Green HR: the sustainability bonus in employment contracts in Europe

Sustainability is a growing priority for many companies. On the European level, there are a range of regulatory requirements with which companies need to comply, such as the Corporate Sustainability Reporting Directive or the European Sustainability Reporting Standards, as well as on the national level, such as, for example the Supply Chain Sustainability Obligations Act in Germany. Faced with this range of regulatory requirements, companies in Europe seem to be inevitably much further ahead in terms of sustainability strategy and compliance than those in the US.

Some employers are going further and introducing innovative bonus schemes. One German professional soccer club has recently included an ecological "common good" clause in its employment contracts – and, in so doing, has implemented a "sustainability bonus system".

Soccer teams' 'common good' clause

The German soccer club recently made headlines as a result of a "common good" clause in many of their domestic employment contracts with employees, including  professional players. In these employment contracts, employees commit to the employer's business orientation towards the common good. They voluntarily undertake to participate in a bonus scheme. This means that in addition to the basic salary, employees are rewarded for the climate-neutral use of resources and, therefore, for their (supposedly) professional reduction of CO2 emissions. It included, amongst other things, transportation options (with more "green" methods being favored) and incentivizing certain food choices including promoting a more plant based diet over meat. If employees meet the criteria, they can achieve a sustainability bonus.  

Despite being introduced for a good cause, this approach clearly did not win wider public approval despite large portions of the public being invested in climate protection. The public discussion made it very clear that employers should not make the mistake of "patronizing" their employees and taking away their freedom of choice. There was strong consensus that employees should be able to eat what they want and commute to work how they want.

As companies look to analyze how they can reduce their current CO2 emissions, is a sustainability bonus, albeit in a different format, still a sensible option to consider? How much flexibility do employers in Europe have to introduce such a scheme?

Bonus flexibility in Europe

The flexibility around structuring a bonus system differs depending on the jurisdiction you operate in.

There are some European countries with a great deal of flexibility over bonuses. For example, a sustainability bonus could be structured as a discretionary bonus taking into account multiple factors, such as sustainability metrics in performance appraisals and reward employees who contribute to environmental initiatives. This could be built on further at the employers' discretion.

In other continental European jurisdictions, employers have less flexibility, because the bonus is not discretionary. From the beginning, a sustainability bonus would generally have to be linked to specific, measurable and achievable targets based on the employee's or company's performance. There are limits if targets are not connected to the employment, especially if it limits the way employees travel to work, or what he or she eats. This would be in the sphere of the employee and could generally not be taken into account. Measuring this behavior and reducing the bonus, such as if the employee consumes meat, would most certainly be considered unfair by labor courts.

In any case, businesses should design a sustainability bonus scheme tailored to the company and the employee. Keep in mind that, depending on the jurisdiction, it might bring tax or social security benefits for employees. Employees who want to contribute to the environment might ultimately receive a higher net payment due to a tax-optimized bonus structure.

A sustainability bonus therefore is not a bad idea per se; especially, where employees explicitly request how they can contribute to the climate protection of a company. As such, voluntary sustainability bonus clauses could actually be an option in employment relationships of the near future, but care will need to be taken in the drafting and implementation.

Osborne Clarke comment

Employers are already working on green HR measures, such as promoting climate-friendly eco travel policies to encourage the use of public transport, sustainable office practices, green training and development for staff, sustainable and green employee benefits (such as subsidies for purchasing electric vehicles or install solar panels at home) and company-wide sustainability initiatives.

Nevertheless, sustainability bonus clauses are a new, interesting instrument for employee participation in climate protection. If requested by employees, employers should think of combinations with other climate protection measures. They can be an exciting way of recruiting and retaining employees – especially younger generations – who are increasingly willing to participate in climate protection efforts.

Due to the legal and cultural differences in Europe and the large differences in the industry and the size of a company, there is no "one-size-fits-all solution". A regulation should be customized to the concrete business operating in the respective jurisdiction and entrepreneurs should be genuine about their green HR efforts to avoid negative media headlines.