Germany: Employer Must Pay Compensation for Setting Bonus Targets Unilaterally that Should Primarily have been Subject to Agreement of the Employee

The employee in the case at hand was employed as Director of Development in the Ships division since mid-March 2020. His renumeration consisted of a basic annual salary and a performance-related variable remuneration (bonus). The employment contract stated that the targets required to earn the bonus were to be agreed upon each year by both the employee and the employer. If no targets were agreed, the employer had the right to set the goals unilaterally.

In June 2020, the employee requested that the employer enters into negotiations with him on these targets. The employee considered the employer’s proposal unreasonable, while the employer did not accept the employee’s proposals. As a result, they were unable to reach a mutual agreement on the targets for the performance-related bonus. At the end of August 2020, the employer unilaterally notified the employee of the targets set.

The employment relationship ended with the employee’s termination at the end of 2020. The employer did not pay out a bonus. The employee later claimed payment of the bonus arguing that the employer was not entitled to set the targets unilaterally.

 

Key Issues

The Federal Labour Court ruled that the employee has a claim for damages against the employer due to lost performance-related variable remuneration resulting from the lack of a target agreement. The employer had breached his duty to conclude a target agreement with the employee. He was not allowed to set the target unilaterally. The relevant provision in the employment contract allowing the employer to unilaterally set targets if no targets are agreed was deemed invalid because it unfairly disadvantages the employee.

The Federal Labour Court found that an employer is, in principle, entitled to unilaterally set targets that the employee must meet in order to receive a performance-related variable remuneration. However, once the employer has contractually committed to entering into a target agreement, it can regularly only fulfil this contractual obligation if it enters into negotiations with the employee regarding the conclusion of a target agreement and allows the employee to influence the setting of the targets. The Court found that the employer had breached this obligation in the present case.

The clause allowing the employer to unilaterally set the targets if they are not agreed was considered invalid as it enabled the employer to undermine the contractually agreed order of priority of target agreement and target setting. The employer could have broken off negotiations on targets for no reason and then, used the clause whereas targets can be set unilaterally if they are not agreed to circumvent the employee’s influence on the target setting process. This creates inappropriate pressure for the employee in advance to accept the employer’s proposals for a target agreement even if his own ideas deviate from them. In light of this, the clause on unilateral target setting was found invalid with the consequence that the case law on omitted target agreements was to be applied. In the case at hand, the Court found that the employer had culpably violated the contractual obligation of negotiating a target agreement and awarded damages in the amount of the bonus the employee would have earned upon target achievement, subtracting a contributory fault on the part of the employee rated at 10%.

Practical Point

• Employers should be careful to use bonus clauses requiring a target agreement with the employee as the courts set very high requirements for employers to fulfil their negotiation obligation. If such clauses are used, it is advisable for the employer to take the initiative for the negotiations and to document the course of the negotiations. Clauses alternatively allowing the unilateral setting of targets if negotiations fail must be carefully worded and must exclude the possibility that the employer can simply break off negotiations without justification.
• It is generally permissible to stipulate in the employment contract that bonus targets are always set unilaterally, i.e. no target agreement is necessary. In this case, the concrete target setting can be challenged by the employee in court, which then reviews whether reasonable discretion was observed.