A gratification is a voluntary special payment by the employer beyond the regular salary, serving as recognition for performance or company loyalty – typical examples include Christmas bonuses, vacation pay, or anniversary payments. There is no legal entitlement, but a claim can arise through employment contracts, collective agreements, works council agreements, the principle of equal treatment, or customary company practice (three consecutive payments without reservation).

Definition: What is a Gratification?

A gratification (from Latin "gratificatio" = favor) is an additional special payment that employers grant their employees beyond regular wages. It serves as recognition for work performed, outstanding achievements, or long-term company loyalty.

Unlike regular salary, a gratification is fundamentally a voluntary benefit – there is no statutory entitlement to it. Employers decide themselves whether, when, and in what amount they pay gratifications. Important for HR professionals: Under certain circumstances, a legal entitlement can still arise – for example, through customary company practice or the principle of equal treatment.

Types of Gratifications

Christmas Bonus and Vacation Pay

The most well-known forms of gratification are the Christmas bonus (Weihnachtsgeld) and vacation pay (Urlaubsgeld). The Christmas bonus is typically paid in November or December and is intended to help employees with additional expenses during the pre-Christmas season. Vacation pay, on the other hand, is usually granted before the main vacation period in summer.

Important: Vacation pay should not be confused with vacation entitlement pay. Vacation entitlement pay is the regular continued payment of wages during vacation, to which employees have a statutory right. Vacation pay is an additional voluntary payment.

Anniversary Payments

Anniversary payments honor employees' long-term company tenure. They are often paid on milestone anniversaries – for example, after 10, 25, or 40 years with the company. The amount is frequently based on the length of service and may be regulated in works council agreements.

Benefits in Kind and Non-Cash Benefits

Gratifications don't always have to be in the form of money. Benefits in kind also count, such as company cars for private use, vouchers, discounts on company products, or additional vacation days. For tax purposes, benefits in kind up to a certain value can be more favorable than cash payments.

Entitlement to Gratification – When Does It Arise?

Employment Contract and Collective Agreement

The most secure path to a gratification entitlement is through an explicit agreement. If the gratification is stipulated in the employment contract, employees have an enforceable legal claim. The same applies to collective agreement regulations – these are binding for all employers and employees covered by the agreement.

Works Council Agreement

In companies with a works council, gratifications can also be regulated in a works council agreement (Betriebsvereinbarung). This then applies to all employees of the establishment. The entitlement can only be eliminated through a new contract or a modification termination.

Customary Company Practice (Three-Time Rule)

Even without an explicit agreement, an entitlement can arise: through so-called customary company practice (betriebliche Übung). If an employer pays a gratification at least three consecutive times without reservation and in the same amount, employees can derive a legal claim for the future from this.

Customary company practice is a common problem in HR practice. Once established, it cannot simply be reversed through a works council agreement – only an amendment agreement or a modification termination can help then. HR professionals should therefore use a written voluntariness reservation with every gratification payment.

Principle of Equal Treatment

The labor law principle of equal treatment can also establish an entitlement. If an employer pays a gratification to a group of employees, they may not exclude comparable employees without objective justification. It would be inadmissible, for example, to exclude all employees under 30 from the Christmas bonus – this would constitute age discrimination under the General Equal Treatment Act (AGG).

Gratification Upon Termination and Repayment

Repayment Clauses and Their Limits

Many employers link gratifications to the condition that employees remain with the company for a certain period. Such repayment clauses are fundamentally permissible but are subject to strict legal limits according to German Federal Labor Court (Bundesarbeitsgericht) case law:

• Gratification under €100: Repayment clauses are generally inadmissible.
• Gratification over €100 but under one month's salary: A binding period until March 31 of the following year at most is permissible.
• Gratification of one month's salary or more: A binding period until June 30 of the following year at most is possible.

Important: If a repayment clause is too broadly formulated, it becomes entirely invalid – it may not simply be "reduced" to a permissible duration. Furthermore: Special payments with pure remuneration character (as compensation for work already performed) cannot be reclaimed at all.

Voluntariness Reservation

With a voluntariness reservation (Freiwilligkeitsvorbehalt), employers can prevent the creation of customary company practice through repeated payments. The reservation must be made in writing, transparently, and with every payment. An example formulation: "This payment is made voluntarily without recognition of a legal obligation and does not establish any entitlement for the future."

Caution: Empty phrases that are not seriously meant can be deemed invalid by courts – for example, if the employer paid despite the reservation in situations where they could have refused payment.

Tax Treatment of Gratifications

Gratifications are fundamentally subject to income tax and social security contributions. For tax purposes, they count as "other remuneration" (sonstige Bezüge) and are taxed separately. This can lead to a higher tax burden in the payment month.

For employers, there are alternatives: Benefits in kind up to €50 per month (tax-free threshold) are exempt from income tax and social security contributions. Certain occasion-related payments can also be tax-advantaged – such as the inflation compensation bonus (Inflationsausgleichsprämie), which was tax-free between 2023 and 2024.

Gratification vs. Bonus – What's the Difference?

The terms gratification and bonus are often used synonymously in everyday language, but there are legal differences:

• Gratification: Fundamentally a voluntary special payment granted as recognition for company loyalty or on special occasions. No legal entitlement unless established by contract or customary company practice.
• Bonus: Often performance-related and linked to specific goals or achievements. Considered a variable wage component, to which a legal entitlement may exist under certain circumstances.
• 13th Month Salary: A fixed salary component without conditions. Is also paid pro rata upon early termination and cannot be subject to repayment clauses.

Frequently Asked Questions About Gratification

What is a gratification?

A gratification is an additional special payment by the employer beyond regular wages. It serves as recognition for work performed, outstanding achievements, or company loyalty. Typical examples are Christmas bonuses, vacation pay, and anniversary payments. Benefits in kind such as company cars or vouchers can also be gratifications.

When does an entitlement to gratification arise?

An entitlement can arise through: explicit agreement in the employment contract, regulation in a collective agreement or works council agreement, customary company practice (three consecutive payments without reservation in the same amount), or the principle of equal treatment (when comparable colleagues receive the gratification). A written voluntariness reservation can prevent the emergence of an entitlement.

What is customary company practice for gratifications?

Customary company practice arises when an employer makes a payment at least three consecutive times without reservation and in the same amount. Employees can derive a legal claim for the future from this. Customary company practice can only be eliminated through an amendment agreement or a modification termination – not through unilateral decision by the employer.

Must a gratification be repaid upon termination?

Only with an explicit repayment clause in the employment contract. For gratifications under €100, a repayment clause is generally inadmissible. For amounts over €100 but under one month's salary, a binding period until March 31 of the following year at most is possible; for one month's salary or more, until June 30. Special payments with remuneration character (compensation for work already performed) fundamentally cannot be reclaimed.

What is the difference between gratification and bonus?

A gratification is fundamentally a voluntary special payment for company loyalty or special occasions. A bonus is usually performance-related and linked to specific goals. Legally, a bonus is considered a variable wage component to which a legal entitlement may exist under certain circumstances. The 13th month salary, in turn, is a fixed salary component without conditions.

Are gratifications taxable?

Yes, gratifications are fully subject to income tax and social security contributions. They count as "other remuneration" and can lead to higher tax progression in the payment month. Alternative: Tax-free benefits in kind up to €50 per month (tax-free threshold) or tax-advantaged occasion-related payments.

How do I formulate an effective voluntariness reservation?

The reservation must be made in writing, transparently, and with every payment. An example formulation is: "This payment is made voluntarily without recognition of a legal obligation and does not establish any entitlement for the future." The transparency requirement under § 307 BGB (German Civil Code) must be observed. Empty phrases can be deemed invalid.

Conclusion

Gratifications are an important instrument for employee retention and employer branding. They show appreciation and can increase motivation. For HR professionals, however, it is crucial to know the legal framework: Without a voluntariness reservation, customary company practice can quickly arise, repayment clauses are subject to strict limits, and the principle of equal treatment prohibits arbitrary exclusions.

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Legal Notice: This article serves general information purposes and does not replace individual legal advice. For specific legal questions, please consult a specialized employment law attorney.

Sources

• German Civil Code (Bürgerliches Gesetzbuch, BGB). Federal Republic of Germany, 2024. https://www.gesetze-im-internet.de/bgb/
• General Equal Treatment Act (Allgemeines Gleichbehandlungsgesetz, AGG). Federal Republic of Germany, 2024. https://www.gesetze-im-internet.de/agg/
• Federal Labor Court (Bundesarbeitsgericht) – Case law on gratifications and customary company practice. https://www.bundesarbeitsgericht.de/
• Haufe Personal Office – Gratification: Repayment Clauses. Haufe-Lexware GmbH, 2024. https://www.haufe.de/