Germany - Contract of Employment (2024)

Targets relevant for the payment of a variable remuneration that are not set towards the employee until more than three quarters of the financial year have passed can no longer fulfil their...

Germany Employment and HR

Targets relevant for the payment of a variable remuneration thatare not set towards the employee until more than three quarters ofthe financial year have passed can no longer fulfil their incentivefunction in a meaningful way. In this case, the employee isgenerally entitled to a payment in the amount of the bonus for 100%target achievement.

Background

Mutual target agreements or unilateral target settings forperformance-related variable remuneration are intended toincentivize and motivate employees. In accordance with the case lawof the Federal Labour Court, an employee is entitled tocompensation in the amount of the bonus that would have been due at100% target achievement if the employer has culpably omitted orprevented the mutual target agreement. A deduction may be made fora contributory negligence on the employee's part, as he canparticipate in the target agreement.

However, the Federal Labour Court has thus far explicitly leftopen the question of whether these principles can be applied to theunilateral setting of targets as well. In a recent ruling, theCologne Higher Labour Court further developed the case law oncompensation claims in the constellation of unilateral targetsetting.

Key Issues

In the present case, the parties are in dispute regardingpayment claims due to unilateral targets that were set too late.The employer had regulated the variable remuneration componentthrough a works agreement, which provided that the targets for theemployee's annual variable remuneration be set by 1 March ofthe relevant year. In the year 2019, the company targets were notset by the employer until October, and the individual targets werenot set at all. The plaintiff terminated his employment effective30 November 2019 and did not receive the full bonus. In court, heclaimed the delta between the payment received and the bonus amountat 100% target achievement.

The Cologne Higher Labour Court ruled that the plaintiff isindeed entitled to damages in the amount sought due to the failureof the employer to set targets for the 2019 financial year on time.A mutual target agreement can only fulfil its incentive function inaccordance with the idea of increasing performance and motivationif the employee is aware of the objectives to be pursued whencarrying out his work. This principle is transferrable toconstellations where the targets are not subject to mutualagreement but are set unilaterally by the employer. If the targetsare set at a time when they can no longer fulfil theirincentivizing function, the employee must be treated as if thetargets had not been set at all. In this case, the employee isgenerally entitled to the bonus payment that would have been due at100% target achievement. Unlike in the scenario of a mutual targetagreement, however, no contributory negligence on the part of theemployee comes into consideration, as the targets are setunilaterally by the employer.

Practical Points

• The judgement emphasizes the importance of setting timely andprecise targets if a variable remuneration subject to targets hasbeen agreed upon. Failure to set targets can result in significantclaims for damages from employees.
• It should be noted that the targets in the case in questionwere set in the last quarter of the relevant financial year. TheCologne Higher Labour Court has indicated that a slight delay insetting targets does not necessarily result in the claims fordamages described above. However, as there is no fixed limit, it isstrongly recommended that the deadlines for setting targets inemployment contracts and works agreements be adhered to.
• It is, therefore, advisable for companies and managers toreview their processes for setting and communicating targets evenmore closely and adapt them where necessary in order to minimiselegal risks.

The content of this article is intended to provide a generalguide to the subject matter. Specialist advice should be soughtabout your specific circ*mstances.