Financial participation for employees - Bad leaver clauses are problematic
In times of growing skills shortages, financial participation programmes for employees are enjoying increasing popularity at many companies, especially at start-ups. The aim, apart from enhancing employer attractiveness, is most notably to improve employee retention. If these expectations are not fulfilled, for example, because an employee resigns voluntarily, or is dismissed by the employer for good cause (a so-called ‘bad leaver’), then the agreements frequently provide for restrictions on participation rights through to their complete forfeiture. These possibilities have now been considerably reduced by the Federal Labour Court (Bundesarbeitsgericht, BAG) through a change to its ruling.
Financial participation models
A range of financial participation models are being deployed in the competition for skilled professionals. Their core aim is generally to hold out the prospect to eligible employees of a remuneration component that allows them to share in the company's success. In contrast to the familiar share option schemes for the management level of larger groups of companies, young enterprises frequently have virtual share option plans (VSOP). Here, no ‘real’ shares (or options thereon) are issued, instead these are ‘virtually’ replicated by granting contractual rights. A condition for the rights to arise is, in each case, the observance of a predefined vesting period.
The issue of ...
In the case in question, the claimant had been employed by the defendant from 1.4.2018. In 2019, he was granted virtual option rights and exercising these could result in a payment claim against the defendant. The virtual options allocated to the employee could be gradually exercised after a minimum waiting period of twelve months during a vesting period of four years altogether. Under the provisions of the virtual share option plan, already exercisable (vested) virtual options that had however not yet been exercised would be forfeited if, among other things, the employee ended the employment relationship by resigning voluntarily. In this case, the forfeiture was supposed to occur gradually within two years after the termination of the employment relationship.
The claimant did indeed terminate the employment relationship by resigning voluntarily within the time limits specified with effect from 31.8.2020 and asserted his right to exercise approx. 30% of the options that had already vested; the defendant company rejected this with reference to the forfeiture provision.
... an inappropriate forfeiture provision
The BAG upheld the position of the employee and - contrary to the lower courts and its own previous ruling - confirmed the respective entitlement to assert the claim (ruling of 19.3.2025, case reference: 10 AZR 67/24). Accordingly, the employee virtual share option plan constituted general terms and conditions (GT&Cs) and, in the new opinion of the court, the forfeiture provision did not hold up to a review of the contents in this respect. The provision did not appropriately take into account the interests of the employee who had already performed his work and could thus claim the agreed remuneration. The vested virtual options constituted consideration for the work performed during the vesting period. Furthermore, in view of the potential financial loss the provision made termination unduly difficult.
The court likewise deemed the two-year forfeiture time limit to be unreasonable. In view of the four-year vesting period, forfeiture that is in comparison twice as faster was not justified by the employer’s interests.
Impact on the executive level?
Bad leaver provisions are also prevalent with respect to the company shares of executives and are basically endorsed by the case law of the Federal Court of Justice. As other criteria need to be used here, it is however likely that the BAG’s new perspective will not be directly applicable to these cases.
