Definition and legal classification of the bonus
The term bonus refers in a legal context to a voluntary or contractually agreed special payment that exceeds the regular base compensation (e.g. wage or salary). A bonus is used in various areas of law, particularly in labor law, tax law, commercial law, and banking and capital market law. Frequently, the bonus serves as a performance incentive or reward for certain achievements, targets reached, or special services.
Bonus in employment law
Types of bonuses
In employment law, different types of bonus payments are distinguished:
- Performance bonus: This form is tied to achieving certain, usually quantifiable targets (e.g. sales or profit targets).
- Christmas and year-end bonus: One-time special payments at the end of the year, which are often granted voluntarily.
- Contractual bonus: A bonus that is expressly regulated in the employment contract or a works agreement.
- Retention bonus: Payment to retain key personnel within the company.
Legal nature and conditions for entitlement
Whether a legal claim to a bonus exists depends primarily on the contractual regulation or company practice. A claim may arise through:
- Contractual agreement: Clear, individually agreed provisions in the employment contract concerning the type, amount, and due date of the bonus payment.
- Company practice: Repeated, unconditional payment of bonuses over several years may give rise to a claim.
- Works agreement or collective bargaining agreement: Bonus payments may be based on collective legal provisions.
If employers designate bonuses as voluntary benefits, a discretionary clause is required to prevent the establishment of company practice and a corresponding entitlement. Case law requires that this clause be explicit and transparently communicated to the employee.
Requirements and modalities
The bonus agreement may specify conditions, such as:
- Achieving certain key performance indicators (e.g. sales, project success)
- Joining, remaining with, or leaving the company on a specific date
- Fulfilment of certain tasks or functions
Payment may be made once or periodically. For target-agreement bonuses, it is important that the objectives are clearly defined and measurable in order to avoid disputes.
Legal consequences in case of disputes
Disputes about bonuses frequently arise when payment procedures, achievement of objectives, or voluntariness are unclear. Labor courts first examine whether a claim arises from an individual or collective agreement, from company practice, or from the principle of equal treatment. Bonus arrangements must not be changed arbitrarily and must adhere to the general principle of equal treatment.
Bonus in tax law
Tax treatment of bonuses
For employees, bonus payments are considered employment income and are subject to wage tax and social security contributions. Taxation follows the general principles of income tax law.
Bonus payments to shareholder-managing directors are subject to particular tax scrutiny to avoid hidden distributions of profit. Tax recognition depends on appropriateness, clarity of contractual agreement, and actual payment.
Special aspects of voluntary benefits
Voluntary bonuses may be favored under flat-rate wage taxation if, together with other tax-free or flat-rate taxed benefits (e.g. non-cash benefits), they remain within certain exemption limits. The currently applicable tax regulations must be observed in each case.
Bonus in banking and capital market law
Bonus payments to executive and managing directors
In listed companies, bonus payments to executive board members are subject to legal and regulatory requirements. The German Stock Corporation Act (AktG) stipulates transparency obligations and the appropriateness of executive compensation. Compensation elements such as bonuses must not provide incentives for risks contrary to the company’s interests. The Federal Financial Supervisory Authority (BaFin) has additional regulations for banks and financial service providers, limiting bonus payments through variable compensation components and demanding transparency.
Bonus in the insurance sector
Insurance companies use bonuses, for example, as profit-sharing for policyholders (rebate bonus) or as an incentive system for sales partners. Special legal provisions apply here, such as the German Insurance Contract Act (VVG) for the treatment and disclosure of surplus participations.
Bonus in commercial and civil law
Bonus in agency law
Commercial agents often receive bonuses in the form of sales commissions (commercial agent’s commission) or as additional remuneration for special sales activities. The legal basis is the German Commercial Code (HGB), which regulates the distinction between bonus and commission, the due date, and the calculation bases. Particularities arise with compensation payments after the end of the contract (§ 89b HGB), into which bonus payments must be included under certain conditions.
Bonus agreements under civil law
Under general civil law, bonus agreements can form part of a bilateral contract. Interpretation is governed by the general rules of the German Civil Code (BGB, §§ 133, 157 BGB). Ambiguous agreements are interpreted to the detriment of the user in case of doubt (§ 305c para. 2 BGB). Issues of validity, particularly in relation to unreasonable disadvantage (§ 307 BGB), can be particularly relevant for standard bonus clauses within the terms and conditions (AGB).
Bonus and the principle of equal treatment
Prohibition of discrimination
The granting of bonuses must observe the general requirement of equal treatment under employment law. Discrimination on grounds of gender, religion, age, or other protected characteristics is not permitted (AGG). Unjustified differentiation in bonus payments can be legally challenged and may give rise to claims for additional payment.
Equal treatment in the workplace
When paying bonuses, there is an obligation to treat all comparable employees equally, unless there are objective reasons for differentiation. Differentiation based on objectively ascertainable performance criteria is permitted, but arbitrary or irrelevant disadvantages are not.
Conclusion
Bonus payments are a complex instrument encompassing employment, tax, commercial, and regulatory aspects. The legal treatment largely depends on the wording and integration of the bonus agreement in contracts or company regulations, as well as on statutory provisions and social security frameworks. For companies and employees, careful and clear drafting of bonus arrangements is advisable to avoid legal uncertainty and disputes.
Frequently Asked Questions
When does a legal entitlement to a bonus arise?
A legal entitlement to a bonus generally arises only if there is a corresponding contractual basis. This can be through an explicit agreement in the employment contract, a separate bonus agreement, or through company practice. If a bonus is firmly promised in the employment or service contract, or the conditions are clearly defined, it is legally enforceable. In addition to individual contracts, collective agreements, works agreements, or company customs (company practice, e.g., established by paying a bonus in the same amount voluntarily three times) can establish a claim. It is important that the entitlement does not arise solely from decades-long expectation, but from objective obligations apparent to the employee. If such a basis is lacking, granting a bonus generally remains at the employer’s discretion.
What legal requirements must a bonus scheme meet?
A valid bonus scheme must be clearly and comprehensibly worded under German law. In particular, it must specify the relevant figures and conditions for payment so clearly that both parties can determine when and to what extent a bonus entitlement arises. Legally uncertain or vague clauses, such as those emphasizing the ‘free discretion of the employer’ alone, generally do not withstand strict scrutiny under the law on standard terms (AGB-Recht). In addition, rules on bonus payments must not violate the equal treatment requirement of § 75 BetrVG or the general principle of equality in Art. 3 GG. Transparency, comprehensibility, and the avoidance of surprising clauses under § 305c BGB must also be observed. The employer is further obliged to communicate framework conditions such as target agreements or sales targets in a timely and comprehensible manner.
Under what circumstances can a previously promised bonus be subsequently withdrawn or reduced?
A previously promised bonus may only be withdrawn or reduced under very limited circumstances. If there is an individual or collectively agreed claim, subsequent restriction is generally only permissible with the employee’s consent or within the context of a contract amendment termination (Änderungskündigung). If the promise is at the employer’s discretion, e.g., if the employer decides ‘at reasonable discretion’ (§ 315 BGB), an adjustment may be possible in the event of significant economic difficulties or changed conditions—but always in compliance with the principles of good faith (§ 242 BGB) and usually only after prior announcement. If the reduction contravenes the transparency requirement or fails to consider disadvantages, it is generally invalid. Special provisions apply for target bonuses: If targets are not set or are set too late by the employer, the bonus may be owed in full as a so-called substitute target bonus.
Are there any special legal rules regarding bonus entitlements for employees who have left the company?
Yes, there are legal particularities regarding bonuses for employees who have left the company. The validity of so-called cutoff date clauses—which make bonus entitlement dependent on the employee still being employed at the time of payment—is subject to strict judicial scrutiny. The Federal Labor Court differentiates here according to the nature of the bonus payment: genuine premiums for services already rendered or for a concluded reference period (e.g., annual bonus for the previous year) cannot generally be made dependent on continuing employment. Clauses excluding such payments for employees who have left are considered non-transparent and often invalid (§ 307 para. 1 BGB). Payments of a purely gratuity nature, which are intended to reward future loyalty to the company, can under certain circumstances be validly tied to continuing employment.
How does release from work during the notice period affect entitlement to a bonus?
In cases where an employee is released from work during the notice period, entitlement to a bonus depends primarily on whether the employer grants the release while offsetting accrued vacation and overtime claims irrevocably, and whether the conditions of the bonus scheme continue to be met despite the release. According to prevailing case law, entitlement to a performance-related bonus generally remains if the employee is not culpably prevented from achieving the targets or meeting the bonus conditions. If, however, the employee is effectively prevented from achieving relevant work results (e.g. by being released from all duties), this may lead to a partial or full obligation to pay the bonus if this is attributable to the employer’s actions (§ 615 BGB, default of acceptance). In such cases, a so-called substitute target bonus may be payable.
What rights of co-determination does the works council have regarding bonus schemes under the Works Constitution Act?
The Works Constitution Act (Betriebsverfassungsgesetz) provides in particular for a mandatory co-determination right of the works council in §§ 87 para. 1 nos. 10 and 11 BetrVG when it comes to the specific structuring of bonus payments as a component of remuneration or the distribution of special payments. This concerns, for example, the ‘how’ of performance- or results-based remuneration (such as: criteria, target systems, payment dates). The ‘whether’ of bonus granting, i.e., the decision to introduce a bonus scheme at all, is not subject to co-determination. The employer must involve the works council at an early stage in the development and modification of bonus systems. If agreement is not reached, the conciliation committee may be called in. The co-determination right is primarily intended to ensure transparency, equal treatment, and employee participation.
What tax and social security law aspects are to be considered with bonuses?
From a labor law perspective, bonus payments are regarded as employment income and are therefore subject to wage tax and social security contributions. The employer must deduct wage tax and properly calculate and pay social security contributions. For tax treatment, it does not matter whether the payment is voluntary, one-off, or contractually guaranteed. If the employer pays a bonus exempt from wage tax (e.g., under a special tax provision such as during the coronavirus pandemic), this must be clearly documented and comply with statutory requirements. In the event of retrospective payments for previous years, there may be additional tax or social security contribution calculations. Even in the event of insolvency, the claim to an already earned bonus is a bankruptcy claim, the enforcement of which depends on the insolvency estate.
