Special payments & bonuses: An overview!

Special payments and Rewards are supplements to remuneration that are paid in addition to the wage or salary or with which the remuneration is at least partially compensated.

There is no legal entitlement to special payments such as Christmas or vacation bonuses. However, employees may be entitled to special payments if, for example, this is agreed upon in their employment contract. Furthermore, an entitlement may also arise from regular payments.

In this article, you will learn what special payments are, in which cases employees are entitled to special payments, what taxes are payable on special payments, and whether employees are entitled to the inflation compensation premium.

What are special payments and bonuses?

The term special payment covers payments made by the employer to the employee that are not part of the regular salary. Supplements to wages Special payments are considered "other benefits" for tax purposes. This essentially corresponds to the social security definition of "one-off payments."

Current remuneration comprises the wage or salary paid to the employee as compensation for their work. This includes compensation for overtime or Sunday work. Current remuneration also includes bonuses, e.g., for work on Sundays and public holidays or for night work, or payments with fluctuating amounts, such as ongoing sales commissions.

In contrast, special payments are by their nature not or not entirely to the ongoing remuneration for the work performed. These are often one-off payments made for a specific occasion or purpose. One-off means that the special payment only once a year In contrast, monthly wages are paid several times a year. However, there is no restriction that only one special payment can be made per year.

What special payments are there?

At Bonuses These are special benefits that the employer provides to the employee for a specific occasion or purpose. These include, for example:

• Christmas and vacation pay, sometimes referred to as 13th and 14th month salary
• Annual special payments (e.g. in TVöD)
• Marriage or birth grants, death grants
• Anniversary bonuses/loyalty bonuses for certain service or company anniversaries (e.g. 25 years of service)
• Corona bonus – compensation for additional burdens caused by the corona pandemic
• Inflation compensation premium – compensation for additional burdens caused by high inflation and high energy prices

One severance payThe compensation an employee can receive for job loss is also a special payment in the form of a bonus. This is because the special payment has a specific purpose—to compensate for the loss of the job and its economic disadvantages.

More on the topic severance pay read in this article.

Bonus payments and rewards

Also Bonus payments/premiums fall under the general term of special payments. Bonuses are payments that are linked, for example, to the personal achievement of certain performance goals. Bonus payments and bonuses are therefore more closely linked to the achievement of certain goals or achievements and have a remuneration character. These include, for example:

• Performance bonus – for achieving individual performance goals or for successful group projects.
• royalties – Participation in the company’s profits, for example if these were very high.

When am I entitled to a special payment?

A legal obligation of the employer to pay a special payment, e.g. Christmas bonus, does not existHowever, this does not mean that employees are not entitled to a special payment. If the employment contract stipulates the payment of a Christmas bonus, a holiday bonus or another special payment, the employee has a enforceable claim, similar to the payment of his wages.

Find a collective agreement to the employment relationship, in particular through general applicability or individual contractual reference, the collective agreement can also regulate certain special payments. For example, the collective agreement for the public service (TVöD) Section 20 provides for annual special payments and Section 23 provides for anniversary bonuses for 25 and 40 years of service in the public sector. If the collective agreement applies, employees are entitled to the specified special payment.

A claim to special payments may also arise from a Works agreement (BV) or Service agreement (DV). The works council and the employer can conclude works agreements and stipulate certain provisions therein. For example, they can agree to pay anniversary bonuses or grant lump-sum payments as marriage, birth, or death benefits.

What is a voluntary special payment?

If there is no entitlement to a special payment under the employment contract, collective agreement or works agreement, the employer can still make a special payment to its employees. Employers usually try to make such a payment subject to a Voluntary reservation The special payment should then only be made once, and no legal entitlement to this one-time payment should arise, for example, in the following year.

Company exercise

Requirement This is because the employer has, for example, paid a Christmas bonus of the same amount three times in a row. However, if the employer has made the special payment subject to a voluntary condition or if the special payment is variable from year to year, different heights, this may exclude an established company practice.

Company practice can then create a legal entitlement that automatically becomes part of the employment contract. A written agreement is no longer required. The employer can no longer unilaterally terminate this company practice.

In order to eliminate the company practice and the resulting entitlement to a Christmas bonus, he would have to either terminate the employment contract entirely quit or a Notice of change However, if general protection against dismissal applies, the employer must provide a reason for dismissal that would not exist in an uninterrupted employment relationship. Company practice in itself does not entitle the employer to dismiss.

As I would like to inform you in case of Termination can help, read here.

Are special payments subject to tax?

If the employer makes a special payment, this is subject to income tax and social security contributionsThe special payment will be added to the salary for the month in which the special payment is actually paid out.

Fifths rule for severance payments

Special provisions apply to severance payments. Although these are also subject to income tax and social security contributions, the so-called Fifths ruleThe tax burden of the severance payment is spread over five years.

Since the individual tax rate increases with increasing annual income, if a severance payment is spread over five years, the increase in the individual tax rate in each year is lower than if the severance payment is taken into account for tax purposes in one year.

Corona and inflation compensation premium

In 2020 and 2022, the legislature created two special options for employers to make special payments to their employees to mitigate certain disadvantages. From 01.02.2020 to 31.03.2022 Employers were able to offer all employees a bonus to mitigate the consequences of Corona pandemic of up to 1,500 euros (Section 3 No. 11a EStG).

From the October 26, 2022 to December 31, 2024 employers can offer their employees a Inflation compensation premium from up to a total of 3,000 euros to mitigate the rise in consumer prices and the consequences of high inflation (Section 3 No. 11c of the Income Tax Act). The prerequisite is that the inflation premium is paid in addition to the agreed and owed wages. The employer may not replace another owed special payment, e.g., a Christmas bonus, with the inflation premium.

What both bonuses have in common is that these special payments tax and social security free If the employer decides to pay such a bonus, the employee receives it without deductions.

Is the employer obliged to pay the inflation premium?

With the inflation compensation premium, the legislature has simply created the possibility for employers to pay this premium to their employees free of tax and social security contributions. There is no obligation associated with thisThis means that there is no obligation to pay the inflation compensation premium.

The principle of equal treatment must be observed when making special payments

However, the employer must observe the principle of equal treatment under labor law when deciding to pay the inflation bonus or any other special payment. For example, the employer may not grant a special payment to certain employees in a department and not to others.

The form of the employment relationship plays a role no roleFor example, the employer may not pay a special payment only to full-time employees, but not to part-time employees or those in marginal employment (mini-jobbers). Since part-time employees or mini-jobbers may receive a correspondingly lower special payment, this does not constitute a differentiation criterion.

Conclusion

• Special payments and bonuses are additional paymentsthat employees may receive in addition to their regular wages or salary. These payments may arise contractually, through a collective agreement, works agreement, or through repeated practice.
• Examples of special payments include Christmas and vacation bonuses, annual bonuses, anniversary bonuses, COVID-19 bonuses, and inflation-adjusted bonuses. Bonuses and premiums are also types of special payments that can be tied to specific performance targets.
• There is no legal entitlement to special payments.
• Employers may make voluntary bonus payments, but this is often done under a discretionary condition to avoid a permanent entitlement to a bonus. However, if the employer repeatedly makes bonus payments, this may become a company practice that creates a legal entitlement.
• Special payments are subject to tax and social security contributions, unless they are special bonuses such as coronavirus or inflation compensation bonuses, which are exempt from tax and social security contributions. Employers are not obligated to pay the inflation compensation bonus, but, as with all special payments, they must comply with the principle of equal treatment under labor law when paying such bonuses.

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