Description of the calculation and size of performance related bonus is not required in an employment contract

Date 22 mar. 2010

On 6 November 2009, the Danish High Court gave judgment in favour of a company in a case concerning the Danish Employment Contract Act. An employee had claimed that his employment contract was incomplete as it did not contain a description of the calculation and size of a performance related bonus.

 

The case in brief

The case concerned an employee who was employed with a company as a sales engineer in May 2006.

 

It appeared from the employee’s employment contract that his pay included a fixed salary and a bonus calculated according to his monthly turnover. Furthermore, it appeared from the contract that the company had a performance related bonus scheme. The scheme was described  shortly in the employment contract with the words: “The Company has a performance related bonus scheme”. Thus, the employment contract did not contain a description of the calculation and the size of the performance related bonus.

 

On 8 August 2007, the employee was dismissed due to the employee’s circumstances.

 

Apart from requiring compensation for unfair dismissal, the employee claimed that he was entitled to compensation because of the incomplete employment contract. The employee claimed that the lack of description of the performance related bonus scheme made it difficult to interpret the calculation of the bonus in connection with the dismissal.

 

The legal background

According to Section 2 of consolidation act no. 1011 of 15 August 2007 on the employer’s duty to inform the wage earner on the terms of the employment (The Danish Contract Act), the employer must provide the employee with information on all significant conditions applying to the employment. Among other things, “a significant condition” is the current or agreed salary which the employee is entitled to at the commencement of the employment relationship and bonuses and other parts of the salary which are not contained herein, e.g. pension contributions and board and lodging, if any.

 

Additionally, if the employer has not complied with his duty of information, the employee may be entitled to compensation in court, according to Section 6(1) of the Danish Employment Contract Act. The compensation, which cannot exceed 13 weeks’ salary, is determined based on the circumstances of the particular case, including whether or not the lack of information has been of specific importance to the employee. In case of aggravating circumstances, the compensation may be increased to 20 weeks’ salary.

 

The City Court’s decision

The employee claimed that he was entitled to compensation based on an unfair dismissal, pursuant to Section 2b of the Danish Salaried Employees Act, performance related bonus in the notice period and a compensation of DKK 30,000 for the lack of description of the performance related bonus in the employment contract.

 

During the process, the company accepted the claim concering performance related bonus in the notice period. However, the company did not accept the claim concerning the incomplete employment contract and that the employee was, thus, entitled to compensation according to Section 6(1) of the Danish Employment Contract Act.

 

The City Court stated that the employment contract was incomplete as regarded the statement of salary, bonuses and other parts of the salary, cf. Section 2(2) of the Danish Employment Contract Act.

 

In its decision, the City Court emphasised that the specific contents of the performance related bonus scheme was not described in the employment contract. Thus, the City Court found that it was a case of incomplete employment contract, which resulted in the compensation being determined at DKK 8,500, corresponding to one week’s salary, including commission.

 

The decision of the Danish High Court

The decision of the City Court was appealed by the company. The company denied liability, in the alternative a smaller compensation than the one decided by the City Court.

 

Additionally, the company found that is was not possible to describe the performance related bonus scheme further in the employment contract, as the scheme implied that the company could determine the size of the performance related bonus from year to year. Thus, the performance related bonus was discretionary.

 

The Danish High Court stated, that the performance related bonus scheme was sufficiently described in the employment contract, and, therefore, in accordance with Section 2 (2) of the Danish Employment Contract Act.

 

In its decision, the Danish High Court emphasised that the scheme could be changed from year to year by the company, and that the employee was not guaranteed a bonus. Likewise, the size and the calculation of the bonus could not be stated in the employment contract, as it was up to the company alone to determine this from year to year.  

 

Furthermore, in its decision, the Danish High Court emphasised that the dispute could not have been avoided even if the company had given a more detailed description of the scheme in the employment contract in that the performance related bonus scheme was based on the company’s estimation alone.

 

Consequences of the decision

According to the ruling on 6 November 2009 by the Danish High Court, the requirements for the description of a performance related bonus scheme are simple, provided that the company alone decides the estimated amount to be paid to the employee.

 

Therefore, it can not be claimed that a performance related bonus scheme must be described in the employment contract if this is not possible.

 

 

If you have questions regarding the above or require additional information about the Danish Employment Contract Act, please contact attorney Pernille Nørkær (pno@mwblaw.dk) or junior associate Lotte Witt (lwi@mwblaw.dk).

 

The above does not constitute legal counseling and Moalem Weitemeyer Bendtsen does not warrant the accuracy of the information. With the above text, Moalem Weitemeyer Bendtsen has not assumed responsibility of any kind as a consequence of a reader’s use of the above as a basis of decisions of considerations.