This article is the second in a series of articles by our French member firm MGG Legal, about how to manage your incentive schemes.
As mentioned in our previous blog post on incentive schemes in France, it is settled case law that the objectives must be set at the beginning of every year. Otherwise, employees could be entitled to the payment of a full bonus and may even bring claims for constructive dismissal.
This being said, when there is a change in a company’s operations, employers may be tempted to change the objectives that they had previously set.
However, the French Supreme Court regularly reminds employers that, under article L. 1221-1 of the French Labor Code, even if the annual objectives are determined unilaterally, they can only change them if the new objectives are “realistic and brought to the employee’s knowledge at the beginning of the year”.
In this regard, French judges consider that the targets should not be subject to too much variation so that the employer cannot unilaterally “change the method of calculation or reduce the amount of the variable compensation” during the course of the year (FSC, May 9, 2019, n° 17-20.767; April 8, 2021, n° 19-15.432).
This is even more true if the objectives are enshrined in the employment contract. In this regard, whenever the documents setting the objectives are submitted for the employee’s signature, they become part of the employment contract and cannot be changed without the employee’s prior consent. For example, the mere fact that an employer seeks the employee’s approval on their annual targets for several consecutive years amounts to a contractualization of these objectives.
In order to circumvent the limits set by case law, employers have a couple of options:
- They can try to include a “variability clause” in their bonus plan, enabling them to adjust the variable compensation in the course of the year. Yet, in order to be enforceable, such clause must:
- be based on objective criteria that are outside the control of the employer,
- not put the burden of the business risk on the employee,
- not lead to a reduction of the overall compensation below the legal or conventional minimum wage.
- They can also opt for a bi-annual bonus plan. This means that a bonus is paid every semester based on objectives that were set at the beginning of each reference period, i.e. at the beginning of each semester.
While this option enables the company to change the objectives at the beginning of each plan period, it is also quite burdensome as it entails the communication of the new objectives to the employees at the beginning of each semester and the payment of bonuses at the end of each plan period.
Stay tuned for the next article on this topic and contact our French member firm MGG Legal and its representative Marijke Granier-Guillemarre for questions and advice.
