Germany: Newest Case Law Stipulates Assumption that Employees Would Have Reached Targets the Employer Failed to Set for an Agreed Variable Remuneration, Increasing the Risk of Damage Claims

Target agreements and settings for variable remuneration are aimed to motivate employees. According to case law, failure of the employer to set targets or setting a target too late can result in compensation claims of the affected employees (cf. our article in the Employment Law Tracker published in May 2024).

 

Background

In the present case, a bonus program was introduced by the employer, which depended on the employee achieving individual targets that were negotiated at the beginning of the year and on the company achieving certain “business targets.” A corresponding reference was included in the individual contracts of the employees participating in the bonus program.

 

For the year 2021, the employer only published the business targets at the end of October 2021, although the targets had already been set internally in March 2021. When it came to the bonus payment for 2021, the bonus was only paid according to the achievement of individual targets. In response, an employee claimed compensation for the employer’s failure to set business targets in time for her to contribute to and thus help achieve them to earn the relevant bonus.

 

Key Issues

The Higher Labour Court of Nuremberg agreed with the employee and found the employer to be in breach of the employment contract. Given the motivational aspect of a bonus system, a target can only serve this purpose if it is set early enough for employees to be able to achieve it. As the targets for 2021 were not published until the end of October of the same year, it was impossible for the employees to contribute properly to achieving them in the remaining months. Thus, the court found that the targets published too late are to be treated as if they had not been set at all (this case law corresponds to a decision of the Higher Labour Court of Cologne, explained in the Employment Law Tracker published in May 2024, “Germany: Compensation Claims of Employees if Targets for Variable Remuneration are Set Too Late.)”

The court further found that the employer was at fault, especially as the business target had already been set internally in March 2021, with no valid reason for the delay until the targets were published in October.

As a result, the employee was found to be entitled to compensation equivalent to 100% of the total bonus, as in principle it is generally assumed that an employee would have achieved the targets set. The employer did not provide any evidence of special circumstances that could have contradicted this assumption.

Practical Point

• If a bonus program based on targets set by the employer is contractually agreed upon, the targets must be set early enough for employees to be able to achieve them. The same applies if the targets are to be agreed upon with the employee. In this constellation, employers must ensure to take initiative in due time to agree such targets.
• If targets are not set at all, this gives rise to compensation claims. The same applies if targets are set too late and thus have to be treated as if they had not been set at all. It is not entirely clear yet how much delay may still be acceptable, but current case law establishes that at least a target setting in Q4 of the relevant bonus year is too late.
• The scope of the compensation is based on the presumption that an employee would have achieved a target if it had been set, i.e., the bonus is due at 100% target achievement. The burden of proof is on the employer to provide special circumstances that may rebut this presumption.