Christmas gifts and labor law - Always "Oh, how joyfully"? Things to consider for employers and employees

Gifts to employees – what should be considered from the company’s point of view?

In addition to paying Christmas bonuses, it is common practice in many companies to express appreciation for their employees through gifts.

The value of the gift

But what and how much is permitted here? In principle, there are no limits to the value of gifts to employees – courts have already had to deal with employers who had given their employees IPads or Krugerrand gold coins for Christmas. The reason for the courts' involvement with the gifts in question was not the value of the gift, but – In the case of the iPad – the fact that it was only handed over to employees who – unlike the plaintiff – had also attended the Christmas party (Regional Labor Court Cologne, 26 March 2014 – 11 Sa 845/13) and, in the case of the Krugerrand coins, their taxability (Federal Fiscal Court, 7 November 2006 – VI R 58/04, NJW 2007, 719).

In practice, it is primarily tax and social security considerations that actually often limit the value of gifts to employees:

In principle, gifts in kind to employees – regardless of the amount – are deductible as business expenses for the employer and subject to income tax for the employee.

The Christmas gift regularly falls under the exemption limit for non-cash benefits. Up to the limit of EUR 50 per month, the gift is granted to employees in addition to their wages – provided the limit has not already been exhausted in December for other benefits in kind – such as contributions to a gym membership or a job ticket. In this case, the employee does not have to declare the gift as income from non-self-employed work in the income tax return in accordance with Section 8 Para. 2 Sentence 11 Income Tax Act (EStG) and therefore does not have to pay tax on it.

If a gift exceeds the exemption limit of EUR 50, it is regularly to be qualified as a salary component that must be taxed like wages. In this case, social security contributions must also be paid on the monetary value of the gift.

If Christmas gifts are handed over on the occasion of the company Christmas party, they do not constitute wages, but are part of the expenses of the company party and must be offset against the tax-free amount of EUR 110.

Caution in case of repetition!

If an employer regularly makes a gift to his employees during the Christmas season, this may result in a company practice (betriebliche Übung). Since in practice duplicate written form clauses are often not in line with the law on general terms and conditions, caution is therefore required here. Once a company practice has arisen, it can generally only be cancelled with the consent of the employees.

... and co-determination?

Finally, in the case of Christmas gifts by the employer, any co-determination of the works council pursuant to Section 87 Para. 1 No. 10 Works Constitution Act (BetrVG) must be taken into account. It is true that the employer alone can decide whether to distribute gifts at Christmas. However, it is subject to co-determination how the benefits are distributed.

Equal treatment also under the Christmas tree

Even outside the scope of mandatory co-determination, the employer is not completely free to decide which employees they wish to give Christmas gifts to, but must observe the general principle of equal treatment under labor law. This prohibits the employer from excluding individual employees or groups of employees from generally favorable provisions of the employment relationship without objective reason and from placing them in a worse position than other employees in a comparable situation.

Against this background, the Regional Labor Court of Cologne which was dealing with above-mentioned matter, gave the green light to the employer who only wanted to give IPads to those employees who had attended the Christmas party: By giving the gift, which had not been announced in advance of the Christmas party, the employer had intended to increase the employees' interest in attending future company parties. The court did not consider the differentiation between employees who participate in the Christmas party and those who do not to be a violation of the principle of equal treatment, since the differentiation made was necessary and appropriate to achieve the intended purpose – to promote the willingness to participate in company parties – and therefore did not constitute an extraneous disadvantage.

Gifts from third parties

During the Christmas season, however, employees are not only presented with gifts by their employer, but also, depending on their position, often with gifts from third parties, in particular from business partners. Depending on the value of the gift in question, this may quickly create a corruption-image, which can cause considerable damage to the companies concerned – both financially and in the form of reputational damage. Accepting gifts can also have significant consequences for individual employees under criminal and labor law – more on this later.

Companies are therefore well advised to clearly regulate how employees are to deal with gifts from third parties. For example, uniform rules on whether and to what value gifts may be accepted can be set up. It is advisable to instruct employees who receive large gifts to obtain internal approval from the responsible department. It can then be decided whether the gift may be kept. All other gifts must be returned or may be suitable for a raffle or donation.

In this way, employees are given a clear guideline to follow in order to prevent possible consequences under criminal and labor law. At the same time, companies get better and legally secure means of preventing their employees from accepting problematic gifts and sanctioning them under labor law.

If a corresponding compliance regulation is to be made, it is subject to mandatory co-determination pursuant to Section 87 Para. 1 No. 1 Works Constitution Act in companies that have a works council and must therefore be concluded in the form of a works agreement.

And what should employees pay attention to?

Acceptance of gifts

First of all: Employees may accept gifts from their own employer without hesitation. However, if the aforementioned value thresholds are exceeded, it is up to the employees themselves to make the correct disclosure in their tax returns. If the value of the gift exceeds the exemption limit of EUR 50, the entire value of the gift must be taxed, because this amount is not an exemption amount, but an exemption limit.

The acceptance of gifts by business partners is more complicated: Here, too, it is quite common to hand over a gift – often in the form of a book, calendar or bottle of wine – on the occasion of Christmas.

However, caution is required here to ensure that the enjoyment of the fine wine does not leave a bad taste in the mouth. Suspicions of bribery under Section 299 para. 1 of the German Criminal Code (StGB) or a breach of internal compliance regulations can quickly arise. Sometimes there may be consequences under labor law in the form of a warning or even termination.

If internal guidelines on the acceptance of gifts exist, these must of course be observed.

If the company has not established any compliance regulations, the decisive factor for the question of acceptance is whether the gift gives the impression that the business partner is expecting something in return. If the gift is directly linked to a claim, the suspicion of bribery may be aroused even if the value of the gift is low. The more valuable the gift, the more likely it is that there is an ulterior motive. The fact that the gift is sent to the employee's private address also suggests that the gift is probably intended to be concealed from the employer.

The question of what can still be regarded as socially adequate in the specific relationship helps to make the distinction. The value of the gift is put in relation to the employee's monthly salary. It is therefore not surprising that a gift to a member of the Executive Board may be of a greater value than one to "ordinary" employees. The intensity of the business relationship is also likely to play a role here – for example, a gift from a business partner with whom a close and lively relationship has already existed for years may certainly be more generous to a certain extent, without already creating a bad impression, than will be the case after only a few and isolated business contacts.

Gifts of low value, such as pens or calendars, are generally considered socially acceptable and are therefore accepted. If the employer does not provide clear compliance regulations, common case law regularly considers gifts worth up to EUR 35 to be irrelevant in terms of tax and criminal law. Nevertheless, to be on the safe side, larger gifts should only be accepted after consultation with the employer.

Irrespective of the risk of corruption and consequences under labor law, the question of the correct treatment under tax and social security law also arises here in order not to be exposed to the frivolous (Sec. 378 German Fiscal Code (AO)) or even intentional (Sec. 370 German Fiscal Code) accusation of tax evasion or a violation of Sec. 266a German Criminal Code.

Gifts to Business Partners

If employees or a company itself wish to give a gift to employees of another company at Christmas, it is advisable to first address them with a greeting or thank-you card to the company itself. In this way, the appearance of secrecy is prevented from the outset and the decision to hand over the gift to the employee or to make a donation, for example, rests with the company. In any case, gifts should not be sent to the employee's private address in order not to cause difficulties for the recipient or for the giver and to avoid any appearance of bribery or corruption.

In the event of uncertainty, it is often possible, at least in the case of larger companies, to inspect publicly available compliance guidelines on the acceptance of gifts. Otherwise, it is worthwhile to inquire with the responsible department within the company.

Particular caution must also be exercised in the case of gifts to public officials such as civil servants or other persons working for the authorities: Due to the extremely strict criminal law regulations with regard to corruption of public officials pursuant to Sections 333 et seq. German Criminal Code, in case of doubt, gifts should be avoided altogether or only low-value gifts worth around EUR 5 to EUR 10 should be given. In any case, it is advisable to obtain prior approval from the employee's supervisor.

From a tax perspective, it is advisable for the value of the gift not to exceed EUR 35. Up to this amount, expenses for gifts to persons who are not themselves employees of the taxpayer can be deducted as business expenses in accordance with Section 4 Para. 5 Sentence 1 No. 1 Income Tax Act. However, if the gift is larger, it cannot be partially deducted as a business expense. This is because the amount in Section 4 Para. 5 Sentence 1 No. 1 Sentence 2 Income Tax Act is not an exemption amount either, but an exemption limit. However, such gifts may be taxed at a flat rate of 30% under Section 37b Income Tax Act.

Conclusion

(Small) gifts maintain friendship – this applies in the professional environment as well as in private life. In order for the gift to really and lastingly bring pleasure, it is important for the giver and the recipient to consider the aforementioned aspects. In general, the following applies: If in doubt, seek advice and follow up on a bad gut feeling in any case. Because what feels wrong often is. Also, secrecy is not compatible with gifts in business dealings.

If these principles are observed, the best foundations are laid for a Christmas that is as harmonious as possible, not only under the Christmas tree with the family, but also between employer and employee.