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Ins and Outs of Bonus and Commission Payments – Part II

In the second part of our two-part overview, we will address further aspects of bonus and commission payments with regard to the possibility to revoke a bonus and the impact of a termination of employment on the bonus entitlement.

Can an employer revoke a bonus?
Under certain, very narrow conditions, German law allows the employer to revoke bonus entitlements. Bonuses may be revoked if (i) there is specific language in the contract or in the bonus plan entitling the employer to do so, (ii) the reasons for which revocation might apply are stated in the contract (permissible reasons are very limited, e.g. a major financial loss), (iii) the employer’s cancellation right concerns no more than 25-30% of the employee’s total remuneration value, and (iv) the exercise of the right of cancellation is lawful and fair in all other respects. It is very difficult to provide and prove a valid reason for revoking a bonus payment. In general, it would be necessary to show that the company is in a severe financial crisis and has no other means to avoid this crisis.

What happens to the bonus entitlement if the employee is put on garden leave?
An employee may be put on garden leave during the notice period. But this release of the employee from the duty to work does not affect the bonus entitlement, i.e. the employee is entitled to the same amount of bonus payments as if he had worked during the notice period. The exact amount is calculated on the basis of his average earnings over the last months of employment.

What is the impact of termination of the employment relationship on bonus entitlement?

In principle, the termination of the employment relationship does not have any effect on bonus entitlement. This applies both to the employer’s termination and the employee’s termination.  But, however, the employment contract may contain language that no bonus payment will be made if the employment relationship ends prior to a certain date (usually 31 December) or the employment relationship is terminated prior to this date (Stichtagsklausel). According to the case-law of the Federal Labour Court (Bundesarbeitsgericht, BAG) the validity of such language depends on the purpose of bonus payment:  

  • If the employer pays the bonus exclusively to reward the employee’s loyalty to the company and not the employee’s performance, a clause that makes the bonus payment subject to the continued existence of the employment relationship would be valid.
  • If the bonus payment is linked to the employee’s performance in respect of the employee’s contractual duties and, therefore, is paid as additional remuneration for work performed, any language which provides that no bonus payment will be made if the employee is no longer in the employment of the company would be invalid. This also applies to bonus payments with a so called “mixed character” which are paid both for the employee’s performance and to reward the employee’s loyalty. Therefore, the purpose of the bonus payment has to be defined precisely and clearly in the contractual bonus provisions. If the purpose is not clear, the provision would be invalid.