We would like to ensure that you are still receiving content that you find useful – please confirm that you would like to continue to receive ILO newsletters.
03 July 2019
In addition to an employee's basic monthly remuneration, employment contracts often provide for the payment of various bonuses or gratuities. The specifics of such payments (eg, whether they are guaranteed, discretionary, conditioned on the achievement of certain objectives or applicable after a certain period) can be freely agreed by the parties to an employment relationship and are usually set out in the employment contract.
In a recent dispute between a chief operating officer and her former employer, the Court of Appeal considered whether the annual bonus provided for in the employee's contract was owed to the employee since she had failed to complete her trial period.(1)
The employment contract in question included the following clause:
The gross annual fixed remuneration of the Employee is, at the date of signing hereof... Gross Euros... To this remuneration will be added an annual bonus of up to €60,000 gross, the terms of which will be fixed each year.
The employee, whose contract had been terminated during her probationary period, argued that she was entitled to the payment of her annual bonus, calculated in proportion to her time with the company.
The employee's request was based on Article 1178 of the Civil Code, according to which "the condition is deemed fulfilled when it is the debtor, obliged under this condition, who prevented its fulfilment". The employee claimed that she was entitled to her annual bonus because her employer had failed in its obligation to determine the method of calculation.
However, the Labour Court and subsequently the Court of Appeal rejected the employee's claim.
The Court of Appeal first analysed the disputed clause and recalled the legal principle according to which:
bonuses and gratuities are in principle a gift left to the discretion of the employer, unless they are due under a commitment expressly stated in the employment contract or in a collective agreement, or that the obligation to pay it results from constant use.
Thus, by definition, any bonus paid by an employer is discretionary unless the employer has to pay it under a contractual or a custom provision ('usage').
In the present case, the annual bonus was not discretionary as it stemmed from the employer's express contractual commitment.
The court noted that the employment contract in question "expressly provide[d] for the payment of an annual bonus, without any suspensive clause" and "indicate[d]… without any possibility of interpretation, that this premium [would] be paid, according to award procedures set each year".
Having characterised the binding nature of the bonus, the Court of Appeal held that the first six months of the employee's employment contract had constituted a trial period. According to the court, the method of calculating the annual bonus was to be determined at the end of the probationary period when both parties were certain that they wanted to continue the employment relationship.
The court pointed out that:
the purpose of the probationary period is to test the employee and to check whether [they are] fit to fulfil the basic task entrusted to [them] by the employment contract, respectively if [they] fits into the team in place. Once this period is over, the employer can reward [its] employee, setting goals beyond the minimum work that can normally be expected.
As the employment relationship in question had been terminated during the six-month probationary period, the employer had not had the opportunity to set the conditions for awarding the annual bonus. The court therefore rejected the employee's request.
This case shows that where the conditions for awarding a guaranteed annual bonus are not provided for in an employment contract, they should be determined at the end of the employee's trial period.
Further, where an employee's contract is terminated during their trial period and the conditions for awarding an annual bonus have not been determined, the employee cannot claim payment of such bonus.
For further information on this topic please contact Guy Castegnaro or Ariane Claverie at Castegnaro by telephone (+352 26 86 82 1) or email (email@example.com or firstname.lastname@example.org). The Castegnaro website can be accessed at www.castegnaro.lu.
The materials contained on this website are for general information purposes only and are subject to the disclaimer.
ILO is a premium online legal update service for major companies and law firms worldwide. In-house corporate counsel and other users of legal services, as well as law firm partners, qualify for a free subscription.