December is the time of year for presents and also the month when many employers pay out performance bonuses or Christmas bonuses to their employees. While this can be an important incentive, it can also come with certain obligations and responsibilities. When paying out performance bonuses, employers must be careful not to discriminate against employees, as the Advocate of the Principle of Equality has repeatedly warned.
This article will look at the conditions under which performance bonuses can receive favourable tax treatment and the key factors employers need to consider to ensure that they do not discriminate and widen the pay gap. We will also discuss a recent decision of the Supreme Court of the Republic of Slovenia, which provides important guidelines to prevent discriminatory practices in the awarding of bonuses.
Examples of prohibited discrimination
Examples of prohibited discrimination often arise in practice because of the criteria for remuneration and promotion. When we talk to employers, we find that discrimination is not usually the result of a conscious decision by the employer. They do not deliberately disadvantage individual employees with certain personal circumstances, but want to establish fair criteria for all employees, without taking into account that certain criteria lead to discrimination between employees on the basis of personal circumstances.
In this context, there is still a common misconception that performance-related payments, bonuses and Christmas bonuses are voluntary payments to employees and therefore should not be subject to legal rules. This article thus aims to point out that voluntary payments are also subject to anti-discrimination rules. The subjective attitude of employers is irrelevant; prohibited discrimination can occur even if it was not intentional. Nevertheless, in such cases all legal consequences apply.
What is indirect discrimination?
It is important for employers to understand the concept of indirect discrimination, as it goes beyond formal equality and requires substantive equal treatment. Indirect discrimination is prohibited precisely because treating persons who are otherwise differently situated in the same way does not guarantee de facto equality. In some cases, the equal treatment of all means a disadvantage for those who, because of their personal circumstances, find themselves in a disadvantaged position.
Indirect discrimination is when an apparently neutral rule, criterion or practice actually puts people with certain personal circumstances at a disadvantage compared to others. The key to identifying indirect discrimination is to establish whether an apparently neutral criterion disadvantages one group of people on the basis of their personal circumstances compared to another group who do not have those circumstances.
Christmas bonus and taxes
On 1 January 2017, the Act Amending the Personal Income Tax Act[1] (ZDoh-2R)[2] introduced the special tax treatment of the performance-related part of salaries. However, this tax benefit does not apply to all performance-related payments, but only if the conditions set out in the Act are met and only up to the amount set out in the Act. The aim of this measure was to encourage companies to ease the burden on the most productive and creative employees, as they tend to contribute most to the value added of the company, to increase the competitiveness of Slovenian companies and to preserve jobs in Slovenia.
Although the possibility of performance-related pay was already provided for in the ZDR-1[3] and agreed in the collective agreements of sectors, the more favourable tax treatment provided an additional incentive for companies to pay it. However, the criteria for payment were often based on presence, which meant that eligibility for or the amount of the performance bonus depended on the employee’s presence at work.
The main provision on the tax treatment of the payments in question is Article 44(1)(12) of the ZDoh-2. It provides that a performance-related payment paid in cash or in kind in connection with the employment relationship no more than twice in a calendar year to all eligible employees shall not be included in the tax base from income if the right to the performance-related payment is provided for in the general act of the employer or in a collective agreement. The limit applies up to 100% of the average monthly salary of employees in Slovenia, which amounted to EUR 2,220.95 gross in 2023.
Criteria for performance-related payments
The logical question that follows from the above findings is what the appropriate criteria should be in terms of labour and tax law.
From a tax law perspective, a performance-related payment must meet the following criteria in order to qualify for exemption from the tax base of employment income:
- the payment must be made in connection with the employment relationship;
- it may be paid in cash or in kind;
- it may be paid no more than twice a year;
- it must be paid to all eligible employees; and
- the right to payment must be laid down in the employer’s general law or collective agreement.
The above criteria must be met cumulatively, which is confirmed by the practice of the Financial Administration of the Republic of Slovenia (“FURS”)[4] and case law. The Administrative Court of the Republic of Slovenia has already taken the view that a payment that is not defined as a performance-related payment in the employer’s general acts or where the general acts do not set out the criteria for the payment of performance-related payments cannot be treated more favourably for tax purposes.[5]
It can be assumed that the interpretation of FURS and the courts would reasonably be the same if the criterion that the payment must be made to all eligible employees is not met. This is often linked to provisions in an employer’s general act or collective agreement that define the right to payment in a discriminatory manner. The conclusion is that a performance-related payment that is not granted to all employees on the basis of discriminatory criteria (e.g. due to sickness or maternity leave) is not considered a performance-related payment under the ZDoh-2 and does not qualify for favourable tax treatment.
However, as the performance-related payment is remuneration for work, it should be borne in mind that statutory protection against discrimination in the employment relationship is very broad, both in terms of to whom it applies and the areas or issues it covers. This means that the employer must also determine the criteria for the performance-related payment in a non-discriminatory manner, taking into account the principle of equal pay for men and women, irrespective of the fact that it is a payment that the employer voluntarily decided to make and is not otherwise obliged to make.
Presence at work as a criterion for the Christmas bonus
Employers often state presence at work as a criterion for receiving a performance-related bonus or the amount thereof. This raises the question of whether such criteria could be discriminatory.
The rules governing performance-related payments often set criteria such as:
“If the company achieves or exceeds its annual turnover target, the company will pay a performance-related bonus equal to one time the average salary of the employee during the financial year to employees who are present for at least 1,900 effective hours during the financial year. If the employee was present for less than 1,900 effective hours, the bonus shall be paid pro rata according to their presence.”
In practice, performance-related payments are thus usually linked to a basic criterion resulting from the company’s performance (turnover, profit, quantity produced), with the duration of the employment relationship and the employee’s effective presence (or absence) in the current year as conditions for entitlement to a bonus.
This may, however, put employees with a particular personal circumstance at a disadvantage compared to employees who do not have that personal circumstance, if employers do not take the reasons for the absence into due account when drawing up the criteria.
For absences related to pregnancy, parental leave and medical reasons, it must be taken into account that these are personal circumstances that must not be the basis for unequal treatment of employees. Even if the criteria appear neutral from the outside, employees with a particular personal circumstance (parenthood, health reasons) will find it more difficult to meet them. Such a criterion would result in indirect discrimination against a certain group of employees, which is prohibited.
This was confirmed by the Advocate of the Principle of Equality who back in 2019 issued a decision concerning a company that had introduced criteria linked to the employee’s presence at work for the payment of performance bonuses. These criteria resulted in a reduction in the payment if the employee was absent due to sickness, maternity leave or other personal reasons. The Advocate found that, although such criteria are designed to be neutral, in practice they put certain employees at a disadvantage due to personal circumstances beyond their control and are therefore discriminatory. This decision was upheld by the Administrative Court in 2020.
Judicial review of performance criteria
New dilemmas regarding the criteria for performance-related payments were introduced by a decision of the Higher Labour Court in 2023, which ruled in an individual labour dispute that the performance component of the salary is an integral part of the salary, and that performance is therefore a key condition for the payment thereof. Following this decision, it appeared that it was permissible for employers to reduce performance-related payments on a pro rata basis for those employees who were absent from work for the whole year, irrespective of the reason for their absence.
This decision was subject to review. In a landmark decision[6] published in October 2024, the Supreme Court took a different view, following the decision of the Advocate of the Principle of Equality. The Supreme Court found that there is unlawful discrimination where the reason for absence is taken into account in determining performance payments, which puts some employees at a disadvantage because of their personal circumstances. This decision therefore confirms that employers must take into account the principle of equal treatment when setting the criteria for performance-related payments, and avoid discrimination on the basis of personal circumstances such as sickness, pregnancy or parenthood.
The decision has set an important precedent for the treatment of criteria that may disadvantage employees on the basis of personal circumstances.
How to assess the eligibility and amount of a Christmas bonus
The criteria for performance-related payments must therefore be designed in such a way as to ensure the equal treatment of all employees. In assessing eligibility and the amount of the bonus, the reasons for the absence must be taken into account, in particular personal circumstances such as sickness, parental leave or other similar circumstances that affect the employee’s ability to achieve the required presence.
A performance bonus may only be reduced in proportion to the presence if the absence is due to other, non-personal reasons such as study leave, employment later in the year or similar cases where the reasons are unrelated to the protected circumstances. Such arrangements ensure that personal circumstances beyond the control of employees are taken into account in a way that prevents discrimination.
What are the consequences of discrimination in the payment of Christmas bonuses?
An employer who fails to provide equal treatment to an employee because of their health condition is liable for damages under Article 8 of the ZDR-1. The employee may claim compensation for pecuniary damages equivalent to the amount of the lost performance bonus and for non-pecuniary damages due to mental anguish.
In addition, a discriminated person may claim monetary compensation of between EUR 500 and 5,000 under Article 39 of the ZVarD.
If the criteria result in unequal pay between men and women, such criteria are invalid under Article 133(2) of the ZDR-1. A person who suffers pay discrimination may claim damages and monetary compensation. The invalidity of discriminatory provisions may affect the entire act or contract containing them. Tax law practice will have to provide an answer about the further tax consequences of such invalidity.
If the criteria for more favourable tax treatment of a performance-related payment are not fully met, the performance-related payment cannot be excluded from the tax base up to 100% of the average monthly salary of employees in Slovenia. The tax treatment of such a payment is the same as that of other employment income, such as salaries, bonuses, etc. Such payment is fully included in the tax base of employment income and is subject to contributions and income tax according to the progressive tax scale.
From a tax perspective, if discrimination is found in the case of a performance-related payment (i.e. the payment was not made to all eligible employees), the risk that FURS would reclassify the payment in question from a performance-related payment to other employment income in the course of a tax audit procedure cannot be excluded. This is because such a payment would not meet the required conditions and, accordingly, the tax treatment would not be appropriate. The employer, as the taxpayer, could therefore be liable to FURS for income tax and contributions (for both the employee and the employer) as well as for default interest of these retrospective charges (see footnote 1).
The risk that FURS could also sanction such employers with an offence cannot be excluded. The fines for employers as taxpayers who fail to submit withholding tax returns in the prescribed manner or within the prescribed deadlines range between EUR 1,200 and 30,000 (see footnote 2).
Are your Christmas bonus payment rules valid?
Following the Supreme Court’s decision, it is clear that criteria for performance-related payments that are linked to the presence of employees, without taking into account the reason for absence, are discriminatory. Employers should therefore take great care when drawing up such criteria in order to avoid potential liability for damages and the payment of additional compensation on grounds of discrimination.
In some cases, the rules or provisions of collective agreements governing performance-related payments may also be invalid. All of the above may lead to additional tax liabilities, both in the form of income reclassification and the assessment of income tax and contributions, and interest on the payments made, as well as sanctions for minor offences.
Footnote 1: Pursuant to Article 59 (4) ZDoh-2, if FURS establishes that an employer, as a taxpayer, has not withheld and paid withholding tax or has not withheld and paid it correctly, it shall impose that withholding tax on the taxpayer in the part not withheld, together with the related charges. The taxpayer shall be entitled to recover that amount from the taxable person to whom the income was paid on which the withholding tax was not withheld.
Footnote 2: A fine of between EUR 1,200 and 15,000 is imposed on a legal person, and a fine of between EUR 3,200 and 30,000 is imposed on a legal person that is deemed to be a medium-sized or large company under the Companies Act (ZGD-1) if it fails to submit a withholding tax return, or fails to submit a withholding tax return in the prescribed manner or within the prescribed time limits, or it fails to calculate, withhold or pay withholding tax for a taxable person as a taxpayer in accordance with the law. A fine of between EUR 600 and 4,000 (EUR 800 and 4,000 for medium-sized or large companies) shall also be imposed on the responsible persons of legal persons for the above offences. If the nature of the above offences could be considered to be particularly serious because of the amount of damage caused or the amount of unlawful financial gain obtained, or because of the perpetrator’s intent or purpose to benefit, the above offences may be punishable by a fine of between EUR 4,500 and 100,000 for legal persons (EUR 10,500 and 150,000 for medium-sized and large companies). A fine of between EUR 1,200 and 20,000 (EUR 1,400 and 20,000 for medium-sized or large companies) shall also be imposed on the responsible persons of legal persons for the above offences.
References
- Act Amending the Personal Income Tax Act (in Slovene: Zakon o spremembah in dopolnitvah Zakona o dohodnini, Official Gazette of the Republic of Slovenia, No. 63/16 of 7 October 2016 – “ZDoh-2R”)
- Personal Income Tax Act (in Slovene: Zakon o dohodnini, Official Gazette of the Republic of Slovenia, No. 117/06, as amended – “ZDoh-2”).
- Employment Relationship Act (in Slovene: Zakon o delovnih razmerjih, Official Gazette of the Republic of Slovenia, No. 21/13, as amended – “ZDR-1”).
- FURS explanatory note: “INCOME TAX, performance-related pay for payments from 1 January 2023 onwards, detailed description, 1st edition, January 2023”, page 3.
- Judgment of the Administrative Court of the Republic of Slovenia I U 1761/2020-11 of 22 December 2022
- Decision of the Supreme Court of the Republic of Slovenia, ref. No. VIII Ips 9/2024 of 20 August 2024
