Bonus entitlement despite non-concluded target agreement

On 17 December 2020, the Federal Labour Court (Bundesarbeitsgericht, BAG, docket number 8 AZR 149/20) decided that under certain circumstances an employee is entitled to a bonus payment even though no target agreement has been made for the bonus period. If the employer by fault breaches its contractual obligation to set targets together with the employee for a target period, this may give rise to a claim for damages after the target period has expired. The Federal Labour Court awarded an employee damages amounting to 90% of the variable renumeration without the employee having to provide any additional performance. It assumed that the targets would have been set in such a way that the employee would have achieved them.

Distinction between target agreements and target setting:

If the employer has promised the employee performance-related variable renumeration, a distinction must be made between target agreements and target settings. In Germany, targets in bonus arrangements can be set unilaterally by the employer (target setting) or negotiated with the employee (target agreement). Whether there is a target agreement or a target setting must be determined by interpreting the contract.

The case:

The plaintiff (employee) was employed by the defendant as Head of Operations. In the employment contract it was agreed that after the end of the probationary period the employee may receive, in addition to his fixed salary, performance-related variable remuneration (bonus) depending on his performance and the business development of the employer in the amount of up to 25 percent of his agreed gross annual salary. The conditions and the amount of the bonus were to be regulated separately. After just under one and a half years, the employment relationship was terminated without a target agreement ever having been reached on the bonus payment. The plaintiff demanded damages from the company for the lost additional remuneration.

The judgement:

Since the employer has by fault breached its obligation to conduct negotiations with the employee about a target agreement and the target period has expired, the employer is obliged to pay damages. The amount of damages is judged in particular by taking into account the bonus promised in the employment contract. The employer could not evade the bonus promised in the employment agreement by demanding impossible targets from the employee and only being willing to agree to targets that no employee is likely to achieve. In the opinion of the court, it must therefore be assumed that the targets would have been set in such a way that the employee would have been able to achieve them. It is up to the employer to demonstrate and prove special circumstances that preclude this assumption.

With target agreements – in contrast to target settings – the employee’s participation in determining the targets for the respective target period is required and is thus not the sole responsibility of the employer. The employee violates a contractual duty and has neither a claim to additional payments if a target agreement was not reached solely due to his fault, e.g. because he was not prepared to discuss possible targets with the employer. If a target agreement is not reached for reasons for which both parties are responsible, the employee’s contributory negligence shall be taken into account appropriately. In this case, the employee has also failed to ask for negotiation of a target agreement. For this reason 10 percent was deducted for the employee’s contributory negligence.

Legal relevance of the ruling:

With this ruling, the Federal Labour Court once again illustrates the consequences of non-concluded target agreements for the employer. Even in times of economic difficulty, simply not agreeing on targets is not a legally safe option. In order to avoid claims for additional payments, the conclusion of annual target agreements must not be forgotten, particularly because the employer cannot in the assessment of the bonus invoke its losses in the target periods in retrospect, e.g. he cannot rely on the fact that a net loss for the year shown in the company’s profit and loss account – irrespective of its causes – excludes a bonus claim due to non-achievement of targets, if this was not agreed in the target agreement.