This post was contributed by Moritz Kunz, Of counsel, Norton Rose Fulbright LLP (Frankfurt a.M.) and Thomas Olbrich, Trainee, Norton Rose Fulbright LLP (Frankfurt a.M.)
Many companies provide their employees with annual bonus payments to that are subject to the terms and conditions of the employment contract, company bonus schemes and/or agreements with the works council. In many cases, the applicable terms and conditions require that the employment relationship continues to exist (and is not under notice of termination) at the end of the financial or calendar year. Due to a recent decision of the Federal German Labour Court, employers have to be very cautious about the wording of clauses that link a bonus payment with the continuation of employment on a certain date.
In November 2013, the Federal German Labour Court decided with regard to a Christmas bonus that a clause tying the payment to an existing employment on a certain date is invalid. However, this only applies if the bonus is (also) granted in recognition of the employee’s performance during the relevant financial/calendar year. In this case, the payment has the character of an earned remuneration and the employee has a legal entitlement to that payment. Therefore, even if the employment is terminated before the end of the financial/calendar year, the employee has a (pro rata) bonus entitlement.
It is the objective of a bonus payment that is decisive. If the bonus is intended to retain the employee with the company (and is not linked with her/his performance at all), the employer is entitled to make the payment conditional on an employment contract being in place (and not under notice of termination) at the end of the financial/calendar year. However, the company bears the risk in case of any doubt with regard to the interpretation of the bonus clause. Thus, the wording of the contract has to be completely clear.