The inflation compensation premium is currently the talk of the town. After all, it gives employees hope that they will receive a payment of up to 3,000 euros from their employer to compensate for the current rapid inflation – tax-free and free of social security contributions.
What is correct is that employers have the option of paying employees an inflation compensation bonus. However, the payment of a bonus is not mandatory. However, if employers decide to pay out this bonus to employees, there are a number of things to bear in mind to ensure that the bonus benefits the employees to the extent planned and that employers do not involuntarily “pay on top”.
For this reason, we have summarized the answers to the most important questions about the inflation compensation bonus from the employer’s perspective here!
What is the inflation adjustment premium (IAP)?
The inflation adjustment premium is a special payment of up to 3,000 euros that employers can pay to their employees – this has been regulated by law since the end of October 2022. The legal basis is the “Act on the Temporary Reduction of the Value Added Tax Rate on Gas Supplies via the Natural Gas Network” with the new Functional Plant Ordinance and Section 3 No. 11 c EstG, in which the premium is also defined as a tax allowance.
Recipients of the premium therefore do not have to pay income tax, nor are social security contributions due. This means that 100% of the inflation compensation premium is received by the recipients of the premium.
The concrete basis for the distribution of an inflation compensation premium is then either
- an individual decision by the company including individual regulations
- a company agreement, or
- a collective agreement that provides for an inflation compensation bonus (as of 18.11.2022, for example, already in the pharmaceutical, chemical and also IG Metall sectors in Baden-Württemberg, with an inflation compensation bonus of 3,000 euros).
If an employer pays such a bonus to employees, these payments are also exempt from social security contributions for the employer and are tax-deductible as a business expense.
What is the period during which the inflation compensation bonus is paid?
The period in which the bonus can be paid out to employees is generous. This is because the inflation compensation bonus must be received by employees between October 27, 2022 and December 31, 2024 in order for employees to benefit from the bonus’s exemption from income tax and social security contributions.
How does an employer structure the inflation compensation premium?
Employers have a relatively free hand when it comes to structuring the distribution of the inflation compensation premium.
On the one hand, payment in cash is possible. Employers do not necessarily have to pay out the amount of 3,000 euros if they decide to pay the premium, nor does the premium amount have to be paid all at once.
Example: An employer decides to pay its employees an inflation compensation bonus in cash amounting to 2,400 euros in installments of 100 euros per month between January 2023 and December 2024. This is possible in this form, as both the amount and the period comply with the statutory requirements.
On the other hand, employers can also give employees other benefits worth up to 3,000 euros as part of the inflation compensation bonus – as a benefit in kind, such as a gasoline voucher.
If a decision is made in favor of a bonus, two things in particular must be taken into account when structuring it:
- An existing works council must be involved when deciding which employees receive the bonus and in what amount. This is because the question of the bonus is a question of the company’s wage structure.
- If you introduce the bonus for your own company, this can be done by means of a works agreement, for example. In the same way, employees can be informed about the inflation compensation bonus, but then at best also about the type and scope of the bonus, payment modalities, etc.
Tip! It is important here to point out that the special payment is voluntary so that, for example, the payment of several partial amounts does not give rise to “company practice” with corresponding subsequent claims.
What else do employers need to consider?
When it comes to designing an inflation compensation bonus, employers must also pay attention to the content.
- It must be a benefit that is in addition to normal pay. Existing benefits that employees would be entitled to anyway (e.g. vacation pay, Christmas bonus, bonuses) may not be reclassified as inflation compensation bonuses.
- The bonus – however it is structured – must be distributed or have been distributed in the period from October 27, 2022 to December 31, 2024.
- It must be recognizable that it is a benefit to mitigate additional inflation-related burdens. Among other things, the notification to employees that an inflation compensation payment is to be made is important for this.
- Last but not least, employers must make the special payment traceable in the payroll account so that the special payment can be identified in the event of an external wage tax audit. A corresponding note “inflation compensation payment”, possibly with reference to the basis (collective agreement, company agreement, individual agreement) is useful.
Can every employee receive the full amount of the inflation compensation bonus?
Yes. The inflation compensation premium or bonus is not restricted to a specific occupational group, etc. Furthermore, it makes no difference whether employees are employed full-time or part-time, whether they are still in training or are employed as minjobber. Employers can pay the full amount of the inflation compensation bonus to each and every employee.
Who receives the bonus or premium and the amount depends solely on whom the employer defines as the recipient (see above). This is because employers can also structure the inflation compensation bonus differently for different groups of employees. However, there must be an objective reason for such “unequal treatment” so as not to violate the “principle of equal treatment” under labor law.
Caution! If an employer violates the principle of equal treatment when structuring the inflation compensation bonus, e.g. because there is no factual reason for different bonus amounts, employees can take legal action against this and demand (financial) equal treatment.
Are employees entitled to the inflation compensation premium?
No, employees are not entitled to payment of an inflation compensation premium. It is a purely voluntary benefit paid by an employer. If the employer decides not to pay a bonus and there is no corresponding binding collective agreement, employees cannot claim or even sue for an inflation compensation bonus.
Claims by employees can only arise if a bonus scheme excludes groups of employees or individual employees from the scheme or puts them at a financial disadvantage without any objective reason. However, this is then a claim for damages due to violation of the principle of equal treatment, not a claim to the bonus!
Inflation compensation premium instead of Christmas bonus?
Currently, the question often arises as to whether employers can redefine the Christmas bonus, for example, or reallocate it to an inflation compensation bonus in order not to have to pay “more” but to provide employees with financial benefits because no income tax or social security contributions are due.
However, this is not possible. This is because the bonus must be paid in addition to the existing remuneration including special payments.
What happens if employers do not comply with the requirements?
If employers do not comply with the requirements for the distribution of an inflation compensation bonus (e.g. do not comply with the “additionality requirement”), nothing changes for the employees. For employers, however, it certainly does. They must subsequently pay the wage tax and social security contributions for the payment – including the employee’s share.
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