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. This is often intended to reward loyalty to the company. But do employers also have the right to discontinue the payment of Christmas bonuses in the future?
Employers have such a right only if the employees are not entitled to Christmas bonuses. Such entitlement is not provided for under German law, but can arise from an individual or collective bargaining agreement or company practice. The principle applies to special payments rendered annually (eg, Christmas bonuses, summer (holiday) bonuses) – the unconditional payment of bonuses of the same amount at least three times establishes employee entitlement.
According to the Federal Employment Court, to prevent the establishment of an entitlement to a Christmas bonus it was generally possible to stipulate in the (standard) employment contract that such benefits are provided ex gratia (voluntarily and at the discretion of the company). However, the courts have gradually increased the prerequisites for such ex gratia provisons in recent years. The payment of a Christmas bonus, for example, is not deemed voluntary if prerequisites and the amount of the bonus are set out in the employment contract at the same time as the ex gratia provision. The Federal Labour Court (10 AZR 526/10, September 14 2011) expressed general doubts that an ex gratia provision contained in an employment contract can prevent an entitlement from becoming established as a result of unconditional payment.
The Federal Labour Court made it clear in two recent decisions (10 AZR 177/12, February 20 2013 and 10 AZR 281/12, April 17 2013) that ambiguities in the wording of employment contracts are to be interpreted to the disadvantage of the employer.
In 10 AZR 177/12, the employment contract contained the following provision under the heading 'Voluntary fringe benefits':
"Voluntary fringe benefits are based on company practice. These are granted currently: Christmas bonus in the amount of… The payment of company bonuses (Christmas bonus, ...) is made voluntarily and without establishing a legal entitlement for the future in each case."
The employer paid an employee a Christmas bonus in accordance with the provision in the employment contract between 2004 and 2008. After the employer failed to pay any Christmas bonus in 2009 and 2010 the employee filed a lawsuit for payment.
The court ruled in favour of the claimant, arguing that because of the word 'granted' and the Christmas bonus amount specifically designated in the employment contract, the employee had a contractual entitlement to a bonus. The fact that the payment of the Christmas bonus was designated in the employment contract as a "voluntary fringe benefit" and the paragraph containing the provision had the heading 'Voluntary fringe benefits', did not change this. It merely signified that the employer was not obliged to pay by law or under a collective bargaining agreement. Ultimately, the explicit ex gratia provision was also invalid because it was not transparent to promise a Christmas bonus and then make its payment subject to the provision that it is at the employer's discretion (voluntary).
Such ambiguities are interpreted to the disadvantage of the employer. In 10 AZR 281/12 the court therefore ruled in the favour of the employee. The stipulation in the employment contract, according to which the "payment of a 13th monthly salary [is] a voluntary benefit that can be granted pro rata as summer (holiday) bonus and Christmas bonus", does not exclude the establishment of an entitlement because it was paid several times without reservation.
These decisions show that employers should look closely at the legal framework conditions before paying Christmas or other bonuses. It applies especially when an employer would like to reserve the right to make additional payments at its discretion in the future.
Employers who want to decide anew each year whether to pay Christmas bonuses, and what the prerequisites for the payments will be, should rely not only on general provisions in employment contracts stipulating the discretionary character of voluntary payments. According to the more recent court rulings, benefits that are promised specifically in employment contracts can no longer be made subject to an ex gratia provision. In addition, employers bear the risk that the provision might be deemed ambiguous. Even the ambiguously worded "holding out the prospect of" a payment might be enough to establish an unconditional entitlement.
Payment of a Christmas bonus should always be accompanied by a letter containing a clear worded ex gratia provision. This can, unless otherwise provided for in the employment contract, also prevent the establishment of an entitlement to a Christmas bonus based on company practice. It is important in this context for the ex gratia provision not to be combined with a reservation of the right of revocation. This would also be invalid, according to case law, because it would be contradictory (Federal Labour Court 10 AZR 606/07, July 30 2008).
For further information on this topic please contact Bjoern Gaul, Patricia Jares, Björn Otto or Bernd Roock at CMS Hasche Sigle by telephone (+49 221 7716 195), fax (+49 221 7716 252) or email (firstname.lastname@example.org, email@example.com, firstname.lastname@example.org or email@example.com). The CMS Hasche Sigle website can be accessed at www.cms-hs.com.