Inflation adjustment premium and the principle of equal treatment
In the period between autumn 2022 and the end of 2024, employers may grant employees an inflation adjustment premium (IAP) up to a maximum of 3,000 euros. This bonus is free of tax and social security contributions.
However, complaints in recent months have demonstrated just how important it is that employers observe the general principle of equal treatment when structuring these bonuses.
This means that employers may not arbitrarily treat individual employees less favorably than comparable employees when providing benefits of this nature (see German Federal Labor Court, decision dated September 21, 2011, Ref: 5 AZR 520/10). Similarly, the principle of equal treatment also prohibits the inappropriate formation of groups when granting such benefits.
Consequently, arbitrary unequal treatment is prohibited whereas unequal treatment for objectively justified reasons remains permissible.
Court case addressing different bonuses for different groups
If employers treat their employees differently when paying out an IAP, they may risk payment claims for equal treatment. In one case, a woman took legal action against her employer demanding payment of the maximum possible inflation adjustment premium. Her employer had defined the bonus as amounts between 200 and 1,000 euros, scaled according to criteria such as length of service, pay, as well as part-time and full-time employment.
Given that she worked part-time, had only worked for the company for a short time and earned less than 2,700 euros gross, she received the minimum bonus in line with the internal regulations.
Claim for the maximum premium
She regarded this as a violation of the general principle of equal treatment, arguing that the groups defined by her employer were unjustified and were not based on valid objective criteria. Moreover, the criteria used lead could to incomprehensible results in individual cases. Therefore, she claimed the maximum possible premium.
Her employer took a different stance and argued that the woman was comparing herself with colleagues with whom her comparison was not valid in view of the length of service and salary. The bonuses paid were determined by groupings, although exceptions were made on the basis of outstanding management functions, for example.
The company stated that it had acted in accordance with a recognizably generalized principle and was not arbitrarily treating people unfavorably.
The ruling
The employee won the case and the employer was required to pay a subsequent bonus of 800 euros. The court ruled that the unequal treatment between the employee groups was not objectively justified.
While forming groups on the basis of objective criteria is fundamentally possible, as is rewarding loyalty to the company,
unequal treatment must ultimately serve a legitimate purpose. However, the court did not see this in the company’s approach. It ruled that the group formation was not appropriate, in particular, when considered in terms of material justice: The purpose of the bonus is to ease the financial burden on employees. Preferential treatment of higher earners fundamentally contradicts the social purpose of the IAP. This is why linking the bonus amount to an employee’s wages and providing a higher bonus for higher earnings and longer service is problematic. Moreover, low earners are hit particularly hard by inflation.
Furthermore, the unequal treatment of part-time and full-time employees in this particular case already represents an inadmissible justification. Last but not least, the court declared that the classification of the groups was inconsistent and failed to include any regulations for specific groups of employees.
Considered as a whole, the employer had made differentiations without sufficiently substantiated reasons: In addition, these differentiations ran contrary to the purpose of the IAP and led to materially unfair results.
Due to the violation of the principle of equal treatment, the employee was entitled to equal treatment and, therefore, to an upward adjustment, in this case to the maximum bonus amount. (Hagen Labor Court, Ref.: 3 Ca 588/23)
Summary of the key facts:
- The general principle of equality must be observed when creating a framework defining how to pay an inflation adjustment bonus.
- Employees must receive equal treatment and exceptions are only possible for objectively justified reasons. Length of service, wages, full-time or part-time employment do not in themselves provide objective criteria for differentiation.
- Given the current uncertainty in case law, employers are advised either to pay all employees a bonus of the same amount without differentiation or to forgo the bonus entirely. Otherwise, they face a risk of payment claims.
