Ins and Outs of Bonus and Commission Payments – Part I

Employers may grant their employees bonuses in addition to fixed basic salary for a variety of reasons, for example, to reward performance, loyalty to the company or just as a Christmas gratuity. In this context different questions arise. This two-part post addresses the most common questions regarding bonus and commission payments. 

 

What are the different types of bonuses payments?

The term “bonus” is not limited to a special kind of a bonus payment. In fact, there are numerous different kinds of bonus payments. These can be categorized in line with the reasons they are paid, as follows:

  • Performance based bonuses are paid as additional remuneration for the employee’s good performance.
  • Profit sharing bonuses allow the employee to benefit from the company’s results. Theses bonuses are usually granted to executive employees.
  • Gratuities paid for specific reasons, eg Christmas gratuities or anniversary bonuses.
  • Supplemental pay which is paid in addition to basic remuneration for specific reasons, e.g. to compensate the employee for taking on a particular burden at work such as night shifts or Sunday work.

 

What is commission?

Commission is a payment based on the employee’s performance. In contrast to a bonus payment which is usually paid once a year, commission is normally paid every month in addition to the employee’s base salary. Commission is usually granted to sales staff and, according to the statutory regulations of the German Commercial Code (Handelsgesetzbuch, HGB), is generally paid upon the conclusion or procurement of a contract. The provisions of the German Commercial Code also apply to employees and may be waived only partially. They regulate, among other things, the time the commission becomes due, the calculation of commission and the conditions under which the employer may reclaim the commission payment. But note, however, that these rules do not apply to bonuses.

 

Can a bonus entitlement be constituted only by written agreement?

No, written agreement is not necessary, oral agreement is also sufficient. Furthermore, a bonus entitlement can also arise by voluntary payments from the employer if the bonus was paid for 3 years in a row and there has not been an explicit statement that the payment is purely in voluntary in nature (so called company practice, Betriebliche Übung).

 

Is it possible to make bonus payments subject to the total discretion of the employer?
The answer is both yes and no, depending on the kind of bonus and the bonus language. There are two scenarios:

  • The employment contract regulates in general terms that the employee is entitled to a bonus payment, provided the employee meets the targets. Under German law, a bonus payment which is linked to the employee’s performance cannot be subject to the complete discretion of the employer. Therefore, it would not be possible for the employer to unilaterally terminate the bonus payment after a few years of employment.
  • This would be different, however, if the employment contract provides that (i) in the first year of employment the employee is eligible for a bonus payment and / or (ii) the employer decides at the end of the year if there will be a bonus program in the following year as well. In this case the bonus language would be limited to one year and the employer could decide at the end of this year whether or not it wishes to continue the bonus program.

 

How can the employer influence the amount of a performance related bonus payment?
The general participation of an employee in a bonus program cannot be made subject to the discretion of the company, but it is possible to agree on a bonus program which makes the bonus payment subject to (i) the employee’s performance and (ii) the performance of the company. The particular targets are defined by the company.

With regard to the employee’s performance, it would, for example, be possible to provide that a bonus will only be paid if the employee fully meets the targets set out by the company. In this case, no bonus would need to be paid if the employee does not meet the targets. But it would also be possible to provide that a pro-rated bonus will be paid if the targets are met by, say, at least 75%, for example.