Federal Labor Court: Forfeiture of “vested” virtual option rights upon voluntary resignation unreasonably disadvantages employees
In its ruling of March 19, 2025, the Federal Labor Court reaffirms the rights of employees after voluntary resignation: According to the ruling, forfeiture clauses in the general terms and conditions that stipulate the immediate forfeiture of virtual option rights in the event of voluntary resignation constitute an unreasonable disadvantage for employees (Section 307 (1) sentence 1, (2) no. 1 BGB). Similarly, discrimination occurs if the virtual option rights expire twice as quickly after the end of the employment relationship as they accrued during the vesting period. In this legal advice, attorney Sascha C. Fürstenow examines the Federal Labor Court ruling and its impact on employment contracts with vested virtual option rights.
What exactly are virtual employee shareholdings?
The purpose of virtual shares is to reward employee loyalty and motivate them. Virtual shares are not real capital shares, but rather a contractually guaranteed shareholding that does not represent actual company shares but is treated as such for economic purposes. The difference between virtual and real shares is that the legal aspects of the shareholders are different. Real shares in a company mean that the shareholders have all the rights to which a shareholder is entitled. Shareholders of virtual shares, for example, have no right to information or voting rights, nor are they entitled to dividends, but only to contractually agreed profit distributions in the event of an exit.
In practice, these virtual option rights may only be exercised after a certain period of time, which is called vesting. During this vesting period, the option rights are transferred or made exercisable in increments. Employees who leave the company before the end of this period by resigning are often “punished” by losing all their shares, as they have not demonstrated loyalty to the company and only employees who are committed to the long term should benefit. But what happens to the option rights acquired during the vesting period if an employee resigns? The Federal Labor Court (BAG) had to deal with this question.
What is the ruling about?
The case in question concerned an employee who was employed by a company from April 2018 to the end of August 2020 and received virtual option rights during his employment. These virtual option rights from the Employee Stock Option Plan (ESOP) can only be exercised in stages after a vesting period of up to four years. According to the ESOP in question, virtual option rights that have already vested but have not yet been exercised expire if the employment relationship is terminated by resignation or expire within two years of leaving the company. At the time of his resignation, around 31% of the option rights allocated to him had already vested, but his employer referred to the expiry of the option rights, arguing that the option rights were a reward for loyalty to the company and not part of his remuneration. In addition, the company was of the opinion that, in the event of other termination of the employment relationship, all options that had already vested would expire twice as quickly as the employee had taken to accumulate them.
However, the Federal Labor Court rules: Forfeiture clause in the event of voluntary resignation is invalid and virtual options are part of the remuneration.
The Federal Labor Court has declared the automatic forfeiture clause in the context of voluntary resignation to be invalid because it constitutes discrimination against employees, explains attorney Fürstenow. According to the court, the provisions on virtual options are general terms and conditions that do not stand up to content review under Section 307 (1) of the German Civil Code (BGB). The forfeiture clause also impedes the employee’s right to terminate employment, which is protected by Article 12 (1) of the German Basic Law (GG). The court has thus also changed its previous ruling from 2008 (Ref. 10 AZR 351/07), according to which the immediate expiry of already established options after termination of the employment relationship was declared permissible.
Similarly, virtual option rights are not only to be regarded as a bonus payment for loyalty to the company, but as part of the remuneration for work already performed.
The immediate expiry of vested options after termination of employment does not adequately take into account the interests of the employee, who has already performed his or her work, and is contrary to the legal principle of Section 611 (2) of the German Civil Code (BGB), according to which the employer must pay the agreed remuneration. According to the court, the entitlement to remuneration is not dependent on the fulfillment of further conditions such as continued employment. However, this does not mean that vested option rights cannot be subject to expiry in principle. They may not, however, expire in a significantly shorter period than originally agreed.
Finally, the clause stating that vested options expire twice as quickly as they were acquired is also invalid, as it unreasonably disadvantages the employee and does not take into account the performance achieved during the vesting period.
Significance for employees and staff
For employees, the company’s decision is welcome news and reinforces their rights, especially in the event of voluntary resignation. However, it is also advisable to have agreements reviewed and checked to ensure that they comply with the new case law. Furthermore, it should not be forgotten that the ruling does not constitute a general ban on the expiry of option rights and that each case must be examined individually.
Significance for companies
Attorney Fürstenow advises that it is now very important for companies to have their employee participation clauses reviewed and adapted to the new case law. In particular, care should be taken not to include blanket automatic forfeiture clauses in the general terms and conditions in the event of voluntary resignation before the expiry of the specified period. Therefore, such contracts and the corresponding clauses should be reviewed for transparency and correctness, or individually designed “expiry models” should be agreed upon. For example, it can be stipulated that the shares only expire gradually in the event of voluntary resignation, or that the bonuses are more clearly distinguished in the contract between bonuses for loyalty to the company, i.e., virtual shares, and performance bonuses. Legal advice is essential for this type of contract design in order to avoid disputes and costs.
The legal advice was prepared by Ms. Dastan, an employee of the FÜRSTENOW law firm, and professionally reviewed and finalized by Attorney Fürstenow.