25. Oct 16

BAG on payment of bonuses pursuant to reasonable discretion

Where an employer decides on variable components of employees’ remuneration, e.g. bonus payments, while exercising reasonable discretion, this decision may be the subject of a full judicial review.

GRP Rainer Rechtsanwälte, Köln, Berlin, Bonn, Düsseldorf, Frankfurt, Hamburg, München und Stuttgart führen aus: It is not unusual under the rules of employment law for employer and employee to agree to variable elements of the latter’s remuneration, for example bonus payments or commission, in addition to a fixed salary or wage. If, in doing so, the employer contractually reserves the right to decide on the extent of any bonuses while exercising reasonable discretion, this decision may be the subject of a full judicial review. Should it be the case that the decision was not made while exercising reasonable discretion then it is not binding and the court can set the extent of the bonus after having heard the parties. That was the verdict of the Bundesarbeitsgericht (BAG), Germany’s Federal Labour Court, in its ruling of August 3, 2016 (Az.: 10 AZR 710/14).

Thus, the employer’s discretion regarding the extent of any bonuses has to be exercised equitably. To this end, it is necessary for the particular circumstances of each individual case as well as the employee’s interests to be taken into account. If the employer is only pursuing his own interests, this will render the decision non-binding for the employee and the court shall be able to determine the extent of any payments anew.

In the instance case, the plaintiff had worked as a managing director at a bank. It had been contractually agreed that he would participate in the bonus scheme and / or deferral plan. The plaintiff received bonus payments in the first two years but not in the third. However, other employees from the same institution did receive bonuses. The managing director therefore sued for payment of a bonus.

The claim ultimately ended up before the BAG. The 10th Senate of the BAG held that the plaintiff was entitled to be paid a bonus pursuant to what was deemed reasonable when exercising equitable discretion. The Court ruled that the employer had failed to provide sufficient justification for why it set the amount at zero. That is why the decision was non-binding for the employee. It went on to say that the task of determining the extent of the payment now fell to the court following factual submissions from the parties. The BAG concluded that a refusal by the employer to provide specific information was not to be detrimental to the employee.

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