What are bonuses?
Bonuses are additional payments on top of the regular salary. They can take various forms: performance-related bonuses, Christmas bonuses, annual bonuses or one-off project payments. What matters is that these payments are usually tied to certain conditions. These can be the employee's individual performance, reaching company targets or other measurable results.
The legal basics
German employment law distinguishes between two types of bonus:
Discretionary bonuses are entirely at the employer's discretion. The employer is free to decide whether, when and how much to pay.
Contractually agreed bonuses give the employee a legal entitlement once the agreed conditions are met.
In recent years the courts have made clear several times that payments that start out as voluntary can become an entitlement. This happens if they are paid regularly and without an explicit reservation. This is known as "company practice" (betriebliche Übung).
The voluntary payment reservation as a safeguard
To protect themselves against unwanted claims, employers should use a clearly worded voluntary payment reservation (Freiwilligkeitsvorbehalt). It must be explicit and unambiguous. Sample wording could be:
- "This payment is made voluntarily and without acknowledging any legal obligation"
- "This does not give rise to any entitlement to future payments"
- "The payment can be withdrawn or its amount changed at any time"
It is important to communicate the voluntary payment reservation with the very first payment. Reservations added later are legally problematic and may be invalid.
Target agreements and bonus schemes
Target-based bonus schemes are especially complex. When employers agree specific targets with their employees and promise bonuses for meeting them, a legal entitlement arises quickly. The courts treat such agreements as binding, even if they include a voluntary payment reservation.
When designing target agreements, employers should keep the following in mind:
- Clear targets: The targets must be clearly measurable and objectively verifiable
- Realistic targets: The targets must not be unattainable or arbitrary
- Transparent calculation: The bonus amount must be easy to follow
- Timely communication: Targets should be set at the start of the assessment period
Keep up with current case law
The Federal Labour Court (Bundesarbeitsgericht) has made several important rulings on bonuses in recent years. One especially relevant ruling holds that target agreements made late in the financial year can be invalid because they can no longer work as an incentive.
Tax aspects
Bonuses are generally subject to income tax and social security contributions. There are some exceptions, though:
- Gifts in kind of up to €60 per year are tax-free
- Special occasions such as work anniversaries can bring tax benefits
- Performance bonuses can qualify for tax relief under certain conditions
Putting it into practice
To set up bonuses on a sound legal footing, employers should follow these steps:
- Create clear rules: Develop a well-thought-out bonus scheme with transparent criteria
- Legally sound wording: Use precise, unambiguous wording in employment contracts and works agreements
- Documentation: Record all agreements and payments in writing
- Regular review: Adapt your bonus scheme regularly to changes in case law
- Professional advice: Have complex bonus schemes checked by employment law specialists
Avoiding risks
Common mistakes with bonuses are vague wording, missing reservations and poor documentation. It is especially risky when employers pay bonuses regularly over several years without stressing that they are voluntary. In such cases employees can successfully sue for the payments to continue.
Conclusion
Bonuses are a powerful tool for motivating employees. They also carry legal risks. With the right preparation and clear rules, employers can use the benefits without taking on unwanted obligations. Setting up bonuses on a sound legal footing takes employment law know-how. It also takes careful, ongoing handling in payroll. This is where cleverlohn comes in. Our digital platform makes sure bonus rules are reflected correctly and transparently, including tax treatment and documentation. Together with our payroll experts, we make sure voluntary payment reservations, target agreements and tax specifics are handled properly. This reduces your legal risks and frees up time for what matters: your employees and your business.
