Bonus budget must be consistent with reasonably exercised discretion

BAG, judgment dated 19.3.2014, 10 AZR 622/13

Employers mainly pursue differing purposes when granting variable remuneration elements. It is only natural to set employees performance incentives. Frequently, however, employers also wish to retain sufficient flexibility to enable them to react to surprising developments. The BAG was called upon to decide on bonus entitlements that an employee “can” receive  “as voluntary benefit without a legal entitlement” under his  contract of employment and in accordance with the respectively applicable works agreement.

The claimant is an employee of a bank that required extensive government support during the banking crisis. Following losses of approx. 5 billion EUR (2008) and 2.6 billion EUR (2009), the  bank had decided not to pay bonuses in these two financial  years. A bonus budget of 25 million EUR was made available  for the year 2010, with the result that the claimant received  approx. 45% of the payment asserted by him. The year 2011  closed with a loss of 328 million EUR, as a result of which no  bonus budget was made available. The BAG dismissed the legal  action concerning the years 2008 and 2009. However, no final  decision was yet possible for 2010 and 2011, for which reason  the matter was referred back to the State Labour Court.

Right of the employer to determine benefits

The BAG initially made it clear that a formulation in the contract of employment under which the employee “can” be entitled to  a bonus, without specifying the level and detailed conditions  and which refers to the provisions of the respectively applicable  works agreement in other respects, does not create an unconditional contractual entitlement to a bonus that is independent  of the regulations of the works agreement. In this respect, it can  be admissible for the works agreement to grant the employer  a unilateral right to decide on benefits, as defined in Section  315 BGB, for determination of the bonus budget. This is by all  means the case if the contract does not regulate a bonus level  and the company parties are not themselves required to specify  the dimensions of the volume to be distributed.

Bonus budget “zero”

In exceptional situations, the bonus budget can be set at “zero” without errors of discretion. The BAG assumed such a situation for the years 2008 and 2009, but not for 2011. In this context, not all negative results justify such exercising of discretion. Normal fluctuation margins, which can also mean losses, are not sufficient.

In the case at hand and under the works agreement, the bonus for the years 2010 and 2011 was supposed to be based on both individually agreed targets as well as on the earnings position of the bank. Against this background, a bonus budget to be determined should - depending on the earnings position - assume dimensions that respect the performance context of the bonus system and are sufficient to enable appropriate reward for performances, striven for through the conclusion of target agreements and actually achieved. In the opinion of the BAG, it was not yet possible to determine whether the budget level for 2010 corresponds to reasonably exercised discretion in this respect.

Reservation of voluntary nature

According to the BAG, the so-called reservation of voluntary nature agreed in the contract of employment (“as voluntary benefit without a legal entitlement”) does not stand in the way of an entitlement of the employee. This is a contractual condition as defined in Section 305 Subsection 1 BGB. A “reservation of voluntary nature” in a contract of employment that can be understood as meaning that the employer reserves the right to decide freely in terms of “whether” to grant the bonus, irrespective of the provisions of the applicable works agreement, violates the direct and obligatory effect of works agreements and is therefore ineffective. A “reservation of voluntary nature” is also inappropriate and thus ineffective if it is intended to reserve the right of the employer to also decide freely in terms of “whether”, even if he applies a variable remuneration system for a financial year through the prior conclusion of a target agreement. Reservation of voluntary nature

Summary

Claims to variable remuneration elements (profit sharing, bonuses) can have differing legal bases. In addition to agreements in contracts of employment, collective wage agreements or works agreements, variable remuneration can also be derived from company practice or the principle of equal treatment. Each form has its special aspects and own pitfalls. When granting such benefits and when choosing the form of implementation, employers must therefore check very precisely whether the desired flexibility is actually given.