The interpretation of bonus clauses in German employment contracts is a never-ending fountain of judicial discussions and disputes. Employers always try to achieve the greatest level of flexibility possible while employees naturally seek clear conditions that guarantee that the agreed bonus is paid once certain requirements are met. In light of recent cases in the Federal Labour Court of Germany the focus now shifts from whether the employee is entitled to a bonus to the question of “how much”.
Even though many schemes refer to the bonus as entirely discretionary, the reality is that as soon as a bonus has any relation to performance it is impossible to make it entirely discretionary.
However, it remains possible that the due discretionary determination of the amount of the bonus, (e.g. in bad economic years or for poor individual performance), can be zero, unless of course the employer contradicts the economic situation argument by arbitrarily paying out bonuses to other employees with no objective justification.
German law contains a provision relevant here that is often overlooked, namely Sec. 315 German Civil Code (Bürgerliches Gesetzbuch). German Labour Courts will interpret any clause trying to make a bonus entirely discretionary as subject to Sec. 315. It provides that courts may replace the wrongfully exercised or omitted discretion of an employer with their own determination of the bonus amount based on the evidence brought forward by the parties. Just recently the Federal Labour Court of Germany has confirmed this concept through a new case ruling.
The claimant, a managing director of a German branch of an international bank, was employed from January 2010 until September 2012. Contractually the parties agreed that his bonus should be entirely discretionary and payment would only be made if the Bank created a bonus pool for the relevant year. The claimant was granted a guaranteed payment of around EUR 200,000 for the business year 2009 (ending in 2010), and EUR 9,920 for the year 2010, while for the year 2011 no bonus was granted to him at all. However, other employees received payments in 2011 of 25-50% of the payments made to them in 2010.
According to the Bank the payment to the claimant for 2009 allegedly included some sign-on bonus elements but its true nature remained unclear. He thought the bonus should be EUR 52,480 as a minimum, about 25% of his 2009 payment. The Labour Court in the first instance ordered the Bank to pay EUR 78,720. On the Bank’s appeal the Higher Regional Labour Court dismissed the claim entirely on the basis that the claimant had not put forward sufficient facts or information to allow the Court to estimate the amount of the bonus by itself.
The Federal Labour Court – just like the Frankfurt Labour Court in the first instance – decided that according to the contract between the parties the claimant had an entitlement to a 2011 bonus subject to “equitable discretion”. It also decided that discretion not exercised or improperly exercised by the employer has to be replaced by the Court. The contractual attempts to make the bonus entirely subject to discretion were invalid.
The Bank’s attempts to reduce the claimant’s bonus to zero by arguing a bad economic situation at the time were found not very convincing since other employees had been granted payments. Also the argument that the EUR 200,000 in the first year was only a sign-on bonus was dismissed since the Bank could not prove this.
As a basis for this determination the Court has to consider the facts put forward by the parties. However, these facts do not have to be proof in a formal procedural sense but can be just general information. If the employer does not give any information on the bonus situation, then this cannot have negative consequences for the employee. It cannot be expected that the employee will be able to give detailed information about relevant facts such as the amount of a granted bonus pool, which will often be unknown to him. Aspects to consider are the amount of payments in the past to him and others, key performance indicators, results of any performance review of the employee, his particular contribution and the contribution of his business unit, etc., and additionally in this case also the fact that for 2009 even though the economic situation was difficult then too, the Bank had paid him a high bonus.
Only in cases where there is little to no information to determine the amount must the Courts refrain from determining the bonus amount. This was not the case here. The case has gone back to the Higher Regional Court of Hesse to determine the claimant’s bonus for the business year 2011, taking into account the findings of the Federal Labour Court.
Lessons for employers
- This decision shows vividly the risks and dangers of not carefully handling a discretionary bonus scheme in practice. Arbitrary decisions not based on demonstrated facts have little chance of surviving before German courts and elaborate drafting will not prevent employees successfully claiming a bonus. There may well be instances where an employer has good reason to argue that the bonus entitlement of the employee should be zero but the hurdles to proving this in front of the Court are high.
- Therefore, where a bonus system is implemented employers should carefully monitor performance based on measurable facts which can be proven in court. Bonus systems and decisions subject to opaque discretion of the employer or ex gratia payments without connection to measurable facts should be avoided. In general it is advisable to use clear objective and reviewable key performance indicators and targets that can be explained and proven. This also has the benefit that in cases of possible low performance an employer could use this as evidence to prove that the employee’s performance was actually not on par with the performance of other employees.
This judgement further underlines that employers should carefully handle the actual pay out of bonuses. The high initial payment of around EUR 200,000 in this case shows this clearly. The Bank argued that this was a sign-on bonus but as the payment was not declared as such due to internal accounting considerations it was interpreted by the Courts as a genuine bonus payment with obvious later implications for the outcome of the case.