In addition to regular salaries, employers frequently offer supplementary benefits, such as holiday bonuses, paid leave of absence from work on special occasions and pension entitlements.
Providing additional benefits that aren’t formalised in the employee’s contract can cause problems for an employer. Under German employment law, “customs and practice” can enforce an obligation on the employer to permanently maintain these benef its. The “customs and practice” system is an unwritten principle under German employment law. It provides for incorporation as a general rule after provision of a benefit three times without any reservation.
Once obligated to pay additional benefits, employers may end the benefit only under very strict conditions. Moreover, under the principles of equal treatment, the employer can even be obligated to expand payments that have become contractual duties to include other employees. Employers cannot claim to be unaware of “customs and practice” or the general rules of German labour law. Non-German companies, therefore, quite often face such problems.
Unwanted obligations can be avoided by imposing suitable contractual terms to which the company then adheres. These contractual terms are subject to a strict judicial review and are declared void if they do not meet the requirements of German jurisdiction. The common stipulation in contracts that all additional remuneration shall be granted voluntarily and at the employer’s sole discretion is, in general, therefore void.
When granting special payments, e.g., a holiday bonus, employers often intend not only to reward the employee’s past achievements, but also to tie employees to the company for as long as possible. Employment contracts therefore sometimes stipulate that the employee will not receive, or will have to refund, a bonus if he or she leaves the company by a certain date.
Under German law, such contractual terms are subject to strict regulations. They must be clear and transparent; any ambiguities in pre-formulated contracts are to the disadvantage of the employer, and terms that do not define clearly the legal requirements are void.
A payment of either a salary or a bonus that has already been earned cannot be refunded when an employee leaves. High bonuses that reach 25 per cent or more of the employee’s annual salary are, according to German case law, usually intended to reward past achievements and, therefore, generally cannot be refunded.
If a holiday bonus is intended to both reward past achievements and provide an incentive for future good services, the parties may agree in advance on a refund structure under the following terms:
- Bonuses that do not exceed a total amount of EUR 100 are not enough to tie the employee to the company. They are therefore non-refundable.
- Bonuses between EUR 100 and a full month’s salary may come with the condition that the employee will not resign prior to 31 March of the following year. If the employee leaves after that date, the bonus does not need to be refunded.
- Bonus payments that exceed a full month’s salary but do not reach two months’ salary can be conditional on employment continuing until 30 June of the following year.
- Under German case law, a longer binding period is only admissible if the bonus payment is “considerable and impressive”. This very much depends on the circumstances of the individual case.
In general, if terms in an employment contract do not meet these requirements, German employment courts will declare them null and void. In such cases, the invalid contractual term is removed without replacement and cannot be reduced to an admissible extent. The employer’s obligation to future “voluntary” bonus payment will then persist.