Fundamental change in the case law of the German Federal Labor Court on the forfeiture of claims from stock option plans - forfeiture clauses not effective for stock options after self-termination

Since 2008 at the latest, the case law of the Bundesarbeitsgericht (i.e. German Federal Labor Court has been established that the conditions for the acquisition of stock options in employee participation programs must apply as general terms and conditions (Allgemeine Geschäftsbedingungen - AGB) and are therefore subject to a review of the content pursuant to §§ 305 ss. of German Civil Code (BGB). On several occasions, however, contractual clauses including leaver clauses that led to the forfeiture of stock options upon termination of the employment relationship had passed the test and such clauses were widely used in practice

In its judgment of 19 March 2025 (10 AZR 67/24), the Bundesarbeitsgericht has now expressly abandoned the previous case law in a new decision on the admissibility of leaver and forfeiture clauses for virtual option rights after the termination of an employment relationship and significantly shifted the standard of review to the detriment of the companies.

The lower labor courts in Munich had still followed the leading decision of the Bundesarbeitsgericht (BAG) from 2008 and drafted the legal argumentation in partly verbatim repetition of the BAG's reasoning at the time. The defendant company was therefore likely to have looked forward to the appeal on points of law confident. The BAG surprised with a departure from its own case law by focusing strongly on the employee's interest in protection.

However, the content of the lower courts’ decisions had already suffered from the fact that the parties were entangled in Babylonian confusion of languages. The employee participation scheme offered by the defendant company was written in English (but subject to German law) and used widely common English legal terms. The parties were in dispute about "vested" option rights, which, in the opinion of the defendant company, could also be taken away from the employee after his own resignation. He wanted to translate "vesting" with "irrevocable", in which the lower labor court followed him. It was only the Labor Cour of Appeal (Landesarbeitsgericht/LAG) that decided on the translation of the term "vesting" as "exercisability". Thus, in application of the above mentioned previous case law of the BAG, the LAG was still able to conclude that "vested" option claims can also lapse again upon termination of the employment relationship by self-termination (bad leaver case). In the specific case, although the claims had arisen at the end of the vesting period, they could only be effectively exercised after further conditions had been met. During this practically extended waiting period (following vesting), the employee had only speculative and unsecured earning potential, according to the LAG's assessment, which was subject to forfeiture in the event of self-termination.

The BAG dedicated a large part of its reasoning to procedural issues and the ultimately not convincing arguments of the plaintiff employee. Almost in passing, the court recalled some principles of employment law that restrict the range of options for companies in terms of employee participation: for example, voluntary benefits are granted as such, but can reinforce into consistent legal positions and are therefore not freely revocable. Furthermore, employee participation programs are as a matter of course subject to the review of the content of the general terms and conditions and the rights from the participation programs are regularly part of the remuneration regulation as substantial part of the bundled employment contract.

These restatements from the BAG alone must companies a heads up and take notice, as they regularly try to distinguish participation programs from the employment relationship and ignore the control of general terms and conditions.

The BAG overruled the specific leaver and forfeiture clause because, according to Section 307 (1) sentence 1, (2) no. 1 of German BGB as a general terms and conditions clause, it unreasonably disadvantaged the employee: in the specific case, according to the BAG's understanding, the vested claims were the consideration and remuneration for work performed already during the vesting period. Thus, the claims were protected by the fundamental principle of "work against remuneration" from § 611a BGB and could not be withdrawn in any case in the event of a self-termination.

Once the BAG had recognized that the vested claims were a compensation for work, the employee is also protected against further leaver & forfeiture clauses in the period after vesting until exercising the option. The threat of forfeiture may constitute an unreasonable restriction of the employee's right to free self-dismissal, which is ultimately protected by Article 12 of German Constitution.

For the practice of structuring of employee equity participation programs, the BAG decision is of difficult landmark. It will hardly be possible to limit the meaning of that decision to the individual case. For each participation program that is based on categories of voluntary awards, followed by an initial waiting period until vesting and a further period until the option can be exercised, it is necessary to carefully examine whether the benefits granted can be forfeited after vesting.

The BAG has not done any favours for Germany as a business friendly environment. German companies that operate globally depend on offering their employees remuneration models that are internationally competitive. The battle for the talent cannot be won if companies run the risk of losing themselves with internationally customary remuneration models in the jungle of translations of sworn interpreters and small-scale school-like general terms and conditions examinations before German labor courts.

In the case at hand, the employee had only been granted benefits with limited scope and subject to forfeiture from the outset on. Of course, in an economic sense, all such benefits awarded (vested or unvested are compensation for work. However, this cannot lead to an overweighting of the employee's interest in protection in the company, which must be competitive in the international labor market. The decision of the BAG may lead to an escape from German labor law and invites companies to offer participation programs from abroad under foreign law. There, however, remains considerable uncertainty as to whether mandatory German labor law with the principles sought by the BAG allows foreign law to apply.

Alternatively, companies can offer the employee participation on a risk-based basis and continue to strive to avoid the pitfalls of the new BAG case law. The control of general terms and conditions could be avoided, for example, if the participation programs were set up as a works agreement with inhouse social partners

However, if there is some justified criticism of the decision of the BAG, one appeal must be heard by everyone: the often unreflected und thoughtless use of English terms in contracts under German law must be professionalized and substantiated. It should not happen to the company that a seemingly common term such as "vesting" is interpreted so differently that proceedings are provoked all the way to the BAG, which gives the employee plaintiff bread but stones for the companies.