Christmas Bonus - a Definition
The Christmas bonus is usually paid with the November salary and is intended to help cover additional expenses associated with the Christmas season. It also serves the purpose of retaining employees' loyalty to the company. Since there is no legal basis for the Christmas bonus, companies that offer this gratification appear more attractive to employees. As a result, there are no legal requirements regarding the amount or timing of the payment.
Who Can Receive a Christmas Bonus?
In 1952, the Public Services, Transport, and Traffic Union succeeded in establishing a collective bargaining agreement for a "Christmas allowance". While many industries have followed this example in the decades since, there is still no uniform practice in terms of the amount, calculation, and timing of Christmas bonuses.
Therefore, whether an employee is entitled to a Christmas bonus depends on the specifics of their individual contracts and agreements. Potential sources of an entitlement to a Christmas bonus include:
- Collective agreements
- Works agreements
- Employment contracts
- Voluntary commitments by the employer
- Company practice
- The customary employment law principle of equal treatment
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How to Calculate Christmas Bonuses?
The amount of the Christmas gratification usually depends on the industry, the company itself, the duration of continuous employment, and established company customs.
From a legal perspective, companies are free to pay different amounts for Christmas bonuses, provided there are valid reasons for doing so. For example, a person having higher qualifications than another is not, in itself, a sufficient reason, according to a ruling by the Federal Labor Court. Many industry associations provide online Christmas bonus calculators on their websites, allowing employees to estimate their potential Christmas bonus.
In many collective agreements, the calculation of the Christmas bonus is based on the length of service. This means that in many cases, there may be an entitlement to Christmas bonuses while on sick leave, but it is not customary to receive a Christmas bonus during the probationary period.
Long-term sick or soon-to-retire employees, as well as those on short-time work, usually have an entitlement to a Christmas gratification.
Staggered Christmas Bonus
A staggered Christmas bonus logic might be structured as follows, with the Christmas bonus amount increasing with each year of employment:
- 25% of the regular monthly earnings after 6 months of employment
- 35% of the regular monthly earnings after 12 months of employment
- 45% of the regular monthly earnings after 24 months of employment
- 55% of the regular monthly earnings after 36 months of employment
Christmas Bonus - Taxes and Social Contributions
Since the abolition of the Christmas bonus allowance with the implementation of the Tax Reform Act of July 25, 1988, the Christmas bonus is no longer tax-free. From a tax perspective, it is considered another income under § 39b (3) of the Income Tax Act (EStG).
If the Christmas bonus, together with the regular earnings, does not exceed the monthly contribution assessment ceiling, the one-time payment will also be used for contribution calculation in social insurance.