Converting a cash bonus - moment of choice is key

Alternative rewards

It is a well-known fact that awarding a traditional cash bonus to employees can be a costly endeavour for both the employer and the employee. In Belgium, a cash bonus will be subject to standard income taxes (i.e. 53.50% to be borne by the employee) and to social security contributions (+/- 27.50% and 13.07% to be borne by the employer and by the employee, respectively). As such, even with a gross cash bonus of a considerable amount, employees may be disillusioned with the actual amount they receive net in hand. Also for the employer, an additional cost, i.e. employer social security contributions being due, is to be factored in. Consequently, the gap between the spendable income received by the employee and the total cost for the employer is significant.

Fortunately, alternatives exist. Some of these alternatives may offer the employer and its employees a tax and/or cost saving, thus ensuring a higher net-in-hand value (e.g. warrants or stock options), while other forms of rewarding may offer the employee additional flexibility and freedom (e.g. flex reward plans). However, when implementing these alternative rewards, both the employer and the employee should tread carefully if they don’t want to risk losing the benefits of the conversion.

Note that, although we’ll be discussing the scenario of the conversion of a cash bonus, the same principles apply to the conversion of any form of remuneration into a benefit with a more beneficial social security treatment. However, with every type of remuneration for which the possibility for conversion is considered, it should first be verified whether - from a labour law point of view - the benefit can be (partly) converted. In this respect, the hierarchy of norms embedded in Belgian labour law should be kept in mind (e.g. a year-end premium that has been introduced at industry level and does not provide for the possibility of conversion cannot be converted at the level of the individual employment relationship).

Acquired right

As mentioned above, the latest possible moment of conversion is inherently linked to the question “When does an acquired, enforceable and unconditional right to a benefit come into existence?”.

With respect to the payment of a cash bonus, the NSSO (“ONSS”/“RSZ”) holds the position that the right becomes acquired and enforceable as from the moment an individual quantifiable bonus allocation has been made. 

When exactly the individual quantifiable bonus allocation is made in turn heavily depends on the specifics of a given bonus plan. 

In the event of a purely discretionary bonus, the individual bonus allocation will only take place on the moment the employer decides to grant a bonus payment and decides on the actual amount of the bonus. Up until that time, employees will thus in principle be able to choose to convert their future discretionary bonus into an alternative benefit. In some cases, it can even be argued that the window for conversion in such a scenario extends to the moment in time when the actual amount of the bonus is communicated to the employees. 

However, where a performance bonus is tied to meeting clearly defined KPIs during a reference year, the outcome can be different. In such a scenario, it could be argued that the employee is gradually building up an acquired right to a quantifiable bonus payment during the reference year. If the parties want to make sure that the employee can convert the entire performance bonus into an alternative benefit, the choice for conversion should preferably be made as soon as possible in the reference year and before the end of it.

A lot of bonus schemes contain mixed discretionary and performance-linked elements, and the above examples clearly show that, when one considers the possibility of converting a cash bonus, the specifics of the bonus plan should be examined in detail in order to determine the ultimate time when the choice for an alternative can be made.

We therefore recommend employers to provide for a system that makes sure that employees make a final choice for an alternative before they have an acquired right. If no choice is made in time, the bonus will be paid out in cash, and standard social security contributions will be due.