Remuneration (employment law)

Remuneration / Vergütung

January 19, 2024

The employment relationship is a mutual contract: the employee performs the agreed work and receives remuneration from the employer in return. The entitlement to this remuneration arises from the employment contract, which can in principle also be concluded verbally. If no contractual agreement on remuneration has been made, the employee is legally entitled to the usual remuneration, Section 612 of the German Civil Code (BGB). If a collective agreement is applicable to the employment relationship, the provisions on remuneration contained therein take precedence over the employment contract.

Remuneration components

Remuneration generally comprises the remuneration paid in return for the employee's work. However, additional, variable components can also be agreed, e.g. bonuses, performance-related pay and allowances or supplements. There are many other types of remuneration, such as share options (ESOP/VESOP), the payment of insurance fees or membership fees for professional organisations, childcare, annual public transport passes, credit cards, etc., which can be paid in addition to the fixed salary.

Remuneration

Remuneration paid for work is generally referred to as wages for workers, salaries for employees, fees for artists and wages for seafarers. However, as the distinction between workers and employees has become less and less important, these different terms are more or less synonymous.

This is based on the standard case of remuneration in the form of a (non-cash) monetary payment, whereby the possibility of so-called remuneration in kind, i.e. "payment" with other benefits that have a monetary value in legal transactions, should be noted. Normally, monthly remuneration is paid in the employment relationship, but depending on the remuneration period, hourly, daily or weekly remuneration is also possible.

As a rule, remuneration is based on the time worked, while the quantity and quality of the work performed are irrelevant. On the other hand, there are piecework and bonus payments, whereby piecework remuneration is based on the quantity of work and bonus payments on the quality or quantity of work. If an hourly wage is contractually agreed as part of the usual time-based remuneration, the employee bears the burden of proof for the actual work performed by him, whereby the employer's obligation to record the working hours must be taken into account.

When agreeing the amount of remuneration, the contracting parties are not unrestricted, as they must comply with applicable limits, which may result from a collective agreement that may be applicable to the individual case, on the one hand, but generally correspond to the statutory minimum wage, on the other.

Special allowances

A benefit is a special payment made by the employer on a specific occasion in addition to the employee's salary. This includes, in particular, Christmas and holiday bonuses and bonuses (e.g. for a company anniversary).

An entitlement to the payment of a gratuity can arise from the labour or collective agreement, but can also arise due to a corresponding company practice. This is usually the case if the employer grants the benefit over a certain period of time and the employee is entitled to assume that this is a permanent benefit, which is usually assumed in the case of three unconditional and equivalent payments. A claim based on company practice is excluded if the employer expressly reserves the right to make the benefit voluntary. Entitlement may also result from the principle of equal treatment if there is no objective reason for not granting the bonus to one or a few employees while all others receive it.

Special payments according to target agreement

This includes bonus payments and so-called management bonuses, which are paid when a target previously agreed between the parties to the employment contract is achieved and are intended to motivate the employee.

Bonuses are usually dependent on the success of the company and are often agreed in the form of profit-sharing, or less frequently revenue-sharing. They serve to motivate employees in influential positions in particular to contribute to a good business result for the company.

Bonus payments, on the other hand, usually relate to the achievement of an individual target by the employee, although it is also possible to include company-related targets.

The entitlement and the calculation of its amount are usually agreed in the employment contract, while the respective targets are usually set annually in a separate agreement. Here too, an entitlement can arise from company practice or the principle of equal treatment.

A due date clause often regulates a condition of these special payments: The payment is agreed on a specific date on the condition that an employment relationship that has not been terminated exists on this date or that the employee continues to work. It is possible to agree a discretionary clause, but the wording must be clear and not contradictory.

Commission

Commission is a form of performance-related remuneration and gives the employee a share in the value of the transactions concluded by him or entered into in his area/customer base. There is also turnover commission, which is not linked to the employee's success, but represents a share in the turnover of the entire company or an individual department.

Allowances and supplements

Allowances can be paid for particular difficulties, such as night work, unhealthy work, shift work or work in an expensive location. Supplements are generally granted for work on Sundays and public holidays as well as overtime, insofar as this is provided for in the contract, and serve to adjust the total remuneration to the special circumstances of the specific employment relationship.

However, overtime bonuses are not to be understood as remuneration for overtime, but merely an additional payment that increases the remuneration to be paid.

Allowances and supplements are often regulated in detail in collective agreements.

Calculation and payment

The employer is obliged to calculate the remuneration and to pay income tax and social security contributions on the calculated amount and to pay the remaining amount to the employee. At the time of payment, the employer must provide the employee with a statement in text form detailing the period and composition of the remuneration.

If a remuneration amount has been agreed in the contract, in case of doubt this represents the gross amount from which the above deductions are to be made.

Sick pay/incapacity to work

According to the basic rule of Section 616 of the German Civil Code (BGB), the employee is also entitled to remuneration if he/she is prevented from working for an insignificant period of time for personal reasons through no fault of his/her own. Section 3 of the Continued Remuneration Act (EFZG) applies primarily to an employee's absence due to illness.

According to § 3 EFZG, the employer must continue to pay remuneration in full for up to 6 weeks in the event of illness through no fault of the employee. This remuneration concept includes the gross remuneration that the employee receives in return for their work. Accordingly, annual bonuses that are not linked to work performance are not taken into account. The 6-week period is not to be considered as a continuous period, but the 42 days can be spread over several periods of incapacity for work. The period also includes Sundays and public holidays and, in the case of part-time employees, days off work.

With each illness that is due to a different cause than the previous one, a new entitlement to another six weeks of continued remuneration arises. However, this does not apply if another illness occurs during an illness-related incapacity to work (principle of unity of the case of incapacity).

However, Section 616 BGB also entitles the employee to continued payment of remuneration in other cases, e.g. caring for a sick child or a family member in need of care in their own household, unforeseeable loss of care for a child and special family events (own (silver) wedding, confirmation/wedding of children, parents' golden wedding anniversary, death in the immediate family, birth of a child for the father as an employee).

Statute of limitations

Contractual remuneration claims are subject to the regular limitation period of 3 years, § 195 BGB. This period is suspended by the filing of an action for performance or declaratory judgement on the remuneration claim, but not by the filing of an action for protection against dismissal.