Germany: "No Work, No Pay" - Bonus reduction during parental leave and sickness

Variable remuneration may be reduced on a pro-rata basis during parental leave and periods of sickness absence, even in the absence of an explicit reduction clause in the employment contract, provided that the variable remuneration honours ongoing work performance rather than rewarding specific results. 

The principle of “no work, no pay” 

On 2 July 2025, the German Federal Labour Court ruled on two cases concerning agency supervisors at an insurance company whose remuneration consisted of a fixed salary and variable, production-based remuneration, linked to insurance sales generated by the sales network they supervised (Case No. 10 AZR 193/24 and 10 AZR 119/24). In the first case, the claimant was unable to work for a total of 149 days in 2021, exceeding the statutory six-week sick pay period. Under German law, employers are required to continue paying an employee's full salary for up to six weeks (42 days) in the event of sickness. After this period, the employee typically receives sickness benefit from their health insurance instead, and the employer's obligation to pay salary ceases. The employer consequently reduced the variable remuneration 
by EUR 12,951.08 gross. In the second case, the claimant took 62 days of parental leave in 2022. During parental leave in Germany, the employment relationship is suspended, and employees do not receive a salary from their employer (though they may receive state parental allowance). Although the target achievement rate for that year was 148.1 %, the employer reduced the variable remuneration by EUR 7,416.36 gross on a pro-rata basis for the parental leave period.

The German Federal Labour Court clarified that, according to established case law, work performance and remuneration in an employment relationship are dependent on each other. According to this principle, entitlement to performance-based remuneration (i.e. remuneration tied to the actual provision of work) lapses if the employee is unable to perform their work, for example due to sickness or parental leave.

The applicable collective bargaining agreement (a binding agreement between the employer and works council governing terms and conditions) in both cases provided that remuneration would be based on an annual gross target income divided into a fixed monthly amount ('the fixed salary' – 60 %) and a variable component ('the variable' – 40 %), forming a unified remuneration package. While the fixed salary was a fixed monthly amount, the variable component was 50 % based on achieving production targets and 50 % 
based on the previous year's performance. The key dispute was whether the reduction was lawful despite the production targets having been achieved at more than 100 %.

The German Federal Labour Court held that the reduction was lawful. The Court classified the production-based remuneration as performance-related pay (i.e. pay tied to the actual provision of work services), primarily due to the connection between the fixed salary and variable remuneration forming a unified target income and the fact that agency supervisors contributed to production results only indirectly. 

Key distinction: Continuous work performance or a directly attributable work result? 

The German Federal Labour Court expressly left open the possibility that the assessment might differ if variable remuneration does not compensate for continuous work performance over an assessment period, but instead rewards the achievement of a specific, individually assigned target. In such cases, full variable remuneration may be owed despite periods of absence without entitlement to continued pay. For example, this would apply to a salesperson who has achieved their personal annual sales targets within a year.

This was not the case here: the agency supervisors did not sell products themselves, and instead only provided indirect support. They were required to promote production and premium-relevant contracts by providing continuous support to sales partners. If they did not provide this service due to taking parental leave or being incapacitated for work beyond the statutory sick pay period, they were not entitled to any 
proportionate variable remuneration for these periods because it was only owed to those who had contributed to its success through their actual work performance. 

Reduction without explicit provision

The German Federal Labour Court also held that an explicit reduction clause is not required, as entitlement to the consideration lapses under the law itself. 

What does this mean in practice?

In light of this case law, employers should examine whether their variable remuneration compensates for continuous work performance during an assessment period or is linked to achieving a specific target set for the individual employee. Factors indicating work performance-based remuneration include the connection between fixed and variable components forming a unified target income; safeguards through minimum guarantees or advances; link to quantitative targets; and the absence of qualifying date clauses or repayment provisions. Reduction clauses are not mandatory in such cases, but are nevertheless recommended. For reasons of transparency and to avoid disputes, an explicit provision is advisable.

For variable remuneration that rewards a specific result directly attributable to the employee (rather than ongoing work performance), the German Federal Labour Court expressly left the decision open. In such cases, it may be advisable to explicitly agree reduction provisions, subject to their enforceability in individual cases. However, consideration must also be given to whether such provisions create negative incentives that might motivate employees to withhold work or delay business transactions.