It is common practice for companies to pay their employees a variable remuneration based on their performance. Such remuneration has become an increasingly popular component of employee compensation as it constitutes a very effective way of ensuring employee commitment.
French case law permits such remuneration but lays down strict conditions to be complied with. Consequently, variable pay is acceptable provided that such remuneration is based on objective criteria beyond the sole control of the employer, does not result in payment below the minimum wage and complies with the general principle of equal work for equal pay.
It is tempting for the employer to act unilaterally in setting and modifying the employee’s objectives and thereby determine his/her possible variable remuneration. Applicable case law permits such unilateral action provided that the objectives are not already written into the employment contract (since modification of the employment contract requires mutual consent), and provided that the employer communicates such objectives at the beginning of the relevant performance period in the French language, and ensures that such objectives are actually feasible.
In the decision at stake, the contract of a Chief Financial Officer provided for the payment of a variable portion up to a maximum of 10,000 Euros, payable upon achievement of objectives which were to be defined at a later stage. Three months later, the employee’s contract was terminated during his trial period while the objectives and methods for calculating the variable part remained undefined. Consequently, the employee filed a claim with the employment tribunal and requested the payment of 10,000 Euros, i.e.: the maximum amount of his variable pay.
The Supreme Court held that where the employer fails to provide the employee with his objectives and the methods of calculation of the variable pay, the employer is required to pay the maximum variable payment provided for in the employment contract.
This ruling can be construed as a logical consequence of a previous decision of the Supreme Court in which it was decided that, in the absence of verifiable conditions of calculation, the variable remuneration should be paid fully for each reference period. Under case law, such negligence in the communication of the objectives also constitutes a serious breach of the employment contract entitling the employee to claim unfair dismissal.
In conclusion, an employer should think twice before creating a variable pay package based on satisfaction of objectives, and ensure that all French law requirements are complied with. Otherwise, the employer could be at risk of having to make payment of a punitive amount even if the employee’s performance has not been satisfactory.