By lawyer and specialist in labor law Jens-Arne Former
German Federal Labor Court Ruling – What Employers Need to Know
In a recent decision (Federal Labor Court, July 3, 2024, Case No. 10 AZR 171/23), the German Federal Labor Court (Bundesarbeitsgericht – BAG) ruled that employers may face significant damages claims if they unilaterally set bonus targets without engaging in proper negotiations with their employees. The case highlights the strict requirements of German labor and contract law, particularly when compared to the more flexible standards often seen in Anglo-American legal frameworks.
The Case: Employer Failed to Negotiate Bonus Targets
The case concerned a “Development Director” at a German ship-holding company, whose employment contract linked the payment of bonuses to the achievement of annually agreed-upon targets. When it came time to negotiate these targets, the employer instead set them unilaterally, relying on a contract clause that allowed such action if no agreement could be reached.
The German Federal Labor Court found this clause to be invalid under the provisions of German AGB law (law governing general terms and conditions). The clause was considered an unfair disadvantage to the employee under Section 307 of the German Civil Code (BGB). As a result, the employer was ordered to pay damages equivalent to the lost bonus payments.
Legal Implications: Why the Clause Was Invalid
While the clause itself was clear and transparent, the court ruled that it unfairly disadvantaged the employee by undermining his contractual right to negotiate. The court also emphasized that the employer had breached its duty to actively pursue negotiations under Section 280(1) BGB. By failing to honor its obligation, the employer was held liable for damages.
What International Employers Should Consider in Germany
1. Understand the stricter German AGB laws
Standard employment clauses that may be acceptable in Anglo-American jurisdictions can fail to meet the strict requirements of German AGB law. Even if contract terms appear clear and transparent, they can still be deemed invalid if they are seen as placing an unfair burden on employees.
2. Engage in genuine negotiations over bonus targets
Merely announcing that targets will be negotiated is not enough. Employers in Germany must ensure that negotiations actually take place, and any unilateral decision on targets can lead to significant financial liability. Many international employers are caught off guard by this requirement, especially when they’re used to more flexible practices in other jurisdictions.
3. Avoid the “incomplete negotiation” trap
A common mistake occurs when bonus negotiations are announced but then delayed or abandoned. This is often due to oversight or, in some cases, intentional avoidance when the employer no longer values the employee’s contribution. Under German law, such inaction can lead to claims for damages, as in this case.
4. Documentation and employee involvement are key
To minimize legal risk, employers must not only involve employees in the negotiation process but also document their good faith efforts to reach an agreement. Neglecting these obligations can create substantial liability, as seen in the court’s decision.
For Employees: Protecting Your Bonus Rights
Employees working in Germany should be aware of their legal rights. If an employer fails to negotiate bonus targets, employees should proactively request negotiations and express their willingness to participate. It’s also essential to be aware of any statutes of limitation (Ausschlussfristen) that could bar claims for unpaid bonuses if the employer does not explicitly refuse to negotiate.
International Employers: Don’t Overlook the German Legal Context
For international companies operating in Germany, it is crucial to recognize that German employment law places stringent demands on contractual fairness. Contracts that may meet with Anglo-American standards often fail under German AGB laws. Failure to adhere to these rules can result in significant legal and financial consequences.
About Jens-Arne Former and LFR Wirtschaftsanwälte
Jens-Arne Former is a founding partner at LFR Wirtschaftsanwälte and a specialist in German labor law. With over 20 years of experience, he advises international companies and executives on labor law matters, including contract design and bonus negotiations. His practice focuses on helping businesses navigate the complexities of German employment law while mitigating legal risks.
