In advance of the holiday season, it is common practice in many companies for the employer to show gratitude and to reward employees for their performance over the year. Typically, this is done by granting a bonus or similar one-time payment. Even though the legal basis of such payments often is a contractual agreement, a collective bargaining agreement or a works agreement, in many instances payment is made on an informal, “voluntary” basis. In such cases, employers often assume that they can decide whether to grant a bonus on a year-to-year basis without creating an obligation towards employees.

While this assumption can be correct, often employers are surprised when confronted with the idea of having established a “company practice”. According to German law, such company practice creates a legal entitlement of employees towards their employer for the same bonus granted during the last years. A typical situation for a company practice to surface is an employer who paid a year-end bonus to all employees, for example, the amount of one monthly salary for the last several years. After a change of ownership, the new management decides not to pay the respective bonus, only to find that employees successfully claim the previously paid bonus in German labor courts.

Once it is established, terminating a company practice is rather difficult. This is because a company practice establishes an individual contractual entitlement of the employee towards the employer. For existing employment relationships, such termination of a company practice would require either a mutual agreement with each employee or, alternatively, a unilateral notice of termination for change of contract. No need to state that obtaining employee consent only for a waiver of an existing entitlement can be tricky. Additionally, courts apply rather high and strict requirements for a termination for change of contract. At least for new hires, it is possible to prevent the applicability of a company practice also to their newly established employment relationships. This can be achieved by including a clause into the employment contract, which expressly excludes the applicability of the respective company practice to the newly established employment relationship.

As the phasing out of an established company practice through new employment relationships is rather impractical, it is best to avoid the establishment of a company practice in the first place. Either one of the following options can help to achieve this:

  1. Employers should grant a bonus to employees only on a clear legal basis. This could be, for example, a contractual obligation, a works agreement or a collective bargaining agreement.
  1. If no legal basis exists and cannot be established, for example, because no works council exists, the employer should make it clear that the bonus is a voluntary one-time payment. This clarification should be made when the bonus is announced but also with the actual payment.
  1. Probably the best way to avoid the establishment of a company practice is, however, to include a valid, qualified written form requirement in every employment contract. Such a clause has the effect to exclude almost all changes to the terms and conditions of the employment unless these changes are implemented in written form. As a company practice is established by repeated actions of the employer and therefore not in written form, case law and literature generally accept that a company practice can be excluded by a valid, qualified written form requirement.

The holiday season is a great time to show gratitude and generosity towards employees. If done correctly, unpleasant surprises can easily be avoided. If you require any advice or guidance in relation to company practice, the Reed Smith Employment Team can help.