Christmas Bonus - a Nice Extra at the End of the Year
The Christmas bonus, also known as Christmas gratification, is an additional payment from the employer to the employees.
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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Once you implement an HR software in your company, you can set these entries company-wide and then benefit from an automated process. However, finding the right HR software can often result in an abundance of providers offering seemingly identical services. That's why we've prepared a step-by-step guide to assist you in the software selection process.
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.
Disclaimer
We would like to point out that our website provides non-binding information, which under no circumstances constitutes legal advice. This also, and especially, applies to topics within the sphere of legal HR advise. The content of this contribution cannot and is not intended to replace individual and binding legal advice. For this reason, all information provided is without guarantee of correctness and completeness, but always researched with the utmost care.