Federal Labor Court Ruling of March 19, 2025 – Case No. 10 AZR 67/24
Contract clauses that cause already vested virtual employee options to lapse immediately or prematurely upon termination of employment are invalid because they unreasonably disadvantage the employee. This was decided by the Federal Labor Court (BAG) in its ruling of March 19, 2025 (Case No. 10 AZR 67/24). Labor courts play a central role in enforcing claims arising from employee participation, as they secure the legal framework for employment relationships and participation models.
Virtual employee options are popular tools for employers, especially startups, to motivate employees and bind them to the company without needing large liquid funds. Besides virtual options, there are numerous other employee participation models, such as equity participation, which offer benefits like stronger employee retention and improved liquidity security for both companies and employees. Choosing the right model is crucial, as different models – ranging from employee equity participation to classic employee share schemes – provide various possibilities, participation levels, and entitlements for employees. Employee participation programs serve not only motivation but also the long-term retention of employees, workers, staff, employees, and individuals in the company. The Federal Labor Court has now significantly strengthened employees’ rights and declared certain forfeiture clauses invalid. Employers should therefore review the design of their employee participation plans and, if necessary, adjust them to the case law, says the law firm MTR Legal Rechtsanwälte, which, among other things, advises on labor law. The Labor Court Act and labor law also form the legal basis for the design and protection of employee participation programs, with the employment contract playing a central role in regulating participations. Tax law aspects and the taxation of employee participation must also be considered, as they influence the attractiveness and implementation of such programs. In times of skilled labor shortages, participations and employee participation programs can be a decisive factor for employee retention and recruitment of qualified personnel. Through participation in company profits and the possibility to assert claims from participation programs, employees directly benefit from the company’s success.
Forms of Employee Participation
Employee participation is a central instrument for many companies to strengthen employee motivation and retention and to share in the company’s success together. Depending on company size, industry, and objectives, different forms of employee participation exist, each offering its own advantages and special features.
A classic form is direct equity participation, where employees acquire actual shares in the company – for example, in the form of stocks in publicly traded companies or GmbH shares in medium-sized enterprises. This participation not only provides employees with a financial benefit but often also gives them a say in important corporate decisions.
Many companies also rely on virtual participation models, such as virtual options or so-called phantom stocks. Here, employees receive a claim to a financial compensation linked to the company’s value development, without actual shares being transferred. Such models are particularly attractive for startups and growth-oriented companies with limited liquid funds, as they allow employees to participate in success without changing the shareholder structure.
Another common option is profit sharing. Here, employees receive a share of the company’s annual profits, which fosters identification with the company and can increase willingness to perform.
Silent partnerships are also an interesting option: employees provide capital to the company and in return receive a share in the profits without appearing externally as shareholders.
For employers, these various forms of employee participation offer the chance to attract and retain qualified professionals – a crucial advantage in the competition for talent. Employees, in turn, benefit from additional income opportunities and the chance to directly partake in the company’s success.
The choice of the appropriate model depends on many factors, such as the company structure, the employer’s goals, and the needs of the employees. Companies should therefore carefully examine which form of employee participation best suits their situation and how to optimally structure the legal framework.
Virtual Options Already Exercisable Upon Termination
The plaintiff in the underlying case was employed by the defendant employer from April 2018 to August 2020. During this period, he received an offer to allocate 23 virtual stock options (so-called Allowance Letter) and accepted it in 2019. The provisions for employee stock options (Employee Stock Option Provisions “ESOP”) stipulated that the options would become exercisable gradually over a four-year vesting period, with a minimum waiting time of one year. Upon termination of employment by resignation, special claims under the employment contract and labor law may arise, particularly regarding contractually guaranteed benefits such as the ESOP. When the plaintiff resigned, part of his options had already “vested,” i.e. were exercisable. According to the ESOP, vested options were to expire immediately if the employment relationship ended by employee resignation. Otherwise, a gradual expiry of the options within two years after the end of employment was provided.
Labor law specifically regulates the claims that may arise upon termination of employment by resignation and provides the legal basis for enforcing such claims. At the time of termination by resignation, 31.25 percent of the options allocated to the plaintiff were vested. However, the employer denied the claim to the virtual options citing the expiration of the options.
Expiry Clauses Invalid
The labor court and the regional labor court confirmed the employer’s position. The Federal Labor Court (BAG), as the appellate court in the German labor jurisdiction, has the task of ensuring uniformity of case law and upholding the legal order. However, in the revision proceedings, the BAG took a different view and ruled that the vested virtual options did not expire. The provisions regarding the employee participation program were general terms and conditions (AGB). The expiry clauses linked to the termination of the employment relationship did not withstand content review. The BAG clarified that the clauses, according to which vested virtual options would immediately lapse upon resignation or lapse twice as fast as the vesting period, unreasonably disadvantage the employee. Therefore, the clauses are void pursuant to § 307 BGB.
The court’s decisions are fundamental for the entire legal system and the uniformity of case law in labor law. According to Article 95 of the Basic Law and based on the Labor Courts Act, the Federal Labor Court is established as the highest court of labor jurisdiction. The court is organized into different senates, each with specific responsibilities within the jurisdiction undertaken by the judges. The seat of the Federal Labor Court is in Erfurt, Thuringia, emphasizing the central significance of this location for German labor jurisdiction. The court’s library is an important resource for judges, staff, and external users, significantly supporting legal work. Images and the architecture of the court building at the square in Erfurt convey an impression of the court’s importance and symbolism. The division of tasks between instances, the court’s role, and the significance of the regular case in jurisprudence are ensured by the clear structure of the courts and the functions of the appellate and revision instances. The wise design of jurisprudence by the judges and senates of the Federal Labor Court significantly contributes to the development of the law.
Unreasonable Disadvantage of Employees
The BAG reasoned that vested options represent at least in part a consideration for work already performed. The employee has provided a specified work performance over a defined period and thereby fulfilled certain conditions. The significance of the employment contract is that it regulates the essential contractual elements and claims arising from employee participation connected to the employment relationship. The asset behind the option does not arise only upon exit, but the option already embodies an economic opportunity and thus a remuneration claim before the exercise event, provided the conditions are met. An immediate or accelerated expiration of these options upon termination – regardless of which side initiates it – deprives the employee without compensation of part of their “earned” remuneration, according to the BAG.
Such a regulation contradicts the fundamental principle of § 611a para. 2 BGB, which states that the employer owes agreed remuneration once the employee has performed their work, the court continued. Labor courts are responsible for enforcing claims from employment relationships and resolving labor law disputes, especially in the area of labor law. An immediate expiration of the virtual options upon resignation also disproportionately hampers the employee’s right to terminate. Resignations can have significant effects on claims from employee participation since legal consequences for existing claims and their enforceability must be observed upon termination of employment.
Impact on Practice
Das Urteil dürfte in der Praxis erhebliche Auswirkungen haben. Unternehmen sollten ihre ESOPs und Beteiligungsprogramme dringend prüfen und ggf. umgestalten. Verfallsklauseln für gevestete Optionen sind nun möglicherweise unwirksam. Arbeitnehmer können daher einen Anspruch auf bereits gevestete Optionen haben, auch wenn das Ausübungsereignis erst nach Ende des Arbeitsverhältnisses eintritt.
Die Entscheidung des BAG zeigt, dass eine klare und transparente Gestaltung der Beteiligungsprogramme von großer Bedeutung ist. Bestehende Programme sollten überprüft werden, ob nach dem Urteil eine Umgestaltung erforderlich ist. Ebenso sollte bei der Gestaltung künftiger virtueller Mitarbeiteroptionen die Rechtsprechung des BAG berücksichtigt werden.
MTR Legal Rechtsanwälte berät umfassend im Arbeitsrecht.
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