Salary sacrifice and employment law
Salary sacrifice – Why there is a need for labour law regulation

1. November 2022   Sabine Katzmair  

Lately I have been talking to many people about the topic of deferred compensation or salary sacrifice in favour of a benefit in kind. Often this option is used when giving a company bike. Many of my participants in webinars neglect an important part – namely the regulation of salary sacrifice in employment contracts and its effect.

What happens in the case of salary waiver or deferred compensation?
The employee waives his gross salary in the amount of the leasing rate of the job bike. The result is a reduction in tax and social security gross. The advantage of this is that less income tax and, below the income thresholds, also less social security contributions have to be paid monthly by both the employer and the employee. The result is a saving in wage tax and, above all, in social security contributions. However, this only applies for the duration of the leasing contract. After the end of the leasing period, the tax and social security gross amount increases again to the ‘normal’ salary.

The leasing instalment is paid in full from the net salary. However, if you offset the wage tax and social security savings, the leasing costs for the employee are also reduced. E.g. the employee pays € 70 leasing instalment for the company bicycle per month. With the savings from the salary conversion, this now only costs €35.

The whole thing is therefore a win-win situation for employer and employee, similar to the company pension scheme. But with the company pension act, this so-called social securityy saving of the employer must now be passed on to the employee since 2019. So it’s not quite win-win any more.

Labour law requirements for salary sacrifice
The main problem here is social security, if the labour law basis, i.e. the employment contract, has not been changed to the reduced salary.

If the basis of entitlement in social insurance is reduced, an amendment to the employment contract is needed for the period of salary conversion/salary waiver. In social insurance, the principle of accrual applies to current remuneration. This means: what is written in the employment contract and collective agreements is relevant for the contribution and not the remuneration that the employee actually receives via the payroll. This is different in tax law – here the inflow principle applies!

The Federal Social Court has affirmed the principle of accrual in various rulings.

For a salary waiver to be taken into account under contribution law, it must meet the following three criteria:

  • The waiver is permissible under labour law.
  • The waiver is agreed in writing.
    Pursuant to section 2, paragraph 1, sentence 2, no. 6 of the Verification Act, the composition and amount of the salary, including supplements, allowances, bonuses and special allowances as well as other components of the salary and its due date must be set out in writing. Since a salary waiver changes the amount of remuneration, it falls under this obligation.
  • The waiver applies only to future pay.A retroactive waiver by the employee of an entitlement to remuneration thus does not lead to a reduction of the contribution claim. The contribution claim has already arisen and is no longer eliminated by the waiver of remuneration.

If the salary waiver does not meet even one of these requirements, it must be disregarded under contribution law.

Attention: Minimum wage and the lower limit of collective agreements must also be observed in the case of a salary waiver!

Effects of missing or insufficient regulations – it gets expensive
If a social security auditor comes to your house, he will check the contracts – i.e. the basis for claims. He will demand additional contributions because the claim from the employment contract still contains the normal salary or does not meet the requirements for a salary waiver. Unfortunately, it does not only remain with additional demands for contributions. Late payment surcharges and interest are also levied by the DRV auditor. That becomes expensive.

In a nutshell: As an employer, you should therefore quickly equip yourself in terms of labour law so that you do not experience any unpleasant surprises in future social security audits!




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