Germany: Court Holds Payment and Amount of Discretionary Bonuses are Subject to Judicial Review

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 court. 

Information contained in this publication is intended for informational purposes only and does not constitute legal advice or opinion, nor is it a substitute for the professional judgment of an attorney.