Latest Developments on EU Level

After lengthy negotiations, the European Parliament, the European Commission and representatives of the EU member states agreed at the end of February to cap bonus payments of bankers. In future, their bonus payments may generally not be higher than their base salary. By way of exception to this rule, the variable remuneration may be up to twice as high as the base salary, provided that three quarters of the companies’ shareholders approve such an increase. This plan has been severely criticized by the banking sector, as the variable remuneration is often the decisive argument in the “war for talent”, especially in the field of investment banking. Even outside the financial districts the proposal is seen as unreasonable interference with the principle of autonomy of the individual. The new provisions are supposed to become effective at the beginning of 2014. The Parliament and the EU member states still have to finally approve the compromise, this is deemed to be a mere formality though.

The implementation of the new regulations with respect to existing bonus agreements is critical from an employment law perspective. It will be crucial to constructively use the limited tools offered by German employment law in order to adjust excessive bonus promises.

Similarity to the Implementation of Remuneration Regulations of 2010

Since the Institutions’ Remuneration Regulation (Institutions’ Regulation) and the Insurance Remuneration Regulation (Insurance Regulation) came into force in October 2010, the concerned companies have been facing the question, how to apply the new regulations to existing agreements. It is to be expected that similar issues will become relevant in the context of the outlined regulations about the capped bonus amount which will apply from 2014. It may be assumed that the companies are at least again required “to work towards” an adjustment of existing agreements that provide for excessively high bonus payments “to the extent permitted by law”, as the Institutions’ Regulation and the Insurance Regulation contain similar provisions.

Employment Law Issues

From an employment law perspective, it is highly controversial whether and how a concerned company can adjust existing agreements if the employee does not consent to the amendment. So far, there appears to be no case law regarding this question, which may be explained inter alia by the fact that most companies may only have tried to implement the new rules for the business year 2012. Furthermore, it is to be hoped that most employees would not challenge an adjustment of those agreements which do not comply with the regulations given that the Remuneration Regulations provide for clear requirements.

New Agreements

Even if the concrete wording of the new provisions has not been determined yet, it is very likely that the maximum amounts which are currently under discussion will apply as of 2014. Companies should therefore take the required bonus caps into account and insert a corresponding legally valid provision in any new employment or service agreement.

Discretionary Variable Remuneration

There should not be any issues with employment or service agreements, or a works council agreement, which merely stipulate that the employee or the management board member is entitled to a variable remuneration, but that the concrete amount is to be determined by the company in its reasonable discretion. When exercising its discretion, the company has to take into account the new requirements for remuneration schemes and may, against this background, determine a bonus payment which does not exceed the then applicable maximum cap.

Problematic Cases

The situation is more complicated if the existing bonus agreement precludes the direct implementation of the new rules, e.g. if it explicitly promises too high bonus amounts. Provided that the new regulations stipulate again an obligation for the employer to work towards a bonus agreement complying with the regulations, the concerned companies should consider the following legal instruments, besides a mutual solution with the employee:

Voluntary or Revocable Bonuses

Where companies validly reserved the right to make voluntary payments only, or to revoke a bonus commitment, they should exercise such rights in order to comply with the upcoming regulations on caps for bonuses. It must be noted, though, that such clauses are subject to a strict control by German courts and they are often held to be invalid in practice.

Dismissal for Variation of Contract

A dismissal for variation of contract, i.e. the termination of the contract of employment combined with the offer to continue the employment relationship with amended terms, is likely to be invalid for lack of a sufficient ground for dismissal. The Federal Employment Court has held that a dismissal for variation of contract which merely provides for the reduction of remuneration is generally possible, but it requires the employer to meet strict standards for the validity. In such constellations, it is especially to be determined whether the proposed variation of contract is reasonable from the concerned employee’s perspective, which is again to be analyzed with regard to the principle of proportionality. This will typically only be the case if the existence of the company depends on the envisaged salary reduction, e.g. in case of salary cuts in order to avoid bankruptcy. Against this background, it is to be assumed that a mere change of the legal requirements of remuneration schemes will not be sufficient to justify a dismissal for variation of contract. It remains to be seen whether the new regulations for 2014 will be phrased in such a way that the wording provides for a compelling operational ground for a dismissal for variation of contract. This is to be doubted, though.

Legal principle of “Frustration of Contract”

According to the principle of “frustration of contract”, a party may ask for an adjustment to the contract if circumstances, which were the basis for the conclusion of the contract, have drastically changed after the conclusion of the contract, so that it cannot be reasonably expected that this party remains bound to the contract. It may already be doubted whether this principle applies besides the general possibility of a dismissal for variation of contract. The applicability is declined in the context of the Remuneration Regulations with the argument that the remuneration elements may only be altered to the extent permitted by law and that the regulation should not result in the amendment of the general conditions of civil and employment law.

Management Board Members

Due to their position as statutory company representatives, the aforementioned employment law protection does generally not apply to management board members, namely managing directors of a limited liability company (GmbH) and board members of a stock corporation (Aktiengesellschaft), so that an adjustment of their existing contracts should be easier. The Remuneration Regulations merely provide that the administrative / supervisory body is in charge of determining the remuneration of the management.

This cannot be interpreted as a basis for a unilateral modification of existing service agreements. It is argued though, that the adjustment of the management’s remuneration may be based on the general contractual principle of loyalty in connection with the new regulatory requirements stipulated in the Regulations. This argument should be transferable to the upcoming regulations about bonus caps. It should therefore be tried to achieve an amicable adjustment of the contracts of the managers on this basis. If this “negotiation solution” fails, a termination of the service agreement (the dismissal protection rules do not apply) or at least the phasing out of a fixed term agreement, which cannot be ordinarily terminated, could be considered, in connection with an offer of continuing the service agreement with terms and conditions that comply with the regulations. It remains to be seen whether the new regulations provide for more concrete instruments with respect to the adjustment of service agreements of managers.

Conclusion

The new regulations can, of course, only be analyzed in detail once the concrete wording has been disclosed. It may, however, be expected that the concerned companies will be confronted once again with the outlined legal issues when trying to implement the new rules. It is therefore strongly advisable to take the newly announced bonus caps in the banking sector into account already today for any upcoming negotiations about bonus agreements in order to avoid any subsequent implementation issues.