What exactly is a bonus, who is entitled to it, and what conditions must be met? As experienced employment law attorneys, we explain on this page what a bonus means in the context of employment law and how this variable compensation component is legally classified.
You will learn:
- When a claim to royalties exists,
- What requirements must be met for this,
- How the bonus differs from other variable compensation models
- Which employment law regulations must be observed in the case of a voluntary reservation or revocation reservation.
We advise both employers and employees on the legally compliant drafting of employment contracts, including the agreement on bonuses. Contact our firm today for a personalized consultation.
What awaits you:
- What is a bonus? – Definition and classification under labor law
- Right to royalties – Where does the legal claim arise?
- Bonus: Requirements for entitlement to payment
- Royalties vs. bonus, commission & premium – what’s the difference?
- Bonuses with voluntary reservation – is this permissible?
- Royalties with revocation right – is this legally permissible?
- What we can do for you with royalty questions
What is a bonus? – Definition and classification under labor law
In labor law, a bonus refers to a variable compensation component based on the company's financial performance. This performance-related bonus is typically paid to executives such as managing directors of a limited liability company (GmbH), board members of a stock corporation (AG), or senior managers. The exact details of the bonus are usually contractually agreed upon and can be adjusted on an individual basis.
Would you like to have your bonus entitlement assessed or how to ensure a legally compliant bonus arrangement? Schedule an appointment with our employment law firm now – we will provide you with expert, personalized advice.
Right to royalties – Where does the legal claim arise?
The right to payment of a bonus usually arises from the employment contract or, in the case of managing directors, from the managing director's service agreement. This contractual agreement forms the legal basis for the variable compensation component, which is often tied to the company's performance.
In exceptional cases, a claim may also be derived from the principle of equal treatment under labor law. If a company grants a bonus to comparable executives under the same conditions, it may not exclude individual members of the management level without objective reason. Such unequal treatment without a comprehensible justification may be legally challengeable.
Would you like to have your contractual rights to a bonus reviewed, or are you experiencing unequal treatment? Contact our employment law firm now – we will vigorously represent your interests.
Bonus: Requirements for entitlement to payment
Whether there is an entitlement to a bonus and the amount depends fundamentally on the contractual agreements—be it the employment contract or the managing director's service contract. These regulations stipulate the conditions under which variable compensation is granted.
Typically, the payment of a bonus is tied to the company's financial success. The basis for calculation can be based on performance indicators such as sales, profit, or other measurable corporate goals.
Do you require legal clarity regarding your bonus agreement or would you like to create a legally sound arrangement? Secure in-depth advice from our employment law firm now – we will provide you with competent, personalized support.
Royalties vs. bonus, commission & premium – what’s the difference?
The bonus is a performance-related compensation component that differs significantly from other variable payments in an employment relationship. Unlike commission, which is based on an employee's individual sales performance, the bonus is based on the overall economic success of the company or a division.
There are also differences compared to target-based bonuses: Target bonuses are mainly tied to personal performance, while bonuses are primarily based on collective company results – for example, profit or sales at the end of a financial year.
Unlike bonuses such as Christmas bonuses or vacation pay, the bonus is not automatically payable, but usually requires the achievement of certain financial goals.
Although the term bonus is often used synonymously, the term royalty must be legally differentiated: a bonus can be set individually and tied to departmental results or individual performance, while a royalty usually reflects the success of the company as a whole.
Would you like to know whether your case involves a genuine royalty or bonus – and what rights you may have as a result? Our employment law firm can assist you with the legal assessment and provide advice.
Bonuses with voluntary reservation – is this permissible?
A discretionary bonus payment requirement is legally problematic and in many cases ineffective. If a bonus is paid based on general, company-wide regulations, for example, within the framework of a company compensation system for executives, the employer cannot effectively make the entitlement subject to a discretionary bonus requirement.
If a senior employee or managing director is given a binding commitment to participate in an existing bonus system, it is contradictory for the company to simultaneously declare that the payment is voluntary and non-binding. This contradiction can lead to the clause being classified as non-transparent and invalid under Section 307, Paragraph 1, Sentence 2 of the German Civil Code (BGB).
The Federal Labor Court confirmed this in its judgment of October 24, 2007 (case no. 10 AZR 825/06): A bonus clause that, on the one hand, guarantees participation in a bonus system and, on the other hand, excludes the right to payment, violates the transparency requirements of the German Civil Code (BGB) and is therefore not legally tenable.
Would you like to have a review carried out to determine whether a discretionary clause in your contract is valid? Our employment law firm will support you in the legal assessment and enforcement of your claims – request a free, no-obligation consultation now!
Royalties with revocation right – is this legally permissible?
A contractual right of revocation regarding the payment of a royalty is only effective under strict legal conditions. According to case law, revocation rights may only be applied if they at least briefly state specific reasons for a possible later revocation—such as economic reasons or performance criteria.
There is a clear limit: The revocable compensation component—the bonus—may not exceed 25 to 30 percent of total compensation. Since bonuses often represent a large portion of total compensation, especially in management positions, a standardized reservation of revocability is usually inadmissible and therefore legally ineffective.
Do you have an employment or management contract with a right of revocation and would like to have its validity reviewed? Our employment law firm will clarify your rights – competently, individually, and effectively. Schedule an appointment now!
What we can do for you with royalty questions
Do you have questions about your bonus entitlement, or would you like to know whether a previously paid bonus has been legally revoked or changed? As an experienced employment law firm, we are at your side with comprehensive advice on all legal issues relating to variable compensation and bonus regulations.
Our services for you:
- Review of bonus claims in the employment contract or managing director service contract
- Assessment of revocation or voluntary reservations
- Advice on changes to the calculation basis or non-payment
- Representation in the out-of-court and judicial enforcement of your claims
- Tactical advice on procedures taking into account possible deadlines
Whether it's discreet advice in the background or negotiations with the employer – we tailor our services to your individual situation and goals.
Act quickly – there are often short deadlines for claiming royalties! Request a free consultation now – we'll fight for your right to royalties.
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