Risk of claim for damages in case of omitted target agreement

On December 17, 2020 (file no. 8 AZR 149/20), the Federal Labour Court (Bundesarbeitsgericht – “BAG”), again ruled on claims for damages in the case of culpably omitted target agreements and recently published the reasons for its decision. In doing so, the BAG confirmed and substantiated its previous case law on the claim for damages due to lost bonus opportunities in the case of a target agreement that was not made but was owed under the employment contract.

Distinction between target agreements and setting of targets

If there is a contractual performance-related commitment to variable remuneration between the employer and an employee, a distinction must be made between a target agreement and a unilateral setting of targets. In the latter case, the employer has the right to set the objectives to be achieved unilaterally. The employer has a unilateral right to determine the employee's own performance in this respect. In contrast, in the case of target agreements, the achievement of which determines the variable remuneration, the targets are set jointly by the contracting parties, i.e. the employer and the employee. If it is unclear whether there is a target agreement or a setting of targets, this must be determined by interpreting the contractual provision of the parties.

Breach of duty under the employment contract in case of failure to agree on objectives

According to the ruling of the BAG, a culpable failure to agree on targets in an employment contract stipulating the conclusion of a bonus agreement generally constitutes a breach of duty by the employer, with the result that it will be assumed that the employee has fully achieved the defined targets. Within the scope of the assessment of fault, the fault of the employer is initially presumed in accordance with section 280 para 1 sentence 2 of the German Civil Code. The employer must then present circumstances, which show that he is not responsible for the failure to achieve the target agreement. This was not the case in this specific instance.

In the opinion of the BAG, the amount of the claim for damages resulting from the employer's breach of duty basically is the amount of the maximum bonus achievement.

Employee's contributory fault

In the most recent case, the BAG assessed the employee's contributory fault, which the employee must accept, with a quota of 10 percent. The reason for this was that the employee had not insisted on a discussion with his employer regarding the target agreement.

If a target agreement was not reached solely due to the fault of the employee, for example, because the employee did not attend meetings proposed by the employer without urgent reason, this constitutes a breach of the employee's contractual secondary obligation with the consequence that the employee has neither a claim to the bonus nor a claim for damages..

No general duty of the employer to take the initiative

If the employer's sole duty to take the initiative to conclude a target agreement has not been agreed in the employment contract, this results in an obligation for the employee to take action as well. According to the ruling of the BAG, it is already sufficient if the employee requests the employer to negotiate on the target agreement and, for example, asks the employer for a respective meeting.

Conclusion and Practical Implementation

In the event, as often, that it is only contractually agreed that a target agreement “will be concluded”, in such cases the BAG, as a general rule, automatically places the burden of initiative on the employer. Employers are therefore strongly advised to actively work towards the conclusion of a target agreement.

Consequently, employers must submit concrete proposals on a target agreement and schedule meetings for negotiations in good time before the target period and document this in order to exclude any risks with regard to possible claims for damages by the employee. If this is not done at all or not done timely, this failure on the part of the employer regularly triggers claims for damages on behalf of the employee.