Employees often see holiday pay as a one-off financial benefit on top of their salary. In Germany, however, the payment is not required by law and is fully taxable.
It is not the salary paid during the holiday (Urlaubsentgelt) but an additional payment, frequently granted on the occasion of the annual holiday.
When an entitlement exists
There is no statutory entitlement to holiday pay in Germany. It is paid only where it is provided for:
- in the individual employment contract
- or through established practice (at least 3 consecutive years without reservation)
Tax and social security treatment
Like regular salary, holiday pay is fully subject to:
- church tax (where applicable)
- social security contributions: pension, health, unemployment and long-term care insurance
The net amount paid out is therefore often considerably lower than the gross figure shown on the payslip.
Special cases
During parental leave
Whether the entitlement continues depends on the purpose of the payment:
- Where it rewards work performed, it lapses during parental leave.
- Where it rewards loyalty, or has a mixed character (performance plus loyalty), it continues during parental leave.
During long-term sickness
An employee signed off sick for the whole year keeps the holiday entitlement and, in certain circumstances, the entitlement to holiday pay as well. It only falls due, however, when the holiday is actually taken.
Equal treatment
The principle of equal treatment prevents the employer from paying holiday pay to certain employees only, without an objective reason.
Can the employer reserve the right to treat it as voluntary?
Yes. To prevent an established practice from arising, the employer has to state expressly with each payment that the holiday pay is voluntary and non-recurring.
For example, a letter describing the payment as “an exceptional bonus, paid voluntarily and without acknowledgement of any future entitlement”.
Reducing or withdrawing holiday pay
- Holiday pay can be abolished for the future by collective agreement, subject to employees’ fundamental rights.
- It can be reduced where the employee leaves during the year or is absent for a longer period.
Leaving during the year
- Where holiday pay counts as additional remuneration, it can be paid pro rata.
- Where it counts as a gratuity, it may fall due in full irrespective of the leaving date.
Where holiday pay has been paid early
The employer can reclaim it only where:
- a clear repayment clause is included in the contract
- the clause is reasonable as to amount and as to the period of commitment
- and the employment has not been terminated by the employer
The recreation allowance as an alternative
One interesting alternative is the recreation allowance (Erholungsbeihilfe): also voluntary, it is partly free of tax and social security contributions if certain ceilings are observed — EUR 156 for the employee.
It has to be linked directly to the holiday period. Unlike holiday pay, it allows the company to reduce its costs while giving the employee a tax-free net benefit.
Holiday pay and the minimum wage
- Holiday pay can be counted towards the minimum wage only where it is paid monthly at 1/12 of the annual amount.
- An employer may not split an annual payment into 12 monthly instalments in order to circumvent the Minimum Wage Act.
Recommendations
- Plan the use of holiday pay carefully: it is taxable, but it remains a valuable form of support.
- Find out where you stand, particularly in cases of parental leave or sickness.
- Be clear and transparent about whether the holiday pay is voluntary or contractual.
- Use it as a strategic instrument for attracting and retaining staff.
- Consider optimising the tax position through recreation allowances.