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No need to specify amount of bonus payments in German employment agreements

Dec 28, 16 • Employment LawNo Comments

Amounts of bonus payments need not be finally specified in the employment agreement. However, employers, who reserve the right to determine the amount at their equitable discretion, open up the possibility of a judicial review and determination of the bonus amount. This can be derived from a current ruling of the Federal Labor Court.

Employee sues for payment of the contractual bonus

In the case at hand, a former employee of a large bank with a branch office in Germany sued for payment of the contractually agreed bonus as he had not been paid a bonus in the fiscal year 2011. He left the amount of his claim to the discretion of the court.

Bonus agreement as a unilateral right to determine the performance

If the amount of the bonus payment is not specified in the employment agreement and if the employer reserves the right to decide on the bonus at its own discretion, the corresponding agreement constitutes a so-called “unilateral right to determine the performance” (Leistungsbestimmungsrecht). In such case, the agreement must reflect the “equitable discretion” exercised by the party that determines the amount. This means that the employer must specify, in a legally binding manner, when and in which amount it will pay the bonus. When doing so, the employer must mandatorily balance the various interests involved in the specific case. If the employer’s decision is inadequate, it may be replaced by a court ruling.

Discretionary decision based on commercial factors

As the employer’s discretionary decision is based on numerous commercial factors that are mostly unknown to the court, making an adequate judicial decision is extremely difficult. As a consequence, the court’s replacement provision must be based on the parties’ statements in the proceedings.

Each of the parties is encouraged to state the circumstances in their favor to enable the court to take them into consideration. The replacement payment will be determined based on the circumstances that have been put on file (e.g. amount of bonus paid in previous years, economic indicators, appraisal results). The assessment of the bonus will only be excluded in the absence of any indicators.

If you have any questions regarding the legal drafting of employment agreements, our specialist attorneys will be pleased to assist you.

Judgment of the German Federal Labor Court of August 03, 2016, 10 AZR 710/14

Continue reading:
Important change in legislation affecting German employment agreements as of October 2016
Designing employment contracts: Avoiding common mistakes

Ellen Pusch

Ellen Pusch specializes in employment law and inheritance law at our Munich office. She drafts and optimizes employment agreements as well as specific types of termination agreements and assists with restructuring projects and M&A transactions (transfers of undertakings).

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