Employees Entitled to Full Variable Compensation in Cases of Unclear Targets
On 4 October 2016, the Court of Appeal of Florence ruled that if the employment contract provides the employee’s right to receive a variable salary, upon achievement of the goals set by the company, the bonus must be paid in its full amount. Such payment will have to be made even if the business goals and the performance related targets, to which the variable salary is connected, have not been fixed by the company and communicated to the employee in due time, in breach of the provisions and the specific terms of the employment contract. This ruling confirms a principle already expressed in a few previous decisions issued by the Italian Supreme Court.
According to the Court of Florence, in the case of complete uncertainty about the goals and targets that must be achieved, due to the company’s negligence in fixing them, the employee is entitled to receive the full amount of the variable compensation provided by his employment contract. This is because it is deemed that in such circumstances the employee has been prevented from achieving such goals and targets and, as a consequence, in receiving a bonus.
The principle under this decision is that the variable salary is subject to the same principle of irreducibility applied to the salary’s fixed part. As a consequence, companies may not decide, at their own discretion, whether to fix the goals and the targets, as this would jeopardise the employees’ right to get the bonus paid.
What are the implications for the employer?
The decision of the Court of Appeal of Florence affects all the employees employed by a private employer, including the executives, who may be entitled to receive a variable salary under the terms of their employment contract. The decision also affects all private companies, the Board of Directors and Local HR Managers.
If the employee’s employment contract or the national collective bargaining agreement applied by the company states that a variable remuneration has to be granted to the employee in connection with the achievement of business goals or performance related targets, companies must pay attention to this provision and, according to the latter, set a proper annual bonus plan.
What are the implications for the employee?
In the case of complete uncertainty or absence of the business goals and targets to be achieved, the employee is entitled to receive the full amount of the variable compensation provided by his employment contract. This is because in such circumstances it is deemed that the employee has been prevented in achieving such goals and targets and receiving a bonus.
For further information or to discuss any of the issues raised, please contact Roberto Ferrario (email@example.com) on +39 02 36742812) or Elisa Pansera (firstname.lastname@example.org) on +39 02 36742815).
Italian Court of Appeal of Florence, 4 October 2016, no. 834
Content is for general information purposes only. The information provided is not intended to be comprehensive and it does not constitute or contain legal or other advice. If you require assistance in relation to any issue please seek specific advice relevant to your particular circumstances. In particular, no responsibility shall be accepted by the authors or by Abbiss Cadres LLP for any losses occasioned by reliance on any content appearing on or accessible from this article. For further legal information click here.
Circular 230 disclosure
To ensure compliance with requirements imposed by the IRS and other taxing authorities, we inform you that any tax advice contained in this article (including any attachments) is not intended or written to be used, and cannot be used, for the purpose of (i) avoiding penalties that may be imposed on any taxpayer or (ii) promoting, marketing or recommending to another party any transaction or matter addressed herein.