Paying employees and staying compliant with tax laws is one of the biggest pain points for firms that employ international workers. Laws and customs vary greatly between different countries, and this represents a huge compliance risk for companies that don’t properly understand and take care of what’s required of them.
Key Takeaways
1. For all businesses, paying holiday bonuses is a great way to increase employee engagement and motivation, and retain them in the long-term. This helps your bottom line
2. Holiday bonuses (also known as 13th-month pay) are a legal requirement in some countries and compliance is necessary to avoid costly fines and penalties.
3. In countries where holiday bonuses aren’t legally required, they should still be paid to employees as they’re a great way to build a strong reputation and attract top talent.
4. For businesses that don’t have the time or resources to research holiday bonus requirements, seeking help from the right partner like a global EOR can help you achieve 100% compliance.
Although not every country mandates a holiday bonus by law, they’re customary in most. In some countries, for example, holiday bonuses are only paid in specific industries or are used as a tool to attract the best talent. Whereas in others, they must be paid to everyone.
As an international employer, you should be aware of the rules and customs for every market that you operate in. Not only does this help you remain compliant and avoid hefty penalties, but competitive bonuses also help you stand out to the best talent, build a positive reputation, and benefit your bottom line.
In this guide, we’re going to cover everything that you need to know about holiday bonuses in general and then explain the rules as they currently stand for popular markets.
What is a Holiday Bonus?
A holiday bonus (sometimes called a year-end bonus) is a monetary gift given to employees by employers. In most economies, holiday bonuses are offered to staff as a means of motivating them to excel in their roles and do the best work that they possibly can in achieving specific goals, completing projects, and meeting targets.
As we’ll see, holiday bonuses can vary dramatically not only between different countries but depending on individual employees, too. Those with longer tenure are often paid much higher bonuses, and this can act as a key motivator and staff retention tool that benefits both the employee and the business on the whole.
Holiday bonus is also known as 13th or 14th-month pay.
Is Holiday Bonus Different from Holiday or Vacation Pay?
Yes—holiday bonuses and holiday pay are two very different things.
Holiday pay (or paid leave) is an allowance given in some jurisdictions which an employee earns through their work during the calendar year. This type of pay is usually aggregated with their normal pay and paid based on the principle that a worker shouldn’t suffer financially for taking holiday. The amount of pay that a worker receives for the holiday they take depends on the number of hours they work and how they are paid for those hours.
In the UK, for example, workers are entitled to at least 5.6 weeks’ holiday pay or paid annual leave per year. This means that a worker will still be paid for up to 5.6 weeks’ worth of time booked off of work. While it’s called holiday pay, it doesn’t actually have to be taken for an actual holiday or vacation. Many employers increase the amount of holiday pay employees are entitled to as they stay with the company for longer.
As with holiday bonuses, holiday pay laws and customs vary between different jurisdictions (some don’t offer it at all!)
Do I Have to Pay Holiday Bonuses?
Again, it depends on each country’s laws and customs. As we’ll see shortly, some holiday bonuses are required by law (e.g., in The Philippines) whereas others are merely paid by virtue of local customs at the discretion of the company.
In places where holiday bonuses are customary as opposed to mandatory, the terms of these bonuses are usually laid out in employment contracts or through trade union agreements. While businesses in countries with customary holiday bonuses are well within their legal rights not to pay it, they often do as a way to maintain their reputation and motivate their employees.
How Much Holiday Bonus Do Employees Get?
The amount of holiday bonus that employees are entitled to will depend on factors such as:
- % of salary
- The country where they’re based (i.e., where they’re a tax resident)
- Any laws or customs surrounding the payment of holiday bonuses
- An employee’s job role and/or length of service
- Company policy—in some cases, you’re free to pay holiday bonuses as you see fit.
Generally speaking, companies are free to set their own rules for bonuses so long as they comply with legal requirements (where these exist).
In most cases, the size of the bonus will depend on the employee and their job role, with employees who have been at the company the longest receiving more holiday bonus. Similarly, employees with more complicated roles or who play more of a fundamental role in the company will also receive more bonus pay than others.
How bonuses are structured is also something that can vary. Employers often use one of the following:
- % of salary
- % of company profits
- % of sales for workers that have a sales target (or % of gross profit generated)
- A flat-rate payment, such as a full month’s salary (13th-month pay).
Percentage of Salary
Employers commonly opt to pay bonuses according to a percentage of their employees’ salaries. This is the simplest and most equitable way. However, it doesn’t account for employees who have gone above and beyond in their roles.
Performance Bonus
Some companies like to pay holiday bonuses based on each employee’s goals and objectives. If an employee has exceeded expectations and has put in significant effort to do their very best for the company, this can be rewarded by a percentage bonus on top of a standard holiday bonus.
Flat Cash Amount Bonus
A flat cash amount bonus is just that—a set bonus that all employees received, usually relative to that year’s profits.
Whether employees’ holiday bonuses are taxed, and whether you withhold this tax or whether your employees are responsible for including it in their tax returns, is entirely dependent on each individual jurisdiction.
Why Should I Pay Holiday Bonuses if I Don’t Have To?
Although employers don’t always have to pay holiday bonuses by law and are free to set their own rules, it’s usually a good idea to do so if you’re operating in a country where holiday bonuses are customary.
When a holiday bonus is based on performance, for example, it can easily motivate employees to meet their targets and goals needed to secure the bonus. And because some companies choose to measure performance during the year before deciding on bonus amounts, higher performance metrics can translate to higher holiday bonus amounts. This is a powerful way to keep employees motivated and performing well throughout the year.
Paying holiday bonuses to your employees is also a great way to secure a good reputation in the jurisdictions where you operate. Over time, this will help you secure the very best talent, retain employees for longer, and benefit your bottom line.
Remember, whether the holiday bonus is paid voluntarily or by legal mandate, any amounts should be detailed in the employee’s paystub or payslip.
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Examples of Holiday Bonuses in Different Countries
- The Philippines
- The Philippines is widely regarded as the pioneer of holiday bonuses (or “13th-month pay as it’s commonly known). In 1975, the government of the Philippines introduced holiday bonuses into law as a concept that offered an extra payment to workers in December. This is still enshrined in law today.
- In the Philippines, 13th-month pay is equal to one-twelfth of an employee’s yearly. This essentially translates to one month’s extra pay which is distributed in December.
- Employers operating in the Philippines must be aware that they are legally required and wholly responsible to offer this payment, and a pro-rated amount must be paid to employees who have resigned or been terminated before the year ends.
- Brazil
- Brazilian law requires that employers offer their workers a holiday bonus in the form of 13th-month pay at the end of each year. As in the Philippines, this amount is equal to one month’s salary.
- Employers in Brazil must offer this holiday bonus in two installments: one between February 1st and November 30th, and the other between November 30th and December 20th. While this is a peculiar arrangement, it’s what the law says; it’s illegal for the bonus to be paid as a lump sum.
- Colombia
- Colombia also requires that companies pay holiday bonuses by law. Much like Brazil, Colombia requires this payment to be made in two installments. The first payment must be paid by the end of June and the second by December 20th.
- Germany
- German law does not require employers to pay their workers any holiday bonuses or 13th-month pay. However, due to the benefits mentioned above, many companies choose to voluntarily offer year-end payments to workers. According to a recent survey, roughly one in two companies pay holiday bonuses.
- While there’s no legal requirement, it’s worth knowing that some industries do have collective agreements that require companies operating within them to offer these end-of-year bonuses, and companies need to make sure that they’re meeting these requirements to stave off unwanted industry action.
- Mexico
- Companies in Mexico must pay what is known as “Aguinaldo”—a Christmas holiday bonus that is a legal requirement mandated by the federal government.
- Aguinaldo is made up of at least 15 days’ worth of employees’ wages. For workers with less than one year’s tenure, this number can be prorated. Many larger companies increase this bonus up to 30 days, and some split it into a summer and a winter payment. For the winter bonus, employers have until December 20th to pay it, and it must be paid in addition to any other regular benefits or payments that are owed.
- Companies must offer Aguinaldo equal to 15 days’ worth of pay (pro-rated for new employees) as a minimum. Not doing so can lead to fines and penalties up to 315 times the national daily minimum wage.
- Spain
- Holiday bonuses are required by law in Spain. Employers must provide workers with two payments: one at the end of the year and another during the summer.
- Bonus payments double an employee’s salary for the month that it’s paid in. So, if an employee makes €1,800 per month, they’ll get an extra €1,800 paycheck in the summer and another in December.
- This means that not only do Spanish employees get to go home and take a siesta in the middle of the working day, but they also get an extra two months’ worth of pay per year!
- United Kingdom (UK)
- In the UK, there are no laws or customs surrounding the payment of holiday bonuses. Some companies do offer bonus schemes. However, such schemes are entirely at the discretion of individual employers.
- Instead of holiday bonuses, UK workers are entitled to holiday pay or paid leave by law. This is a minimum of 5.6 weeks (including public holidays) per year where employees can take time off of work but still get paid for it.
How an Employer of Record Can Help You Stay Compliant
If you’re thinking about growing your operations internationally, chances are that you’ll need to hire workers internationally, too. And when you do, you’ll need to ensure that you’re paying these workers the holiday bonuses that they’re entitled to.
Horizons works closely with companies like yours to help them achieve compliance with international labor and tax laws when it comes to things like hiring, payroll, taxes, and holiday bonuses.
We primarily do this by operating as a global EOR, meaning that we act as the “employer” of our clients’ international employees as an “Employer of Record.” In this capacity, we take on responsibility for all employer-related obligations in the relevant host countries, such as taxes and payroll.
