Key Takeaways
- Employee participation programs are generally subject to sec. 305 ss. of the German Civil Code (BGB) governing the content control of general terms and conditions (GTC) if they are provided by the employer and were prepared for multiple uses, which is the case in almost all programs.
- In its decision of March 19, 2025, the BAG has now consistently assessed the vesting provisions of the virtual employee participation program at issue in the proceedings on the basis of the strict requirements of sec. 305 ss. BGB. It rules that vesting provisions are invalid to the extent that (a) they result in the immediate forfeiture of vested options of an employee who resigns from employment (Eigenkündigung) or (b) virtual options that have already vested expire again after the end of the employment relationship due to the lapse of time with no trigger event (exit transaction or IPO) occurring.
- Employers should review existing programs for compliance with the BAG ruling and, if necessary, have them adapted.
On March 19, 2025, the German Federal Labour Court (Bundesarbeitsgericht, BAG) issued a pivotal decision regarding the forfeiture of vested virtual employee stock options upon termination of employment (10 AZR 67/24). Currently, only a summarizing press release of the decision is available, while the detailed reasons for the ruling have not yet been published.
In More Detail: The Ruling of the BAG
Summary of the Facts
The plaintiff employee, who worked for the employer from April 1, 2018 to August 31, 2020, accepted an offer for 23 virtual option rights in 2019. According to the provisions of the EPSP, exercising the virtual options, which can result in a payment claim against the employer, requires fulfilment of a vesting period and the occurrence of an exercise event, such as an IPO. The options could be exercised in tranches over a four-year vesting period, with a minimum waiting period of twelve months (cliff). The vesting period is suspended if the employee is released from work without salary entitlement.
The employee terminated the employment contract through resignation and requested to exercise the vested options, which added up to 31.25% of the 23 options granted to the employee. The employer refused to allow the employee to exercise the vested virtual options, citing the terms of the EPSP.
Based on the EPSP, a voluntary resignation of an employee results in the employee's virtual options to forfeiting immediately upon resignation, even if vested. Further, the EPSP provided that upon termination of employment, any virtual options retained by the employee would lapse twice as fast as they had vested during the vesting period.
The plaintiff employee argued that these forfeiture clauses were invalid.
Decision of the BAG
The BAG followed the argumentation of the employee and ruled that the said forfeiture clauses were indeed invalid. The court found that EPSPs are considered general terms and conditions under section 305 para. 1 sentence 1 of the German Civil Code (Bürgerliches Gesetzbuch, BGB) and are thus subject to a content review (Inhaltskontrolle). The key points of the ruling were:
- The clause resulting in vested options to expire immediately upon the employee's voluntary termination of employment constitutes an unreasonable disadvantage (unangemessene Benachteiligung) to the employee and does not stand up to content review under section 307 para. 1 sentence 1, para. 2 no. 1 BGB, making it invalid.
The options were deemed essential components of the employee's remuneration package pursuant to section 611 para. 2 BGB, compensating the plaintiff employee for work performed during the vesting period. This is particularly evident from a program provision that suspends the vesting period during periods when the employee is not entitled to remuneration (e.g. during long-term sickness or paternity leave). The immediate expiry of vested options post-termination does not adequately consider the employee's interests.
- The immediate forfeiture of vested options upon termination by the employee placed disproportionate pressure on the employee not to terminate the employment relationship voluntarily, in particular with regard to financial loss, however, potentially even if there were legitimate reasons for doing so.
- Additionally, the clause specifying that vested options would lapse twice as fast after termination of the employment than the respective options vested also constitutes an unreasonable disadvantage to the employee and is thus invalid in the BAG's perspective.
Although it reflects the gradual decline of the options, allowing their influence on company value to decrease over time, it permits the virtual options to expire twice as fast as they vest, based on a four-year vesting period and a one-year minimum waiting period provided in the program subject to the decision of the BAG. This does not consider the employee's work during the vesting period appropriately.
Conclusion
In the recent decision, which has significant implications for (virtual) employee participation programs, the BAG has abandoned its previous case law on the permissibility of forfeiture clauses in stock option plans. Solely on the basis of the press release, it is, however, not yet possible to conclusively assess the extent of the change in case law. In any event, the decision which strengthens employees' rights, seems debatable in substance and both the full reasoning of the decision and its practical implications on existing programs remain to be seen.
Employers should nevertheless ensure that the vesting clauses implemented in their employee participation programs do not unreasonably disadvantage departing employees. Specifically, the following aspects should be considered when establishing new or aligning existing programs with the recent decision of the BAG:
- Vesting rules treating employees voluntarily resigning from employment as "bad leaver," resulting in the forfeiture of vested (virtual) options in addition to unvested portions, bears a high risk of being held invalid if challenged by the affected employee.
- Considering the character of vested options as remuneration for completed work, clauses in the program pursuant to which vested options forfeit gradually over time following the employee's departure if and as long as no trigger event is occurring may not provide for a (at least significantly) shorter period of time than the vesting period. Otherwise, these bear an invalidity risk as well.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
