Judgment of the Federal Labor Court on Bonus Target Agreements

This gives us the opportunity to examine a Federal Labor Court ruling from July, where the court took the opportunity to further develop its jurisdiction on employment contract target agreements. The ruling emphasizes the need for caution when drafting contractual formulation of target agreements.

Background

Contractual target agreements linked to bonus payments for specific time periods are widespread. Equally common are clauses allowing employers to unilaterally set targets in the absence of mutual agreement. Such a clause was central to the ruling of the Federal Labor Court.

In the case, the employee had demanded the employer to enter negotiations for a target agreement for the fiscal year to come. The employer responded by asking the employee to make an initial proposal. When the employee did not comply with the request, the employer sent its own proposal, requesting feedback and offering to discuss it. The employee replied with a counterproposal, which the employer rejected before unilaterally setting the targets based on the employer’s proposal. The employment relationship ended shortly thereafter through the employee’s ordinary termination. The employer did not pay a bonus for the relevant fiscal year, prompting the employee to sue for damages equivalent to the full bonus. The employee argued that the employer had omitted to negotiate bonus targets.

Decision

The Federal Labor Court ruled that the target agreement clause in question, which allowed the employer to unilaterally set targets as a fallback, was unreasonably disadvantageous to the employee and thus invalid. Such a clause, the court found, enables the employer to circumvent the contractual priority of mutual target agreements over unilateral target-setting. By refusing or breaking off negotiations without justification, the employer could position itself to unilaterally determine targets. This would deprive employees of their primary opportunity to influence the target-setting process to protect their interests. The court further noted that the mere possibility of unilateral termination of negotiations creates undue pressure on employees to accept the employer’s proposals, even if they deviate from their own expectations.

As a result, the Federal Labor Court applied the general principles governing the negotiation and breakdown of target agreements. In the concrete case, it found the employer’s efforts to reach an agreement insufficient. The court could not ascertain that the core content of the proposed target agreement had been genuinely open to negotiation or that the employee had a meaningful opportunity to influence the employer’s proposals. Consequently, the Federal Labor Court found that the employer had culpably violated its contractual obligation to negotiate a target agreement. It awarded the employee nearly the full bonus amount.

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