If the employer and employee agree a variable remuneration in the form of a bonus in the employment contract, the payment of which is linked to the achievement of various targets that are unilaterally set by the employer, the employer is liable to pay damages to the employee if it sets the employee the targets so late that the target cannot have any incentive or motivational function for the employee (BAG, judgement of 19 February 2025, Ref. 10 AZR 57/24).
Legal background
Last year, the Regional Labour Court of Cologne ruled that an employee is entitled to compensation in the amount of the full bonus payment if the employer does not set the targets until September of the year instead of by the date agreed in the employment contract – by 1 March of each year (LAG Cologne, judgement of 6 February 2024 – 4 Sa 390/23). In the opinion of the Regional Labour Court, a target that is not set at all or is set so late can no longer fulfil the incentive and motivational function, the achievement of the target is therefore made impossible and justifies a claim for damages in the maximum bonus amount.
With this argument, it follows the established case law of the Federal Labour Court regarding a target agreement between employer and employee regarding a bonus payment that was not made at all or was made too late (BAG, judgement of 03.07.2024 – 10 AZR 171/23). Accordingly, an agreement on objectives can only fulfil its incentive function in accordance with the idea of performance enhancement and motivation if the employee already knows the objectives to be pursued by him when performing his work and knows which personal and/or company-related objectives the employer attaches particular importance to achieving in the respective period and is therefore prepared to pay the promised bonus if these objectives are achieved. It is therefore not possible to set targets for a past period that do justice to the idea of increasing performance and motivation and thus the purpose of a target agreement (BAG 17.12.2020 – 8 AZR 149/20 – para. 46).
The Federal Labour Court has now recently applied this legal opinion to the case of unilateral target setting by the employer and confirmed the Cologne Regional Labour Court in its decision (BAG, judgement of 19 February 2025, Ref. 10 AZR 57/24): “The employer culpably violated its obligation by not setting individual targets for the employee and only communicating the company targets to him in a binding manner after around ¾ of the target period had already expired. At this point, it was no longer possible to set targets that would fulfil their motivational and incentive function.” However, the Federal Labour Court does not specify a concrete date by which the employer must have set the targets.
Distinction between target agreement and target setting
Whether the employee’s objectives to be achieved are determined by means of an agreement on objectives or by setting objectives is regularly regulated in the employment contract.
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Target agreement
In a target agreement, the employer and employee jointly agree (usually at the beginning of the financial year or at the end of the previous financial year) on the type, weighting, scope or timing of the targets to be achieved within a certain period of time.
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Target setting
Unlike target agreements, targets are set solely by the employer, who is granted a unilateral right to determine performance within the meaning of Section 315 (1) BGB(Federal Labour Court 17 December 2020 – 8 AZR 149/20 – para. 37 mwN, BAGE 173, 269). The participation of the employee is not required and the target can also be enforced against the employee’s will.
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Contributory negligence
However, the different handling of any contributory negligence on the part of the employee in accordance with Section 254 (1) BGB, according to which the claim for damages is to be reduced under certain circumstances, must be taken into account.
In the event of a delayed target agreement, any contributory negligence on the part of the employee may be taken into account to reduce the claim if, for example, the employee did not request the employer to conclude a target agreement at all, so that according to the highest court case law of the Federal Labour Court, a reduction of the claim for damages of 10 % is appropriate (BAG, judgment of 17 December 2020, Ref. 8 AZR 149/20). This applies at least if the burden of taking the initiative to conduct target agreement meetings is not clearly imposed on the employer in the employment contract.
In the case of late target setting, on the other hand, contributory negligence on the part of the employee is generally out of the question, as the employer alone bears the initiative burden for setting the targets.
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Consequences for the employer and recommended action
Employers should always bear in mind whether they alone bear the initiative for setting the targets to be achieved within the framework of bonus agreements or whether they set them together with the employee.
In either case, employers are advised to introduce internal company procedures to ensure that the targets to be achieved are set or agreed in good time and that the process as a whole is documented.
If a delay has already occurred, consideration should also be given to setting the employee targets for the outstanding period that he or she can still achieve in terms of time or, in the case of a target agreement, agreeing corresponding targets with the employee, as this can minimise the damage. The Federal Labour Court does not specify a concrete date by which the employee must be given targets. However, this should be possible by the end of the first quarter of the respective financial year, as future targets often depend on the results of the previous year. The earlier the better” applies here.