In many companies it is common practice to pay employees 'extra' in addition to their regular remuneration in the form of a Christmas bonus at the end of the year. According to recent surveys, this applies to more than half of all employees in Germany. But what about employees who leave the company during the year? Or employees whose employment is terminated without notice on a certain reference date?

Exclusion of entitlement

Employment contracts frequently provide that the payment of a Christmas bonus or other bonuses depends on the employment relationship existing on a certain reference date.

Mixed-character bonus

According to the law, in principle, bonuses can be made subject to whether employees are in employment relationships for which no notice has been given on a certain reference date. However, the Federal Labour Court has made it clear (January 18 2012, 10 AZR 667/10) that bonuses which are tied to past performance and serve as an incentive for future company loyalty (a mixed-character bonus) cannot be tied to a reference date outside the reference period. This would contradict the basic principle that an employee is entitled to payment of remuneration for the work that he or she has performed.

Bonus amount

As a rule, a bonus is presumed to have mixed character if, for example, it amounts to more than 25% of the annual base salary because, according to the Federal Labour Court, it cannot be assumed that payments of this amount have the sole purpose of ensuring that employees remain in the employment relationship. For this reason, such bonuses should also be considered as remuneration for work carried out by the employee during the reference period. It is therefore irrelevant that the employer intended to reward the employee for future company loyalty.

Narrowing of court position

The Federal Labour Court has once again narrowed its position on bonuses. In a November 13 2013 case (10 AZR 848/12), an employer had promised its employees a Christmas gratuity. In this regard, the employer sent the employees a letter each autumn (and also on September 30 2010) that cited the appropriate guidelines and included the following:

"In appreciation of your previous dedication this year and at the same time as an incentive for a continuation of a loyal and effective working relationship, we are paying you a Christmas gratuity.

The gratuity is calculated on the basis of the following guidelines:

  1. Payment will be made to employees who are in employment relationships for which no notice has been given on 31 December 2010.
  2. The amount of the gratuity will be equivalent to 100 per cent of the gross salary for November if the employment relationship has existed since 1 January 2010 and there has not been any leave without pay. If there have been any changes to working hours during the year, the gratuity will be calculated on a pro rata basis.
  3. Employees whose employment commenced after 1 January 2010 or who have been given leave without pay will receive one twelfth of the gross monthly salary for each calendar month of the existing employment relationship."

An employee whose employment was terminated by his resignation on September 30 2010 did not receive the Christmas 2010 gratuity. After the first-instance court dismissed his claim to payment of 9/12 of the gratuity, the Federal Labour Court allowed his claim.

Purpose of bonus

The court allowed the claim because it was not simply a gratuity with the sole purpose of giving money on the occasion of Christmas. Although the term 'Christmas gratuity' used in the guidelines appeared to indicate that this was the case, the guidelines also made clear that the bonus was intended as consideration for work performed. For example, the payment was made explicitly "in appreciation of personal dedication". Moreover, the prerequisites for the claim in Paragraphs 2 and 3 showed that the payment not only was tied to the existence of the employment relationship in the reference year, but also depended on the fact that either work had been performed or no unpaid leave had been taken. The payment thus constituted consideration for work performed.

Impermissible impediments to termination

A reference date within a reference year makes it more difficult for an employee to exercise his or her right to terminate his or her contract, although work has been performed during that year at least in part. According to the clause, because an employment relationship must exist "without notice having been given" on December 31, the guidelines demanded loyalty to the company beyond the reference year in which the work was performed. This caused the employee to suffer an unjustifiable disadvantage because the value of work performance depended not on the length of employment, but on the quality and success of the work. In this case, there was no indication that the work performance in any period before the reference date had special value.

Comment

The Federal Labour Court decisions have considerable significance in practice. Reference date clauses for Christmas bonuses (and other bonuses) are not unreasonable and invalid in all cases. It is possible for reference date clauses to be drafted in such way as to have legal certainty, but it is not only designation that is important. What is decisive is the reason (to be stated in the contract) why a Christmas bonus is paid. The payment may not be intended as a reward for performance or success and the bonus amount may not make up a major part of the total remuneration. If the payment is intended solely to reward past or future company loyalty, a reference date arrangement tied to the existence of the employment relationship on a certain reference date is valid. The court has made it clear that it remains possible for a bonus payment to be tied to corporate success that occurs at specified times.

Björn Otto

Patricia Jares

Björn Gaul

Bernd Roock

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