Germany: Target Agreements as a Liability Risk? Liability for Damages in case of unilateral Target Setting
Written By
Associate
Germany
As an associate in our International HR Services Group in Düsseldorf, I advise our domestic and international clients on all aspects of individual and collective employment law.
The Federal Labor Court (BAG) has ruled that employers can be liable for damages if, contrary to the provisions of the employment contract, they do not conclude a target agreement with the employee but instead set the targets for the variable remuneration unilaterally.
In its judgment of 3 July 2024, the court found that by unilaterally setting targets, the employer had culpably violated its obligation to negotiate a target agreement and was therefore liable for damages.
BAG, judgment of 3 July 2024 – 10 AZR 171/23
Facts
The employee claimed compensation for variable remuneration that was dependent on the achievement of certain targets. The employment contract concluded between the parties stipulated that a target agreement should be concluded on the targets to be achieved. If no agreement on the targets was reached, the employer reserved the right to set the targets unilaterally.
The parties had different positions. The employer then set targets unilaterally without discussing them with the plaintiff and subsequently did not pay any variable remuneration.
Unilateral Target Setting generally possible
The court ruled that the employer was generally entitled to set the targets for determining variable remuneration unilaterally at its reasonable discretion based on a corresponding contractual agreement. However, this right is limited if it is likely to undermine the contractually agreed hierarchy of target agreement and target setting.
If a clause stipulates that targets are to be determined primarily by agreement and only secondarily by the employer's unilateral decision, it unreasonably disadvantages the employee if the employer can refuse or break off negotiations on the target agreement and instead can unilaterally determine the specifics of the targets to be achieved.
Breach of Duty to Negotiate constitutes Liability for Damages
This unilateral determination violates the employer's contractual obligation to conduct and conclude negotiations on the target agreements.
The court ruled that the employer only fulfils its obligation to negotiate a target agreement if the employer has seriously put the key content of the proposed target agreement up for discussion and granted the employee leeway to safeguard his interests. The BAG thus sets strict requirements for the fulfillment of this obligation.
Similar to the case of delayed target setting (cf. April 2024 newsletter), the employee is generally to be placed in the same position as if he had achieved the agreed targets when calculating damages. The only exception to this would be if there were specific circumstances that suggest the opposite. This may be the case, for example, if the employee has regularly failed to meet the targets in previous years.
If the failure to reach an agreement on targets is the responsibility of both parties to the employment contract, this must be considered when assessing the damages in the context of contributory negligence (Mitverschulden) in accordance with § 254 BGB.
Practical tip: Target Setting instead of Target Agreements
Given the high standards established by the BAG on the employer's obligation to negotiate target agreements and the associated liability risks, we recommend that clauses on target agreements be avoided altogether.
Instead, we recommend relying on unilateral target setting clauses to avoid exposure to the risk of damages for failure to fulfil negotiation obligations.
