Damages claim for failure to agree on targets?

Judgement of the Federal Labour Court of 03 July 2024 - 10 AZR 171/23 

The Federal Labour Court (Bundesarbeitsgericht - BAG) clarifies that employers are in breach of their contractual obligation if they fail to negotiate a target agreement with the employee. Furthermore, the BAG considers a clause on the unilateral setting of targets by the employer in the event that no target agreement is reached between the contracting parties to be invalid. 

Facts of the case

The plaintiff was employed as a Development Director at a ship holding company and was entitled to variable remuneration under his employment contract, which was dependent on the achievement of certain targets. The targets were to be agreed each year between the plaintiff and the defendant employer. If no agreement was reached, the contractual provision stipulated that the employer could set the targets unilaterally at its reasonable discretion. 

No target agreement was reached for 2020 as the parties were unable to achieve consensus.. Instead, the employer unilaterally defined targets, which the plaintiff considered unreasonable. The plaintiff terminated the employment relationship at the end of 2020 and asserted a claim for damages against his employer in the amount of approx. 100,000.00 gross EUR due to lost variable remuneration for the year of 2020.

Content of the decision

The BAG ruled in favour of the plaintiff and ordered the employer to pay damages in the amount of 83,000.00 gross EUR. 
According to the BAG, the employer had breached its contractual obligation to negotiate a target agreement with the plaintiff and to allow him to influence the setting of the targets. 

The BAG clarified that a clause which allows the employer to unilaterally set the targets in the event that negotiations on a target agreement fail is invalid due to a breach of sec. 307 para. 1 and 2 Civil Code (Bürgerliches Gesetzbuch – BGB). Such a clause enables the employer to undermine the contractually agreed order of precedence of target agreement and target setting. Assuming the validity of the clause, the employer could refuse or break off negotiations on a target agreement for no reason. In this case, the employer is solely responsible for specifying and prioritising the objectives. The employee, however, has no possibility of preventing this. This constitutes a violation of the principle that contracts and the obligations arising from them are binding for each party. In addition, the clause leads to unreasonable pressure for the employee to accept the employer's proposals even if their own ideas deviate from them in order to avoid unilateral target setting by the employer, even in the run-up to a negotiation, according to the BAG.

With regard to the asserted claim for damages, the BAG assumed that the plaintiff had achieved the agreed objectives, as there were no apparent indications to the contrary. 

Practical note

The BAG's decision shows that it is not possible to circumvent the obligation to negotiate target agreements by the employer unilaterally setting targets, even if the employer expressly reserves the right to do so in the contract. 

If the employment contract provides for a target agreement, the employer - if he/she wishes to avoid claims for damages by the employee - must negotiate seriously and promptly with the employee about the targets to be achieved and document this. The employee must be given an appropriate opportunity to participate in these negotiations. If the employee does not agree to proposals for realistic targets, this behaviour can serve as proof of exoneration for the employer in the context of a possible judicial assertion of claims for damages.

Alternatively, the parties may agree on a unilateral target setting clause in the employment contract in the first place, which grants the employer a unilateral right to determine performance in accordance with sec. 315 para. 1 BGB. However, this unilateral determination of performance is subject to full judicial review.