Definition and Legal Foundations of Performance Bonuses
Performance bonuses are additional compensation components paid on top of the base salary to recognize or incentivize exceptional job performance. They are a term used in labor law and public service law and play an important role in the compensation structure for employers and employees in both the public and private sectors. Performance bonuses may be governed by collective agreements, individual contracts, or company agreements and are subject to specific legal frameworks.
Performance Bonuses in Employment Law
General Principles of Bonus Payments
Performance bonuses serve to reward outstanding individual performance, special knowledge, qualifications, or additional responsibilities. They are variable and, from the outset, not necessarily part of the basic salary but represent additional payments that may also be temporary or revocable. The conditions and modalities of granting such bonuses are determined by the relevant collective, company, or individual contractual provisions.
Legal Classification and Distinction
Performance bonuses are to be distinguished from similar compensation components such as functional bonuses, hardship allowances, premiums, or surcharges. While hardship allowances are paid for demanding activities, performance bonuses are determined specifically by individual performance. Legally, performance bonuses are considered ancillary contractual benefits, the granting, amount, and revocation of which follow the general rules of employment law.
Legal Sources and Areas of Regulation
Collective Bargaining Agreement Provisions
In many collective bargaining agreements, especially in the public sector (e.g., TVöD, TV-L, TV-H), the foundations for performance bonuses are regulated. According to § 18 TVöD, employees who demonstrate special performance or abilities may receive performance bonuses. Detailed requirements and procedures are often further specified by service or internal company agreements.
Company and Service Agreements
Company and service agreements often govern the specific modalities for awarding performance bonuses. These include criteria for performance evaluation, procedures for granting bonuses, control mechanisms, potential time limitations, and possibilities for revocation. The co-determination rights of the works council under § 87 (1) No. 10 of the Works Constitution Act (BetrVG) must be considered in the design of performance-based remuneration.
Individual Employment Law Agreements
Performance bonuses can also be agreed upon within the framework of individual employment contracts. Such arrangements are subject to the general principles of employment contract law, particularly the rules governing standard terms and conditions (§§ 305 ff. BGB), if pre-formulated contractual conditions are used. Performance bonuses are, unless expressly excluded by contract, generally to be taken into account for continued pay and in the calculation of holiday pay.
Entitlement, Payment, and Revocation
Requirements for Entitlement
A claim to a performance bonus generally arises only if it is expressly provided for by collective agreement, company agreement, or individual contract, or results from established company practice. Employers can set conditions for the performance bonus, such as achieving certain targets, performance agreements, or evaluation results.
Payment and Structure
Performance bonuses can be paid monthly on an ongoing basis, as a one-time payment, or as a special payment. They are generally subject to tax and social security contributions. In the public sector, performance bonuses are often limited in duration—usually for a period of three years (cf. § 18 (3) TVöD).
Possibility of Revocation and Reclaiming
Performance bonuses can be structured as revocable benefits in accordance with the rules of employment law (§ 308 No. 4 BGB). Revocation by the employer requires a legitimate reason and a clear contractual provision. Performance bonuses paid unlawfully may be reclaimed under certain conditions, for example, if it is subsequently determined that the performance requirements were not met.
Tax and Social Security Treatment
Performance bonuses are considered employment income within the meaning of § 14 SGB IV and are therefore subject to both income tax and social security contributions. They are treated like basic salary and must be considered when calculating social security contributions. Exceptions apply only to certain tax-privileged special payments as per § 3 EStG, which generally do not apply to performance-based bonuses.
Special Cases: Public Service and Civil Service Law
Public Service
In the public service, performance bonuses are a central element of performance-related pay. The key factors here are the collective bargaining provisions (e.g., § 18 TVöD, § 18 TV-L). The performance criteria, selection procedure, and scope of possible bonuses are further specified through supplementary service agreements.
Civil Service Law
In civil service law, § 42 of the Federal Salary Act (BBesG) in particular regulates the ability to grant performance-related salary components, such as performance bonuses and performance incentives. The amount and requirements are determined by the relevant administrative authority in accordance with statutory and subordinate regulations.
Data Protection and Co-Determination
Granting performance bonuses requires the processing of employees’ personal data. The requirements under data protection law according to the General Data Protection Regulation (GDPR) and specific legal provisions (e.g., § 26 BDSG) must be observed. In addition, the co-determination rights of the works council under § 87 BetrVG are relevant for designing performance bonuses.
Distinction from Similar Compensation Components
Performance bonuses must be clearly distinguished from supplements for overtime, night work, Sunday and public holiday work (overtime supplements), and premiums for innovations or suggestions for improvement. Bonuses and one-off payments also serve different purposes and are subject to separate legal treatment.
Summary
Performance bonuses are flexible, performance-based compensation components that serve as important incentive and control mechanisms in employment law and the public sector. Their structure, entitlement requirements, and legal consequences are primarily determined by collective agreements, company agreements, and individual contract arrangements as well as applicable legal provisions. From a legal perspective, particular attention must be paid to the contractual right of revocation, the obligation of equal treatment, as well as tax and social security considerations. Transparent and legally compliant structuring of performance bonuses significantly contributes to employee motivation and legal certainty.
Frequently Asked Questions
Who is legally entitled to a performance bonus?
A legal entitlement to a performance bonus generally exists only if it is expressly regulated by law, collective agreement, company agreement, or employment contract. In the public sector, performance bonuses are, for example, governed by relevant collective agreements such as the TVöD (Collective Agreement for the Public Service). These specify the requirements, procedures, and extent of such bonuses. In the private sector, entitlements often depend on whether the company has made a corresponding promise, has an established company practice, or a collective arrangement exists. In the absence of a legal basis, the employer may decide at their own discretion whether and to what extent performance bonuses are granted. If there is no entitlement, the employer is not obliged to pay or continue to pay such a bonus—unless previously granted performance bonuses have been paid so regularly and without reservation that a company practice has arisen.
What are the legal requirements for introducing a performance bonus?
The introduction of performance bonuses is subject to varying legal requirements depending on the regulatory framework. In the public sector, employee representation, such as the staff council, must be involved according to the applicable staff representation laws. In companies with a works council, there is a mandatory co-determination right under § 87 (1) No. 10 BetrVG when establishing or amending the remuneration system—including performance bonuses. If the bonus is introduced collectively, the relevant formal and substantive requirements, such as those for a company agreement, must be met. Additionally, anti-discrimination laws under the AGG (General Act on Equal Treatment) and collective bargaining discipline under § 77 (3) BetrVG must be observed.
How are performance bonuses legally established and awarded?
Performance bonuses are usually agreed upon either individually or collectively. In the case of individual agreements, an explicit provision must be included in the employment contract. If there is a collective arrangement, such as a collective agreement or company agreement, the granting and modalities are governed by its provisions. Performance bonuses must be awarded transparently and comprehensibly, especially where objective or subjective performance criteria are applied. Prohibitions on arbitrariness must be observed; selection and assessment of performance must be based on objective criteria and cannot involve discrimination.
Can a performance bonus once granted be legally revoked?
Revocation of a performance bonus is legally permissible only if the employment contract, company agreement, or collective agreement expressly provides for a right of revocation, and if the revocation is for a legitimate reason, which must also be plausibly explained to the employee concerned. If no such provision exists, the performance bonus is considered a fixed part of the remuneration and is protected by termination protection under § 2 KSchG (amendment termination). Company agreements can generally be terminated without continuing effect, unless in individual cases a post-effect under § 77 (6) BetrVG applies. In any case, revocation or modification must be non-discriminatory and implemented in accordance with the principles of good faith (§ 242 BGB).
What co-determination rights exist for defining performance criteria?
According to § 87 (1) No. 10 BetrVG, the determination of the principles for the remuneration system, and thus also the structuring of performance bonuses including the underlying criteria, is subject to the works council’s mandatory co-determination. Employers cannot unilaterally determine the criteria. If there are no specific collective regulations, the employer and works council must jointly determine which criteria are relevant for assessment and how they will be applied objectively. Unilateral performance assessments by the employer are not permitted. This also applies to suitable assessment procedures, the frequency of review, and the transparency of decision-making processes.
What legal limits exist for structuring performance bonuses?
The legal structuring of performance bonuses is subject to various statutory limits. These include the prohibition of discrimination under the AGG, in particular by reason of gender, origin, religion, disability, or other characteristics. Bonus regulations must also not undermine collectively agreed or statutory minimum working conditions. Furthermore, the principle of equal treatment must be observed: Employers must provide reasonable and understandable reasons for any differentiation when awarding performance bonuses. Arbitrary, biased, or discriminatory provisions are impermissible. Finally, employment law data protection requirements must also be observed, for example if performance-related data are processed automatically.
What are the legal consequences of unlawfully refusing a performance bonus?
If a performance bonus is unlawfully refused—for example, contrary to a collective agreement, company agreement, or contractual commitment—the affected employee is generally entitled to retroactive payment of the bonus. Such claims can also be asserted retroactively, subject to labor law limitation periods. Furthermore, unlawful refusal may trigger claims for damages or compensation for lost earnings if the employee suffers a financial disadvantage due to the employer’s actions. In addition, there is the right to file a claim in labor court for the granting of the bonus. A violation of co-determination rights under works constitution law can also lead to cease-and-desist or reversal claims.
