The legal regulation on tax and social security free inflation compensation premiums expires at the end of 2024. Employers thus have the opportunity to support their employees with increased living costs with a special tax and social security payment. Payment is generally voluntary, but may be defined by tariff regulations in some companies.
Background to the inflation compensation premium
The inflation compensation premium was introduced to financially relieve workers and offset the increased cost of living. Due to its tax and social security exemption, it is an attractive instrument for employers.
The verdict of the Düsseldorf Regional Labor Court
Initial rulings by the regional labor courts now show what leeway employers have when it comes to paying this premium. In the specific case of the Düsseldorf Regional Labour Court dated March 5, 2024, the employer decided under a collective agreement to exclude employees in the passive phase of partial retirement from payment of the inflation compensation premium.
The plaintiff was in the active phase of his partial retirement period from May 2018 to April 2022 and worked regularly. Since May 2022, he has been in the passive phase, during which he continues to receive a salary but is released from work. The relevant collective agreement provided that only employees who are in an unterminated and non-dormant employment relationship on 31 May 2023 receive the inflation compensation premium (IAP). The action brought by an affected employee who wanted to legally challenge this decision was unsuccessful in the second instance.
Effects of the judgment on employers and employees
For companies, this ruling means that they can use the inflation compensation premium in a targeted manner to reward their employees for performance and to promote their loyalty to the company. It is legally permissible to exempt employees in the passive phase of partial retirement from the premium without violating the principle of equal treatment. From a legal perspective, a detailed examination of the extent to which individual employees are affected by inflation is not necessary when making payments.
This ruling underlines the importance of carefully designing and documenting premium regulations in order to avoid legal conflicts and to set the desired incentives.
