Companies often tell staff how the bonus pool is doing during the fiscal year. According to a new decision of the German Federal Labour Court greater caution should now be exercised in this regard.
The employees received an annual bonus payment awarded at the employer’s discretion. In August 2008 the employer formed a view of the likely size of the bonus pool for 2008 and informed the employees about this. In February 2009, the employer informed all employees that the bonus pool heralded in August would be cut by 90 % because 2008 had in fact suffered from unexpectedly low operating earnings. Accordingly, the employees received only 10 % of the bonus originally suggested. They sued for the difference. In the end, the Federal Labour Court dismissed the claim as unfounded; however, in doing so the Court did establish several noteworthy principles.
Under the provisions of the employment contract, the employer had a unilateral right to determine performance (as relevant to decide the bonus pool). Once that determination is made, the previously discretionary position is crystallised. However, that does not apply where the employer is merely laying down bonus criteria or the principles by which the bonus will eventually be calculated. Telling the employees about the size of the pool did not confer rights on them as individuals to specific sums of money.
Determining the volume of a bonus pool does, however, still have a certain amount of binding force according to the Federal Labour Court. The employer was found to have limited the degree of discretion that it had by way of that self-commitment. The determined volume of the bonus pool was one essential factor to be taken into account when exercising its discretion. The determination of the volume of the bonus pool in February 2009 was, however, still within the scope of equitable discretion in the present case. Due to the seriously negative operating earnings for 2008, particularly significant circumstances existed which justified a deviation from the originally communicated size of the bonus pool. Accordingly, the employer was allowed to proportionally cut the employee’s bonus claim.
Although the Court dismissed the employee’s claim in the present case, this case does show that caution should be taken when determining a bonus pool. Employers should beware of making a possibly irrevocable commitment in the future if they define a bonus pool or a bonus payment in a certain amount before the binding results of the fiscal year are available. In order to avoid an undesired commitment, it is advisable to include an explicit reservation or clarification that the employer has not yet fully exercised its discretion in the notification of decisions concerning the amount of bonuses. Nevertheless, determinations of the size of a bonus pool – even if announced with all due caveats and reservations – will still limit the employer’s degree of discretion. According to the Court, the employer can then only deviate from a bonus pool that has already been communicated if “significant circumstances” justify such a departure. If such circumstances do not exist, then the employer may well find itself bound by the previously communicated volume of the pool.