News - Germany

Germany - October 2009

Germany: New limits on variable pay arrangements

Recent case law decisions mean it is now necessary to revise clauses in employment contracts which provide that certain payments are discretionary or may be revoked in certain circumstances.  The nature of a discretionary payment means that the employee is not entitled to it.  Revocation clauses allow for an agreed payment which was agreed for an unlimited period to be revoked under certain circumstances.

The Federal Labour Court has ruled that clauses which contain both discretionary elements and the ability to revoke are not enforceable (BAG, 30/07/2008 – 10 AZR 606/07).  Furthermore, contractual clauses should not conflict (such as in the instance where one paragraph grants a special payment, for example, using the words “the employee receives”, and a further paragraph then states that this payment is voluntary or at the discretion of the employer (BAG, 24/10/2007 – 10 AZR 825/06)).  The court also considered that monthly payments cannot be agreed to be discretionary (BAG, 25/04/2007 – 5 AZR 627/06).

Commentary

As a result of this decision, it may be sensible to only include an element of discretion for benefits which exclusively reward loyalty to the company.  Any other payments that reward work performed could contain a revocation provision specifying the reasons for revocation in certain circumstances (for example economic reasons, conduct of the employee) and stipulating that not more than about 25% (based on previous Federal Labour Court decisions) of the compensation package may be revoked.

The alternative could be to agree a revocation clause for monthly remuneration and to make other benefits discretionary, for example payments such as Christmas bonuses, premiums.  However, it remains to be seen whether future decisions of the Federal Labour Court will allow this alternative, particularly where such payments also compensate an employee for the services he has provided to the company.

For further information or to discuss the issues raised, please contact Stefanie Andrelang (Turn on Javascript!) on +49 89 24 22 30 0.

This article was produced by, and re-produced with kind permission of, our correspondent firm in Germany, Keller Menz Rechtsanwälte.  www.keller-menz.de

Keller Menz

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