Judgment of the Federal Labor Court on February 19, 2025 – 10 AZR 57/24
In addition to a fixed salary, employment contracts may also stipulate variable compensation tied to the achievement of specific targets. However, the employer must provide these targets in a timely manner, as failure to do so can trigger claims for damages from the employee. This was the decision made by the Federal Labor Court (BAG) in its ruling of February 19, 2025 (Case No. 10 AZR 57/24).
Variable compensation is intended to serve as an incentive for the employee to achieve certain targets. To fulfill this purpose, it is essential that the employee is aware of the targets they are expected to meet. Therefore, the employer must specify the targets in advance, as explained by the business law firm MTR Legal, which provides legal advice and consistently represents its clients’ interests both out of court and in court.
A delayed or missed target setting generally cannot fulfill its motivational and incentive function. This can, in principle, trigger the employee’s entitlement to compensation, as demonstrated by the BAG’s ruling.
Employer’s Delayed Target Setting
In the underlying case, the plaintiff, who held a managerial position, had a variable compensation component stipulated in their employment contract. The works agreement stated that the target setting should be provided by March 1 of each calendar year. The targets were to consist of 70% company goals and 30% individual goals. The amount of the variable compensation was tied to the employee’s achievement of these goals.
In 2019, the company only presented the company goals in October. The plaintiff did not receive any individual goals. For 2019, the plaintiff was ultimately awarded a variable compensation of around €15,500.
Employee Claims Compensation
The plaintiff contested this decision. He filed a claim for compensation, arguing that he did not receive individual goals, and that the company goals were presented late. He contended that had the goals been set in time, he would have been able to achieve both the individual and company goals, and that the variable compensation should have been higher. Therefore, the plaintiff claimed €16,000 in damages.
The employer, on the other hand, argued that the target setting was done on time and in accordance with principles of fairness, and therefore, no compensation claim should arise.
The Labor Court rejected the plaintiff’s claim, but the Regional Labor Court in Cologne ruled in favor of the plaintiff on appeal (Case No. 4 Sa 390/23). The employer carried the dispute further to the Federal Labor Court. However, its appeal was unsuccessful. The Tenth Senate of the Federal Labor Court confirmed the decision of the Regional Labor Court in Cologne: The plaintiff is entitled to compensation of around €16,000.
BAG: Employer Breached Its Duty
The BAG stated that the employer had negligently violated its duty to set the targets for the year 2019, as stipulated in the works agreement. The employer had not communicated individual goals to the plaintiff and had only provided the company goals in October, by which time nearly three-quarters of the target period had already passed. At that point, the motivational and incentive function of the target setting could no longer be fulfilled, the BAG clarified. Therefore, there could be no subsequent judicial determination of performance targets.
When determining the amount of compensation, the variable compensation corresponding to the achievement of the target should be used. It could be assumed that the plaintiff would have fully met both the company goals and individual goals, based on reasonable discretion. There were no exceptional circumstances to exclude this assumption, the BAG stated.
The plaintiff should not be held responsible for contributory negligence, as the employer alone is responsible for setting the targets, according to the BAG.
Enforcing Your Interests
The BAG’s ruling has clarified the situation. Employers should ensure that targets are communicated on time to avoid legal disputes.
Workplace disputes are not always avoidable. MTR Legal attorneys consistently represent clients’ interests, both through out-of-court settlements and through careful litigation as cases progress through the courts.
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