March 31, 2008
Failure to agree on annual bonus objectives may give rise to damages according to a recent ruling of the German Federal Labour Court. The damages will be calculated on the basis of the maximum bonus achievable. Employers therefore need to pay more attention to their bonus plans and agreements.
A widely used form of bonus agreement provides that the annual bonus payment is subject to achieving certain objectives to be agreed individually with each employee. However, in practice employers often neglect their obligation to negotiate the objectives. At the end of the bonus period the amount of the bonus is in most cases determined by the employer on a discretionary basis.
The German Federal Labour Court (“Bundesarbeitsgericht”) recently set out the principles that apply if the employee disagrees with the bonus amount as determined by the employer. The Court ruled that the objectives cannot be determined by one party retrospectively for the past bonus period. It held that an employer who, contrary to the bonus plan or agreement, did not seek an agreement with the employee on the objectives to be reached was in breach of contract and therefore liable for damages.
Thus, the employer owes the employee damages for what the employee would have earned if the parties had agreed on the objectives. According to the Court, the parties would generally have agreed on objectives that are achievable for the employee. Further, the Court assumes that the employee would have fully reached these objectives unless there are reasons why this assumption is unrealistic. The burden of proof for these reasons rests with the employer. In other words, the employee is entitled to the full bonus unless the employer can prove that the employee would not have reached the agreed objectives.
The employee, on the other hand, must alert the employer if an agreement on the objectives has not been made and must ask the employer to do so. Otherwise, the employee would only be entitled to claim a part of his damages.