Does your company annually specify the targets to be entitled to the Bonus? Courts strengthen the employees’ right to be paid the Bonus by penalising the companies

By Juan Carlos Lombardía

The European Justice equals compensations payable upon expiration of permanent and fixed-term employment contracts. How can this ruling affect your company?

By David García

Does your company annually specify the targets to be entitled to the Bonus? Courts strengthen the employees’ right to be paid the Bonus by penalising the companies

Juan Carlos Lombardía

Within the remuneration systems to employees, the practice to incorporate into the remuneration package of employees performance-base fees (Bonus) is recurrent. However, on many occasions such systems are ambiguous and inaccurate or they do not even specify the targets to be achieved, but the right to be paid the Bonus is merely defined in the employees’ employment agreements. Such practice, which has become persistent, must be controlled by companies in order to prevent that mechanisms designed to reward the employees’ performance for achieving certain key and strategic targets for the company are denatured and become a fixed incentive of employees given the lack of regulation or ambiguity in its definition.

Determination of targets within the variable remuneration system is aimed at involving employees and boosting their participation, improving their commitment in the strategic targets of the company. Despite its critical importance, there are cases where such targets cannot be specified and thus employees cannot perform them and become discouraged in their efforts because they ignore the specific targets or goals that must be attained to qualify for such incentives. But, additionally, this non-specification of targets may also have legal consequences in respect to the variable remuneration system.

Recently, litigation and controversy regarding variable remuneration systems (Bonus) are materially increasing. Courts, through many judgments, are forcing companies to review their Bonus policies and plans to avoid that the Bonus is consolidated as an additional fixed wage of employees. There are recent cases where Courts have forced the companies to recognise such Bonus to their employees despite of the fact that such targets have not been reached or have not been established.

(…) the non-establishment of the targets will not prevent the employee from being paid the Bonus.

Then, we must ask ourselves, what are the consequences for a company that does not annually define the Bonus targets?

The answer to such question is given by Case Law of the Supreme Court and the National Court of Justice, which have dealt with different cases on the issue.

The doctrine of the Supreme Court on this issue became established in Judgments of the Labour Courtroom dated 14.11.07 and 09.07.13. In such decisions, the Supreme Court has ruled that an employee will be entitled to be paid the Bonus if the targets to be attained are not clearly specified by the company. In other words, we start from the basic premise that the performance-base fee is part of the salary agreed, whose amount will depend on the performance degree of the targets assigned, which means that the company must determine and communicate to employees each year (or the time agreed) the targets to be achieved, without allowing the liberalization of the variable fee payment when the company does not provide the employee with such targets.

The arguments on which the Supreme Court supports such thesis are the following:

1. The company that does not determine the targets and prevents the employee from being paid the Bonus turns the agreement into an incentive agreement subject to the exclusive will of one of the contracting parties, thus conflicting with the prohibition established in Article 1256 of the Civil Code.

2. The company is liable for determining the targets and if the same are not established, employee is being prevented from fulfilling the condition that entitles him/her to be paid the Bonus, which is prohibited by Article 1115 of the Civil Code. Such precept establishes that when the performance of a condition (target) depends on the exclusive will of the debtor (the company), the conditional obligation shall be null and void. This means that if the specific targets entitling the employee to be paid the Bonus are not established, the obligation to pay such Bonus is not any longer conditional and becomes directly demandable by the employee.

3. Ambiguity or obscurity in the terms of the target establishment can only be interpreted against the party that included the clause in the agreement, i.e., the company. The Courts reaches such conclusion by applying Article 1288 of the Civil Code, which sets out that interpretation of obscure clauses in an agreement shall not favour the party that may have caused such obscurity or ambiguity of the clause. This way, either if regulation was unilaterally established by the company or established in the employment agreement, the company shall be the one to be liable for an unclear wording, the employee being interpreted as entitled to the Bonus in this case.

4. Finally, the Courts argue that the rule must be interpreted in the most appropriate sense to be effective. For this reason, we must not understand that given the lack of targets the whole clause is null and void, but only the condition, i.e., the condition to achieve some targets, the obligation to pay the Bonus being therefore valid but without the need to perform any condition. This way, the non-establishment of the targets will not prevent the employee from being paid the Bonus.

Furthermore, a recent Judgment of the National Court of Justice has established doctrine requiring that companies pay the Bonus although the targets have not been attained or quantified.

(…) we recommend that companies carry out a review of their Variable Remuneration Plans (…)

Such Judgment declares the nullity of the decision of a company not to grant the Bonus of 2015 because the targets were not achieved, since the ruling understands that the company had not communicated the specified targets for 2015 to the parties concerned.

The National Court of Justice highlights that the targets must be known by employees and cannot be communicated ex-post, since although the company is free to establish the targets, such targets cannot be communicated after the term where they should have been achieved.

As we can see, the absence of targets, their inaccuracy or the lack of communication prevents the employee from performing the condition that entitles him/her to the Bonus, which may imply that in the event of any claim for payment by the employee, the courts may consider that the employee is entitled to be paid the Bonus although the employee has not performed the targets or such targets have never been specified.

Hence, in light of the increasing litigation existing on variable remuneration, we recommend that companies carry out a review of their Variable Remuneration Plans to confirm that the regulation conditions of such Plans are in accordance with the legal and case law requirements to avoid that such variable remuneration tools cease to be performance-based fees and become part of the fixed salary of employees.

The European Justice equals compensations payable upon expiration of permanent and fixed-term employment contracts. How can this ruling affect your company?

David García

The Judgment of the Court of Justice of the European Union (hereinafter referred to as the CJEU) dated 14.09.16, which established that rights of interim workers should be equal to those of indefinite workers as regards indemnification has provoked controversy on the possibility and consequences to equate the amounts of the compensations of fixed-term and permanent workers. But, what was exactly discussed in the Judgment?

The Judgment of the CJEU dated 14.09.16 resolved a preliminary reference put forward by the High Court of Justice of Madrid, which required the CJEU to decide upon the compliance with the European Law of the Spanish rule that excludes the compensation for expiration of the interim employment contract, while recognises the right to be paid the compensation in the event of expiration of an indefinite contract for objective circumstances.

The High Court of Justice of Madrid filed a petition for a preliminary ruling to the CJEU, which contained 4 preliminary references on the interpretation of the European Law and, particularly, Directive 1999/70, for its specific application to the case to be settled by the Court.

The plaintiff in such proceedings was hired as an interim worker by the Ministry of Defence to replace another employee who had her contract suspended for seven years due to acting in an official capacity (Public Administration Labour Personnel). In her lawsuit, the interim employee alleged that her employment contract had been entered into fraudulently and the High Court of Justice, before issuing a ruling, put forward before the CJEU as a preliminary reference, if the Spanish rule excluding the compensation for expiration of the interim employment contract, but recognizing the right to be paid the compensation in the event of termination of an indefinite employment contract for objective circumstances, is in accordance with the European Law.

(…) the principle of non-discrimination prevents a different treatment between workers (…)

The purpose of Directive 1999/70 is to apply the framework Agreement incorporated into the Directive and signed between the general cross-industry organisations. Article 4 of such Agreement states that In respect of employment conditions, fixed-term workers shall not be treated in a less favourable manner than comparable permanent workers solely because they have a fixed-term contract or relation unless different treatment is justified on objective grounds.

The issue was to resolve if the different treatment between interim workers, who are not entitled to compensation upon expiration of their contracts, and permanent workers, who are entitled to such compensation when the contract is terminated on objective grounds, is consistent with the principle of non-discrimination stipulated in Article 4 of the framework Agreement.

In response to the preliminary references issued, the CJEU ruled that the principle of non-discrimination prevents a different treatment between workers with a fixed-term contract and workers with a permanent contract in a comparable situation, unless there are objective circumstances that may justify such difference.

The Judgment should also decide if in the litigation causing the preliminary ruling, the situations of the employee with an interim contract and another employee with a permanent contract were comparable and, should the response be affirmative, if there was any justification for such different treatment. Pursuant to the Court, the situation of the worker with a fixed-term contract was comparable to the one of a permanent worker because she performed a work analogous or identical to the one of a permanent worker, based on the fact that during seven years the interim worker held the same position as the one held by the employee with a permanent contract.

Moreover, the Judgment admitted that the interim nature of the employment contract or relation is not a sufficient objective ground for a different treatment, because this would render the purposes of the Directive void and would mean to perpetuate the maintenance of an unfavourable situation for workers with an interim employment contract.

The conclusion of the reasoning reflected in the statement of the Community Judgment is that Article 4 of the framework Agreement incorporated into Directive 1999/70 opposes the Spanish regulations which deny any compensation upon expiration of an interim contract, but allow such compensation for a comparable permanent worker without the mere temporary nature of the contract being an objective reason to justify such different treatment.

Then, pursuant to the CJEU, before two identical situations whose sole difference is the duration of contract, compensations shall be equalled.

But, what are the possible consequences of this Judgment? Particularly, the union Comisiones Obreras has stated, after the Judgment becoming known, that it will bring legal actions to ensure payment of the economic differences of all employees affected by expiration of their interim contracts in the last year. In turn, UGT has warned that if the Statute of Workers is not reformed, it will resort to the parliamentary groups and the Parliament for the Spanish legislation to make the relevant corrections under a draft law.

Similarly, several Spanish Courts are passing Judgments by applying the case law of the CJEU in relation to interim employment contracts. This has been the case of País Vasco, Andalucía and Madrid, for example.

The High Court of Justice of País Vasco issued on 18.10.16 the first Judgment which, in application of the CJEU doctrine, equals dismissal of permanent and fixed-term workers on objective grounds, thus increasing the compensation of the interim contract.

Such Judgment discussed the expiration of a contract executed for a certain work or service (more precisely, a research project) and the High Court of Justice of País Vasco ruled that the compensation to be paid to the worker whose contract expired and whose adjustment to law was not questioned by the Courtroom, is of 20 days of salary per year worked, i.e., the same that would correspond to a worker with an indefinite contract, the foregoing based on the primacy of the Community case law and the prevalence of the European Law against the domestic law.

Hence, the first interpretations of our High Courts of Justice of such CJEU doctrine seem to follow the trend to effectively equal compensations between permanent and fixed-term contracts, provided that they expire for objective reasons (compensation of 20 days of salary per year worked) and the only difference between workers is the temporary nature of their respective contracts.

For this reason, companies should provide for the contingence that, upon expiration of a fixed-term contract because the work or service or the eventual cause of production that led to the contracting has been concluded, and in the event of a claim by the employee before the Labour Courts, the Judge may finally increase the compensation of such employee from 12 to 20 days of salary per year worked.

It seems to be obvious that the intention of the CJEU is that legislations of the European countries adapt themselves to palliate what the Court of Justice considers to be a discrimination between workers with interim contracts and workers with permanent contracts. Therefore, and still ignoring the specific legislative reforms to be undertaken or if a single model for employment contract will be created, we however can advance that in the next legislature compensation upon expiration of interim contract will be probably increased directly by Law or in the negotiations of the Collective Agreements.