The principle of remuneration based on the employee’s performance has long been permitted by French employment law provided in particular that such remuneration is based on objective criteria, does not result in payment of remuneration inferior to the minimum wage and complies with the general principle of equal work for equal pay.
In the context of variable remuneration, the setting of the employee’s objectives is decisive since it is the achievement of such objectives that determines the extent of his/her variable remuneration.
In addition, if the employment contract provides that the employee’s objectives will be set upon agreement of both parties at the beginning of each year, the employer is not entitled to modify unilaterally the objectives on the basis of which the variable pay is calculated. In this context, what happens if the employer fails to engage in the negotiations of the employee’s objectives?
In a ruling of the Supreme Court dated 19th November 2014, the remuneration package of an employee included a variable pay element amounting to 60% of his annual gross basic salary determined on the basis of annual objectives set by mutual agreement at the beginning of each year. However, in this case, the employer had not initiated such negotiations and the employee lodged an action before the employment tribunal in order to obtain the judicial termination of the employment contract as well as the payment of his variable pay package.
The Supreme Court considered that since the employer had not complied with its obligation to negotiate the objectives with the employee, the court was entitled to determine such objectives so as to calculate the employee’s entitlements to variable pay. In addition, the Supreme Court ruled that such breach of the employer’s obligation had prevented the contract from continuing, and therefore ordered the termination of the employment contract (with the same effects as unfair dismissal).
The Supreme Court reiterated in its decision its usual position which is that the employer remains obligated to make payment of the variable portion of the pay package if it fails to commence the negotiations of the employee’s objectives where this is required by the employment contract. More interestingly, however, this ruling also confirms a new trend in case law under which the judges only pronounce the judicial termination of the employment contract if the breach of the employer’s obligation actually prevents the employment contract from continuing. In this case, the judges took into consideration the fact that the amount of variable remuneration represented a large portion of the total amount of the employee’s annual gross salary. Therefore, the breach of the employer’s obligation was sufficiently significant to justify ordering the judicial termination of the employment contract (having the same consequences as unfair dismissal). As a result, employers will need to ensure that they engage in the negotiation of the employees’ objectives in accordance with the contractual provisions if any. Otherwise, they could face significant financial liabilities resulting from salaries claim or judicial termination request.