Ruling on performance targets: Federal Labour Court further tightens bonus regulations

Bonus schemes often link variable remuneration to the achievement of specific targets. A distinction must be made between target agreements and target setting – a distinction that has significant legal consequences.

In the case of a target agreement, the employer and employee set the targets jointly. If such an agreement is culpably not reached, the employer may be liable for damages.

The situation is different in the case of a target. Here, the employer alone determines the relevant targets within the scope of their right to determine performance under Section 315 of the German Civil Code (BGB). However, this discretion is bound by the principles of ‘ ’ (reasonable discretion) and must be exercised in good faith towards the employee. If the target is not set or is set too late, claims for damages may arise.

With its latest ruling, the Federal Labour Court (BAG) is, amongst other things, consistently continuing its case law from the judgements of 3 July 2024 (10 AZR 171/23) and 19 February 2025 (10 AZR 57/24).

The case

The claimant’s variable remuneration consisted of the achievement of individual targets and a company-related financial modifier.

Under the relevant works agreement, the company’s targets were to be set at the beginning of each year. In practice, whilst the employer did set the financial targets internally, it did not inform the employees eligible for the bonus of these targets. It was only after the end of the bonus year that the relevant company targets were announced during a town hall meeting.

For the year in question, the employer paid out only around half of the potential bonus. The employee subsequently claimed damages amounting to the difference. Whilst the Labour Court and the Regional Labour Court dismissed the claim, the appeal before the Federal Labour Court was successful.

Decision

The Federal Labour Court (BAG) clarified that a target can only fulfil its purpose if employees are made aware of the relevant targets in good time. A purely internal determination is not sufficient.

The court emphasised that the setting of targets constitutes a declaration of intent requiring receipt within the meaning of Section 315 of the German Civil Code (BGB). The performance requirement only becomes effective once it has been communicated to the employee. The targets are intended to provide guidance and create an incentive for performance. By its very nature, this purpose can no longer be achieved if the targets are only announced after the target period has expired.

The Federal Labour Court’s (BAG) ruling on the amount of damages is particularly relevant in practice. If the employer has breached its duty to set targets in good time, it is generally assumed that the employee would have achieved the targets. If the employer wishes to rebut this presumption, it must set out and prove specific facts showing that the targets would not have been achieved even if they had been announced in good time. A mere assertion that the financial year was economically poor is not sufficient for this purpose.

Nor is the employee under any obligation to remind the employer of the targets or to demand that they be set. The initiative lies exclusively with the employer.

The judgement does not represent a fundamental change of course, but rather a further important refinement of the Federal Labour Court’s case law on bonuses.

Recommendation for action:

• Review bonus schemes: First, clarify whether your remuneration system is based on target agreements or target specifications. Both models are subject to different legal requirements.
• Communicate targets in good time: It is not sufficient to set company targets internally. The targets must be verifiably communicated to the employees concerned at the start of the target period.
• Ensure documentation: The timing, content and receipt of the targets should be documented. This makes it easier to prove that targets were set correctly in the event of a dispute.