How Flexible Remuneration Works: 7 Keys to Understanding It

Flexible Remuneration has a lot to say when it comes to the new expectations of employees in the company’s Employee Experience. In addition to remote work, flexible hours, the work environment… one of the biggest demands from employees is for their company to offer some form of in-kind compensation. And Flexible Remuneration is the bestseller among in-kind compensation types, as it allows employees to enjoy a range of products and services at a lower price than the market rate, and without any financial investment from the company.

Since we spend a significant part of our day at the workplace, doing so with more comfort and facilities is crucial for improving our well-being. Through Flexible Remuneration, this well-being comes in the form of meals at a lower-than-usual price, fiscally subsidized training courses, or tax-exempt health insurance. Welcome to Flexible Remuneration, a world of advantages for both the company and employees, as we’ll see below.

1. What is Flexible Remuneration

Flexible Remuneration is a type of compensation that allows employees to allocate part of their gross salary to the consumption of certain products or services at a lower price than the market rate. By paying from their gross salary, the employee will achieve total or partial tax exemption, allowing them to avoid or reduce, respectively, the income tax to be paid for these products and services. In other words, the advantages of Flexible Remuneration translate into significant monthly savings, which accumulate into a higher annual net salary.

Today, more than 70% of companies opt for Flexible Remuneration to improve their employees’ conditions. This type of remuneration has a triple benefit, as it allows (1) increasing the net salary of employees (2) without increasing salary costs and (3) with a high impact: improving motivation and the well-being of the workforce.

This formula has been highly sought after in recent years, where the economic crisis has prevented salary revisions. While the salary is not increased directly, employees are provided with access to products and services of daily use at a lower-than-market price: expenses on meals, public transportation, childcare, training, life and health insurance, etc. We will go through each of these in section 4.

2. Is cash remuneration the same as Flexible Remuneration?

Although they are closely related and very close relatives, they are not the same. And yes, it must be said, they are surrounded by confusion and ambiguity. If you search for information on this, you will find some who use Flexible Remuneration and in-kind remuneration as if they were synonyms, or others who avoid giving a clear explanation. That’s why today, we have a firm intention to clarify the matter. Let’s break it down…

Speaking in the language of the Official State Gazette (BOE), the remuneration offered by a company to a person for their work is called “gross income from work.” The company can offer me this remuneration in cash or in kind. -And here, with the permission of the BOE, we allow ourselves the license to add emotional compensation (flexible hours, remote work, compact schedule, afternoons off for personal matters, etc.).-

Cash remuneration leaves no room for doubt; we all know what money is at the end of the month. But what is in-kind remuneration? We consult directly with the BOE, which defines it as “Income in kind” according to Article 42.1 of the Personal Income Tax Law (IRPF): “Income in kind consists of the use, consumption, or obtaining, for private purposes, of goods, rights, or services free of charge or at a price lower than the normal market value, even if it does not represent a real expense for the grantor.”

Income or remuneration in kind

And it is this income in kind, also known as remuneration in kind, that encompasses everything related to Social Benefits, Flexible Remuneration, and combinations of both. So, answering the question: Flexible Remuneration is a type of remuneration in kind that, as we have seen, allows the employee to allocate part of their salary to pay for certain products, to benefit from tax exemptions.

We have touched on the concept of Social Benefits here as well, and to avoid any confusion, no, it’s not the same either.

In our Guide to Social Benefits, you can see the main differences between remuneration in kind or Social Benefits and Flexible Remuneration.

If Ana earns €25,000 gross annually and wants to pay for her meals through Flexible Remuneration, the amount of those meals will be deducted from her €25,000. Ana commits part of her gross annual salary to benefit from tax advantages.

If Ana earns €25,000 gross annually, and her company offers her monthly restaurant vouchers as a Social Benefit, the amount of those vouchers will be additional to her €25,000. Ana does not commit her gross annual salary, and she enjoys free meal vouchers thanks to her company.

3. What does the legislation say about Flexible Remuneration?

The State covers everything related to in-kind salary in the BOE, in the General Regulation on Personal Income Tax (In-kind income. art. 42 of Law 35/2006, on Personal Income Tax), where it establishes different characteristics that must be met for the remuneration to be considered Flexible Remuneration:

– The total amount allocated to Flexible Remuneration cannot exceed 30% of the annual remuneration.

– There will be no cash payment for the employee to buy any goods; instead, it will be about obtaining products free of charge or at a lower cost than the market.

– The contribution base of a worker adhering to a Flexible Remuneration plan will not change. It will be the same as that of a worker who is not part of this plan. The income tax will change and will be reduced as seen above.

– It will not necessarily entail an expense for the company.

– It is a service that the employee will use entirely voluntarily, and the use of the service must not entail a cost for them.

– It will, in any case, be a benefit that occurs within an employment relationship between the company and the employee.

– Expenses derived from direct professional activities, such as a work tool or a business trip, will not be included.

4. How Flexible Remuneration Works

For the company to easily implement a Flexible Remuneration plan, it is essential to understand the functioning of this remuneration formula. We don’t need to get bogged down in the law and nuances, but understanding the mechanism that will allow the employee to receive a higher salary without the company having to invest more is crucial.

So, let’s start at the beginning and look at it from an employee’s perspective. As workers, we have some expenses directly related to the work we do, included in the elements of Total Compensation. According to the State, these expenses are not chosen by us but are rather an obligation acquired by the fact of going to work every day. Something like “I work, so… I eat out, use public transportation, take my kids to daycare, need health insurance…”

Due to this cause-and-effect relationship, the State also determines that expenses related to the payment of these services

Si observamos el gráfico, vemos una primera columna con “Ingresos”, los que recibimos directamente en nuestra nómina, el conocido salario bruto antes de cualquier impuesto. Y tenemos dos posibilidades:

5. Main Products Offered with Flexible Remuneration

Always considering that the total consumption cannot exceed 30% of the annual gross salary, we list below the Flexible Remuneration products that the company can offer, along with their respective limits per product, if any.

Traditional Products

Meals

In the form of a paper voucher or card, meals are the flagship benefit. They greatly facilitate the daily life of employees, especially for those who are not adept at cooking, as they allow them to dine out and pay with a discounted rate for each meal.

Limit: up to €11 per working day*, €220 per month.

*The company can establish its own conditions, such as providing only one voucher per day or, in the case of cards, limiting the time or days of use.

Public Transportation

Since 2010 (Section 2 of Article 42 of the Personal Income Tax Law, letter h), the state encourages and promotes employees’ commuting from their residence to the workplace by public transportation.

Limit: up to €136.36 per month, €1,500 per year.

Childcare

This type of remuneration allows the employee to be exempt from income tax (IRPF) without annual or monthly limits. In practical terms, this results in significant savings, equivalent to two free monthly childcare payments.

Limit: no spending limit. The only condition is that it is intended to cover services for the first cycle of infant education, i.e., between zero and three years of age.

Health Insurance

It is one of the most offered products, either as a Social Benefit fully assumed by the company or as part of Flexible Remuneration. The health crisis of the last year has also made health the most demanded benefit by employees.

Limits: employees can deduct up to €500. The tax-exempt health insurance also allows including close family members and obtaining the same benefit. However, they are not exempt from Social Security contributions.

There are some special situations, such as for people with disabilities, in which a deduction of €1,500 can be obtained.

Training

The great advantage of this product is that it is completely exempt from income tax (IRPF) and is a great lever to activate employee motivation. Training allows addressing employee concerns without incurring additional costs for the company, a win-win situation.

Limits: no spending limit.

Pension Plans

Pension plans as a Flexible Remuneration product are one of the most revolutionary, gaining strength and promising to energize compensation programs as they were traditionally conceived. They allow employees to achieve savings that complement the public pension they will receive after retirement.

Although it is not a product with immediate savings that can be seen monthly, it has a long-term impact, highly beneficial to the financial well-being of the employee. With a pension plan provided by the company, the employee can contribute a fixed amount from their salary each month, with the corresponding tax exemption. If the company decides to collaborate and make its contribution (turning it into a mixed benefit between Flexible Remuneration and Social Benefit), pension plan contributions can be deducted from the company’s Corporate Income Tax Base.

Gym Membership

Another product not exempt from payroll taxation as such but that can be accompanied by significant savings for both the company and the employee. The company can negotiate with a gym chain the monthly fees for a large group of employees and deduct the amount from Corporate Income Tax.

By offering it to the employee, they can pay these fees from their salary with the reduced price negotiated by the company.

Less Common Products

There is another group of products and services that can also be offered within a Flexible Remuneration plan but require closer examination as they have specific and peculiar conditions:

Life Insurance

Although they do not have tax advantages as such, they are considered as Flexible Remuneration products since the employee can pay for their life insurance from their salary. Another product also aimed at promoting the financial well-being of the employee.

Shares or Participation in the Company

Shares have a clear impact on the employee as they increase their commitment and sense of belonging to the company. They have a limit set by the Official State Gazette (BOE) with an income tax exemption of up to €12,000 per year.

Car Leasing

Another fairly widespread benefit that will be considered as a kind of in-kind payment of 20% of the market value of the vehicle.

Since this special valuation is used, the company must closely examine how much this 20% would amount to depending on the model and conditions of the vehicle to assess whether it is worthwhile to include it in a Flexible Remuneration plan or not.

Housing

Some companies may offer an owned property to the employee, for them to assume its cost as Flexible Remuneration. In this case, using a property owned by the payer will have a 10% exemption from the cadastral value.

6. Advantages of Flexible Remuneration

When looking for or applying for a specific position, a worker no longer only considers the salary ranges and projects offered. In many cases, what tips the scales in favor or against a new job opportunity is something much more tangible and appreciated: the benefits offered by the company.

In addition to elements linked to emotional compensation to attract and retain talent, Flexible Remuneration and social benefits present an important asset when it comes to making an employee identify with a company. Here are some of the advantages that both the company and the employee have when integrating a Flexible Remuneration system:

Advantages for the Employee

1. Short and Long-Term Savings

Flexible Remuneration allows the employee to significantly reduce several expenses performed regularly. Whether in daily expenses like meals (where an average salary would go from paying €12 to approximately €8, for example) to long-term expenses like pension plans (allocating a monthly amount with its corresponding tax exemption with a view to future savings).

An average annual salary, which according to the National Institute of Statistics (INE) is slightly over €23,600, could achieve savings of almost €2,240 through Flexible Remuneration, as the withholding of income tax would decrease from around 12% to approximately 4% due to a reduction in the annual gross and taxable base.

2. Freedom to Choose Products and Amounts

The employee is the protagonist. Therefore, they can always choose whether to join or not the plan offered by their company and decide on the products they want to enjoy.

As we have seen, there are various systems in the current market that allow more or less flexibility with these elements. The success of a Flexible Remuneration plan often relies on the ability to offer flexibility to an employee.

3. Work-Life Balance

Creating a good environment translates into employee adherence and loyalty to the company. When an employee feels valued and knows that a department of the company is working on their well-being, their bond with the company is stronger.

4. Sense of Belonging to the Company

The employee is aware that their company, specifically the Human Resources team, makes an effort to offer better conditions. Offering and effectively communicating a Flexible Remuneration plan to the employee will increase their commitment to the company and their stability within it.

Advantages for the Company

1. Improves Salary Without Salary Costs

Flexible Remuneration allows the employee to perceive a higher disposable income without incurring additional salary costs. Moreover, this increase will be in a format that is pleasant for our employee since it is

7. How to Implement a Flexible Remuneration Plan

1) Define the Benefits Strategy

Before diving headfirst into Flexible Remuneration, it’s advisable to take a look at the existing types of in-kind compensation. Taking into account the Human Resources strategy, budget, company profile, and workforce characteristics, including factors such as turnover, you will define the type of benefits you will offer:

• Flexible Remuneration: Offer employees the opportunity to voluntarily access significant savings thanks to tax exemption. This will not entail any additional cost to the company.
• Subsidy of benefits, or social benefits: In this case, the company will be responsible for offering products at zero cost to the employee.
• Create a mixed benefits system: In this case, the company does not fully subsidize the benefits and is complemented by Flexible Remuneration.

2) Select the Benefits

The company will choose which benefits to offer its employees; it can do so universally or in a personalized manner, according to employee groups or even specific employees. Although in Flexible Remuneration, it is the employee who chooses which products to consume, compensation trends show a clear inclination towards personalized plans.

3) Design the Plan

The expert responsible for creating and offering the plan to employees should look for the tool that best suits their needs. Ideally, opt for a centralized platform that consolidates all benefits into a single, user-friendly, automated, and agile solution. This will avoid unnecessary workloads and contracts with intermediaries.

4) Internal Communication

Communication is often a point that we tend to overlook in the creation of a benefits plan. Given the wide variety of possibilities through which compensation can be received in a flexible system, it is most appropriate to conduct a survey among the company’s staff first. This way, they can designate the most common needs among employees, and the company can adjust its program as much as possible to the actual needs of its human team.

5) Evaluation and Analysis

The success of the Flexible Remuneration plan will be determined by employee participation. To assess this, it is best to use a tool that includes automatically generated monthly reports.

Do you already know everything you need about employee benefits to enhance their happiness and increase their purchasing power?

If you require assistance in defining your company’s social benefits strategy, we are at your disposal!