Germany: Compensation Claims of Employees if Targets for Variable Remuneration are Set too Late

The Federal Labour Court has confirmed a previous ruling of the Cologne Higher Labour Court (on which we reported in the March 2024 Employment Law Tracker). According to the Federal Labour Court, if the employer culpably breaches its obligation under the employment contract to set the employee targets for a variable remuneration in good time for a target period, this generally entitles the employee to claim damages in accordance with Sections 280 (1), (3), 283 of the German Civil Code if a subsequent target setting can no longer fulfil its motivational and incentive function.

 

Background

The plaintiff was employed by the defendant in a management position until November 2019. Part of his remuneration was variable, tied to targets to be set by the company annually. According to the applicable company agreement, targets were to be set by March 1st each year, with 70% of the variable remuneration to be based on company goals and 30% on individual goals. However, the defendant did not set any individual targets for the plaintiff in the year 2019 and only provided company targets in October 2019, after three quarters of the relevant target period had already passed. The plaintiff argued that, had the targets been set on time and appropriately, he would have achieved the targets and was therefore entitled to additional compensation according to such target achievement.

The defendant contended that the targets were set in good time and in line with the principles of fairness, asserting that the plaintiff could only seek a judicial determination of performance and not damages due to the delayed target-setting.

 

Key Issues

The labour court had dismissed the claim in the first court instance, but the Cologne Higher Labour Court upheld it on appeal. The Federal Labour Court now confirmed the judgement of the Cologne Higher Labour Court, ruling that the defendant had breached its obligation to set targets in accordance with the company agreement. By failing to set individual targets and delaying the setting of the company targets, the defendant had undermined the motivational purpose of the target system. As a result, the court awarded the plaintiff damages, assuming that he would have achieved the full target amount had the targets been set properly and on time. The court rejected the defendant’s defence, stating that the plaintiff was not at fault for the delay and that contributory negligence did not apply.

Practical Point

• This case underlines the importance of setting targets for variable remuneration on time. Failure to properly set targets in accordance with the employment contract or company agreements can expose employers to substantial claims for damages.
• Employers must ensure that internal processes align with the targets specified in employment contracts or works agreements. Setting targets too late diminishes the potential for employees to meet the performance goals and undermines the incentive system.
• Employers should regularly review their processes for setting and communicating targets to ensure compliance and minimise the risk of future legal claims.