Employee participation and post-contractual competition prohibition

Consideration of claims from employee participation in the case of compensation payments and other earnings, exclusion of compensation payment

Timeliness of employee participation programs

In times of a shortage of skilled workers, employee participation programs play a major role in attracting, motivating and retaining employees, and not just in the startup scene. In the coalition agreement there is at least the announcement that employee participation will be made more attractive - among other things by further increasing the tax exemption. When designing employee participation programs, however, there are not only tax aspects but also many legal points to consider.

General legal aspects

The first step is to determine the form of participation, whereby a choice can be made in principle between debt and equity participations, option programmes and real or virtual equity participations. In addition to questions under company and supervisory law in the case of direct participation in the company, questions often also arise under labour law, e.g. with regard to periods in which the employee does not exercise his or her working capacity, as well as forfeiture and revocation regulations.

In particular in the case of employee participation programs in (international) groups, where the participation is often not granted directly by the company itself with which the employee is employed, it also plays a role against whom claims arising from the employee participation can be asserted and before which court and according to which law and what role granted options play in the context of post-contractual non-competition clauses.

Employee participation and post-contractual non-competition clauses

With regard to post-contractual non-competition clauses, the question arises in the case of employee participation programs to what extent the participation granted is to be taken into account in the calculation of the amount of the compensation payment as well as the creditable other earning and whether a post-contractual non-competition clause in an employee participation program which is subject to the foreign law of the parent company can be agreed completely without compensation payment.

BAG on compensation payment and restricted stock units

In a recent decision dated 25.8.2022 (Ref.: 8 AZR 453/21 ), the Federal Labour Court (Bundesarbeitsgericht - BAG) ruled on the extent to which so-called restricted stock units (RSUs - restricted share acquisition rights) are to be regarded as part of the "contractual benefits" within the meaning of § 74 para. 2 German Commercial Code (HGB) and thus increase the compensation payment payable in the event of a post-contractual competition prohibition. In the case decided by the BAG, the plaintiff, who had been subject to a nine-month post-contractual non-competition clause in return for the payment of a compensation for non-competition, sued for the payment of a further compensation for non-competition in the amount of approximately EUR 80,000, taking into account RSUs granted to him. In this context, the defendant company was part of a group of companies with a US parent company in whose "RSU program" the plaintiff participated during his employment and from which he received a certain number of RSUs per year on the basis of the agreements he had made with the parent company separately in each case.

The Federal Labour Court, like the lower court (LAG Hamm, judgment of 11.08.2021, Ref.: 10 Sa 284/21), rejected the plaintiff's claim on the grounds that the RSUs were not "contractual benefits" within the meaning of § 74 para. 2 HGB, as this only included benefits that were based on the exchange nature of the employment contract and that the employer owed to the employee as remuneration for work performed. The RSUs as a benefit provided by a third party on the basis of the agreements concluded with the parent company would only have had to be taken into account if the contractual employer, i.e. the defendant, had - expressly or impliedly - assumed a (co-)obligation with regard to the granting of the RSUs. According to the BAG the LAG had correctly denied this, but it is an aspect which should be taken into account when structuring employee stock option plans. In our opinion, the requirement of the "linkage" of the employee participation program with the employment contract or employment relationship with the employer established by the BAG can also be applied to other forms of employee participation (cf. for a limited partnership participation LAG Berlin-Brandenburg, judgment of 2.12.2020, Ref.: 15 Sa 964/20).

Even if this has not yet been decided by the highest court, we believe that the same principle applies to the mirror-image question of whether earnings earned during the competition prohibition period must be offset against the compensation payments pursuant to § 74c HGB. In this respect, claims from a participation program would also only be credited if the (new) contractual employer has itself committed or co-obligated to grant these to the employee (cf. in this respect the ruling of the BAG of 9.01.1990, Ref.: 3 AZR 110/88, according to which all the income components that determine the amount of the compensation payment also delimit the scope of the creditable benefits).

According to the prevailing opinion, the fundamental obligation to pay compensation for competition prohibition periods cannot be avoided in group relationships by agreeing on a post-contractual non-competition clause without compensation in the participation agreement with the foreign parent company under the choice of foreign law. Even if one regards such a partial choice of law as permissible, according to the relevant international private law regulations §§ 74 et seq. HGB as protective provisions of German law are to be applied with priority and a post-contractual non-competition clause agreed without compensation would be null and void (thus in the result LAG Hessen, judgement of 14. 8.2000, Ref.: 10 Sa 982/99).

Practice Tip:

In the case of employee participation programs in multinational groups, it should be carefully examined how the individual contractual relationships are to be structured and which company shall be subject to claims under the program. It should be kept in mind that a post-contractual non-competition clause agreed under foreign law in an employee participation agreement with the foreign parent company cannot be enforced without agreeing on a compensation payment corresponding to German principles.


Published: December 2022

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