An annual "performance evaluation" is not a reference letter

LAG Schleswig-Holstein, Judgment dated December 9, 2021 – 5 Sa 149/21

The issuance of an annual "performance evaluation" does not follow the same standards as that of an employer's reference letter pursuant to section 109 para. 1 of the German Industrial Code (GewO). Therefore, the special rules on the onus of proof set by case law for the claim to a reference letter are not applicable to the issuance of such an evaluation. The courts merely review whether the evaluation is based on a fair process and whether the employer has exceeded the scope of the evaluation. 

Facts

The defendant has employed the plaintiff as a regional sales manager since January 1, 2000. The cause of the dispute between the parties was the granting of stock options to the plaintiff by the defendant's parent company in the United States. The plaintiff and the defendant in Germany had concluded a target agreement for the year 2019, for which a "performance evaluation" was made by the defendant at the end of the year. The defendant assessed the plaintiff's performance in 2019 one level lower than the average assessment level of the workforce. In each of the prior two years, the plaintiff's performance had been rated at the overall average. The defendant's parent company granted the plaintiff fewer shares for 2019 than in 2018. The plaintiff therefore suspected a connection between the lower "performance evaluation" and the lesser shares he received from the Long Term Incentive Plan (LTIP).    

In an action brought before the Lübeck Labour Court (judgment of March 10, 2021 – 4 Ca 1765/20), the plaintiff asserted the direct granting of the difference between the shares received in 2018 and 2019, but was rejected by the court. The Labour Court argued that only the parent company, but not the defendant, were obliged to pay shares under the respective LTIP.

Before the Schleswig-Holstein Regional Labour Court (Landesarbeitsgericht, LAG), the plaintiff filed an additional claim to have the overall assessment of his annual "performance evaluation" – which in his opinion influenced the amount of shares granted – corrected in his favour.

Decision of the Regional Labour Court

The LAG rejected the plaintiff's admissible appeal as well. The defendant was not required to reassess the overall grade of the "performance evaluation" or to change it in favour of the plaintiff.

The plaintiff was not able to demonstrate any errors of assessment on the part of the defendant – in particular, no violation of its own assessment guidelines. The court argued that the "performance evaluation" is a business evaluation, which generally serves internal purposes. For this reason, the evaluation does not follow the same principles as the issuance of an employer's reference letter pursuant to section 109 para. 1 GewO, and is therefore not subject to the rules in the case law of the labour courts on the burden of proof for reference letter. According to the court, already the terminological difference between ‘evaluation’ and ‘reference’ shows this. An evaluation is an act of obtaining knowledge in which the evaluator has a margin of discretion. In contrast, a reference is intended as a document for the future professional development of an employee and thus for the information of possible future employers. The correctness of the evaluation itself cannot be reviewed by the courts. Only the assessment process as such is subject to judicial review. The employer's discretion when evaluating the performance only exceeded if the employer bases his evaluation on irrelevant aspects or disregards generally applicable assessment standards. The plaintiff had not been able to demonstrate such an overstepping of the discretion of the defendant such as a procedural error or an incorrect factual basis. In particular, there was no contradiction between the commentary and the overall grade.

Notes

The ruling of the LAG deserves to be approved. The provision of section 109 para. 1 GewO expressly and unambiguously refers to the issuing of reference letter. The necessity of complying with the requirements of section 109 GewO for reference letters is due to the purpose of their use vis-à-vis third parties, i.e. outside the company. This differs from a purely internal annual performance evaluation, which has no relevance for third parties. For this reason, the employer is to be granted more discretion for such an evaluation. Therefore, the result of this evaluation cannot be assessed by the courts as correct or incorrect, but may only be reviewed for errors in the evaluation procedure itself.

Another – more important – learning from the decision is that the Schleswig-Holstein Regional Labour Court also follows the line of the German Federal Labour Court that when stock options are granted by another group company (in practice often the parent company in the United States), there is usually no claim against the respective German employer. When designing compensation packages that are to include the granting of shares or stock options, this very advantageous structure should always be considered. We will be pleased to advise on the practical implementation of such compensation models.

In addition, the decision should serve as a reminder to the everyday HR-practice, where legal advice cannot be sought all the time: When evaluating the achievement of objectives, for example in the context of granting discretionary bonuses, the limits of the scope for evaluation must always be observed. In particular, only relevant aspects may be factored into the evaluation. The actual positive sides of the employee’s performance must always be taken into account appropriately and must not be ignored.