Court rules on cut-off date provisions in bonus plans

On 29 January 2020 the Berlin-Brandenburg Regional Labour Court ruled on the effectiveness of a cut-off date clause in a works agreement (4 Sa 1456/19). The court held that a special payment to an employee intended to reward both loyalty and performance can be dependent on the existence of the employment relationship on a certain cut-off date.

Background

The plaintiff had worked for the defendant as an employee from 2012 until 2018. On 30 November 2018 the employment relationship ended as a result of a termination by the plaintiff. The plaintiff requested from the defendant the payout of an annual special payment for 2018.

The defendant and its works council had concluded a works agreement on an annual special payment for employees to reward both company loyalty and performance. However, only employees whose employment relationship still existed on 1 January of the year following the end of the bonus period were entitled to this payment. Since the plaintiff's employment relationship ended on 30 November 2018, the defendant did not pay the special payment to him.

The Berlin Labour Court decided that the plaintiff had no claim to the special payment because on 31 December 2018 the employment relationship between the plaintiff and the defendant no longer existed.

Following the Berlin Labour Court's negative judgment, the plaintiff pursued his claim before the Berlin-Brandenburg Regional Labour Court. He argued that the cut-off date clause in the works agreement was invalid. Therefore, whether an employment relationship existed on 31 December 2018 was irrelevant for the payment claim.

Decision

The plaintiff's appeal was unsuccessful. The Berlin-Brandenburg Regional Labour Court decided that the plaintiff was not entitled to a bonus payment for 2018, because on 31 December 2018 no employment relationship existed between the plaintiff and the defendant. In the court's view, the cut-off date clause in the works agreement was legally valid and enforceable because the special payment was not only a remuneration for the plaintiff's performance but also for his loyalty.

The court stated that, in its view, the annual payment was a special payment of a mixed nature. On the one hand, this payment was intended to provide a remuneration for annual work performance. On the other, it was intended to create a bond between the defendant and its employees beyond the end of the bonus period. The bonus payment was supposed to induce employees not to terminate their employment relationship in the current fiscal year.

In the case of a special payment of a mixed nature, the parties to a works agreement (ie, the employer and the works council) are free to make such payment subject to ongoing employment through to a cut-off date at the end of the bonus period. In the case of a payment which depends solely on employees' performance without simultaneously honouring their loyalty, employers cannot effectively determine that the entitlement to the payment is forfeited if the employment relationship ends before the end of the year. However, in the case at hand, the special payment had a mixed character so the cut-off date clause was effective and violated neither Section 75 of the Works Constitution Act nor Section 611a, Paragraph 2 of the Civil Code.

Comment

The Berlin-Brandenburg Regional Labour Court's judgment differs partially from the Federal Labour Court's 13 November 2013 judgment (10 AZR 848/12). In its 2013 decision, the Federal Labour Court awarded a payment claim to a plaintiff although the cut-off date was, as well, the end of the bonus year. The difference was that in the 2013 decision, the cut-off date clause was included in an individual contractual bonus promise, whereas the Berlin-Brandenburg Regional Labour Court had to decide on a clause included in a works agreement. Employment agreements are subject to a more stringent review under the German law on general terms and conditions. Extra payments with a mixed character promised on an individual contractual basis are considered to be earned and vest on a monthly pro-rated basis. Clauses in individual contractual bonus promises that retroactively eliminate an entitlement if an employment ends prior to the end of the bonus year are considered unreasonably disadvantageous for employees and, therefore, invalid. Therefore, in practice, the existence and the implementation of a bonus plan with a works council gives employers more flexibility.