On August 3, 2016, Germany's Federal Labor Court ruled that
while the payment of employee bonuses and their amounts are at the
discretion of the employer, they are subject to full judicial
review. Under this reinterpretation of existing law, if the court
concludes that the refusal to pay a bonus, or payment of an
insufficient bonus amount, is not a reasonable exercise of employer
discretion, the court is entitled to determine both whether a bonus
should be paid, as well as the amount of any bonus.
In the case before the court, the plaintiff was employed as
managing director of a major German bank. It had been contractually
agreed that the plaintiff would participate in the applicable bonus
plan. For fiscal year 2009, the plaintiff received a bonus of EUR
200,000.00. For fiscal year 2010, he was paid a bonus of EUR
10,000.00. In fiscal year 2011, the plaintiff received no bonus. In
contrast, other employees did receive a bonus for 2011. However,
these other bonuses were in most cases also significantly lower
than in previous years.
In his complaint to the Labor Court, the plaintiff requested
payment of a bonus of at least EUR 52,000.00 for 2011.
The court established that the bank was contractually required
to pay the plaintiff a bonus, the amount of which was up to the
employer's "reasonable" discretion. However, the
Court also held that if an agreement provides for the right to
unilaterally determine benefits—for example, the
employer's right to unilaterally fix the amount of a
bonus—then, according to Section 315, paragraph 3, sentence 1
of the German Civil Code (BGB), such a provision is only binding
for the other party if it is reasonable. If the payment is
not considered reasonable, the agreement is nonbinding, and,
according to Section 315, paragraph 3, sentence 2 of the BGB, the
court must fix the bonus. Thus, the Court held that it is
entitled to decide whether and in what amount a bonus is to be paid
to the plaintiff if the employer's decision does not satisfy
the requirement of "reasonable discretion."
In this case, the bank was unable to cite any objective,
verifiable grounds for having set the bonus at zero in fiscal year
2011. Thus, the employer could not prove its decision was
reasonable, and therefore was not legally binding. The Court could
then set a new bonus.
According to the Court, the arguments of the parties form the
basis for determining the amount of the bonus. However, in this
context, there would not be a burden of proof in the procedural
sense. In other words, employees would not have the burden to
provide evidence of facts not generally known to them. For example,
an employee would likely be unaware of the amount of funds
available for the payment of bonuses. In this regard, the court
could not expect the employee to submit any arguments. Rather, in
fixing the amount of the bonus, the court would have to work with
the facts on record, such as the amount of the bonus paid in
previous years, economic indicators, payments to other employees or
the result of a performance evaluation. A court would not set a
bonus amount in the absence of such evidence. However, in the
present case, the facts submitted on record were sufficient for the
court to be able to set a bonus.
In practice, many employment contracts with executives in
Germany provide that the bonuses will be paid only at the
discretion of the employer. The use of discretionary bonuses
remains a valid practice. However, where the employer makes a
mistake in the exercise of this discretion—i.e., refuses to
pay a bonus or pays an insufficient bonus amount—that failure
to exercise reasonable discretion will render the decision
non-binding. In this instance, the bonuses were set by the Court
(again) and the employer's decision "overruled."
The scope of discretion granted to employers in the provision of
discretionary bonuses is therefore limited, and these limits must
be observed. Otherwise, the bonuses may be set by the
The content of this article is intended to provide a general
guide to the subject matter. Specialist advice should be sought
about your specific circumstances.
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