Invalidity of Lapse Clauses for Vested Virtual Option Rights in the Event of Voluntary Resignation
In its ruling of March 19, 2025 (Case No. 10 AZR 67/24), the Federal Labor Court (BAG) held that a provision in an employee stock ownership plan that provides for the forfeiture of vested virtual stock options if an employee voluntarily resigns is invalid. Contrary to the lower courts, the BAG views the forfeiture clause as an unreasonable disadvantage to the employee, which renders the clause invalid under Section 307(1) of the German Civil Code (BGB), since the vested options constitute consideration for the work performed and are thus part of the employee’s compensation under Section 611a(2) of the BGB. This article therefore aims to provide an overview of the implications of the BAG’s decision for employee stock ownership plans.
Taxation of Stock Options
Since employee stock options constitute compensation for the work performed by employees, they are taxed as income from employment. It is irrelevant whether these are virtual stock options, in which the employee does not receive actual company shares, or whether actual shares in the company are issued to the employees. The income is therefore taxed at the employee’s personal tax rate. Because the one-time payments to the taxpayer are often very high in such cases, if the vesting period for the options exceeds 12 months, reduced taxation is available under the “one-fifth rule” of Section 34 of the German Income Tax Act (EStG), which treats the income as if it were distributed over five tax periods. Regardless of this notional distribution, however, the entire capital gain is taxed in a single tax assessment period.
Previous Case Law of the Federal Labor Court (BAG)
In this regard, the Federal Labor Court (BAG) is reversing its previous ruling of May 28, 2008 (Case No. 10 AZR 351/07) on the forfeiture of stock options. Previously, the BAG had considered expiration clauses in stock option plans to be permissible, since the clause did not deprive the employee of compensation already earned, but rather represented only an opportunity to earn income of a speculative nature. The employee was therefore deemed to be less deserving of protection, as he could not rely on the options retaining their value.
Change in Case Law: Vesting Options as Part of Compensation
The Federal Labor Court (BAG) has now expressly departed from this previous case law. In its latest ruling, the BAG determined that the provisions of an employee stock ownership plan must withstand a substantive review as general terms and conditions. The immediate forfeiture of vested options makes it disproportionately difficult for the employee to resign and therefore places the employee at an unreasonable disadvantage. Such a forfeiture clause also contradicts Section 611a(2) of the German Civil Code (BGB), which obligates the employer to pay the agreed-upon compensation.
Conclusion
The ruling has significant practical implications, as a large number of stock option plans contain expiration clauses. Companies should therefore review their stock option plan provisions—at the latest when the reasoning behind the Federal Labor Court’s (BAG) latest ruling is available—and, if necessary, amend them to align with the new legal situation. With regard to former employees, companies should examine whether their employment contracts contain limitation periods that preclude former employees from asserting claims.
