with the works councils concerned.

However, the 'collective agreement for the future' contains a 'revision clause'. In the event of considerable changes in economic development which may, according to the company, mean that it is no longer able to continue to honour the agreement, the bargaining parties must then enter into a consultation and mediation process. If this process does not lead to a new agreement, then the current agreement can be cancelled with three months' notice prior to 30 June or 31 December each year.

Reactions to the agreement

On 5 November 2004, the new package of agreements was accepted by the bargaining commission of IG Metall, with a majority of 93 to 15. The chief negotiator for IG Metall, Hartmut Meine, called the outcome a fair compromise, while the chair of both the company and group works council at VW, Klaus Volkert, stated that securing employment at Volkswagen also meant securing a perspective for the sites and the regions concerned. The chair of IG Metall, Jürgen Peters, also welcomed the outcome, but admitted that the union had made substantial concessions, such as accepting lower pay levels for future employees.

The chief negotiator for Volkswagen, Josef-Fidelis Senn, was quoted in the press as saying that the agreement would unite the safeguarding of employment with what he called an absolutely necessary reduction in costs.

The president of the Gesamtmetall metalworking employers’ association, Martin Kannegiesser, called the VW agreement an encouraging signal. He added, however, that the future economic performance of the company would ultimately decide on whether the six-year employment guarantee could be maintained. The agreement, he stated, could not serve as an example for small and medium-sized enterprises. The president of the Confederation of German Employers’ Associations (Bundesvereinigung der deutschen Arbeitgeberverbände, BDA), Dieter Hundt, also welcomed the outcome, stressing that the goal of VW to cut costs would be shared by other companies.

Representatives of other trade unions reacted cautiously to the outcome. The chief negotiator for the United Services Union (Vereinte Dienstleistungsgewerkschaft, ver.di), Jörg Wiedemuth, said to the press that his union did not intend to renounce demands for wage increases in the forthcoming bargaining rounds (for example in the public sector). He did, however, admit that the agreed pay freeze at VW would be an incentive for other employers to follow this example. The chair of the Trade Union of Food, Beverages, Tobacco, Hotel and Catering and Allied Workers (Gewerkschaft Nahrung-Genuss-Gaststätten, NGG), Franz-Josef Möllenberg, said that VW, with its pay levels above the average for the metalworking industry, was a special case and not comparable with the low-pay situation in the food and hotel and catering sectors.

Commentary

The VW agreement must be regarded against the background of similar recent agreements at Siemens (DE0407106F) and in particular at DaimlerChrysler (DE0408102N). Volkswagen, however, has always been a special case - not only as Germany's most prominent company negotiating its own specific collective agreements but also because of a distinct culture of co-determination influenced by the fact that the state of Lower Saxony still figures amongst VW's owners. It had been clear from the beginning of the negotiations that, confronted with the threat to relocate production to other countries, IG Metall would prioritise safeguarding the current employment level over pay increases. Nonetheless, the concessions have been considerable. In particular the acceptance of a future two-tier pay system is at odds with traditional trade union principles such as equal pay. In the long-run, the compromise will considerably lower the present pay levels at VW. On the other hand, as in the case of DaimlerChrysler, the trade union managed to obtain firm promises from management for future investments. Whether this agreement effectively secures employment at VW in the long run remains to be seen. It can be assumed, however, that VW’s competitors in Germany will follow suit and that VW will not be the last case where IG Metall is confronted with a demand for a wage freeze. (Heiner Dribbusch, Institute for Economic and Social Research, WSI)