Germany: Invalid vesting clauses: Federal Labour Court strengthens employee rights regarding options

Contractual clauses that provide for the immediate or accelerated forfeiture of "vested" virtual stock options – often in the context of so-called Employee Stock Option Plans (ESOPs) – in the event of voluntary resignation or termination of employment, unreasonably disadvantage employees and are therefore invalid pursuant to Section 307 (1) sentence 1 of the German Civil Code (BGB).

This was clarified by the Federal Labour Court (BAG) in a ruling dated 19 March 2025 (Ref. 10 AZR 67/24).

Vested options are earned remuneration and not just an incentive

Virtual stock options are popular employee retention tools; however, they also entail legal risks. Expiry clauses, which regulate when "vested" (acquired) option rights expire, are particularly challenging from a legal perspective. 

Vested options are considered "earned" – i.e. accumulated through work performance. ESOPs usually define a so-called vesting period: over a specified period, usually four years, the employee "earns" his or her options on a pro rata basis. A one-year cliff is also common (the first proportion is paid after 12 months).

In its decision, the BAG clarifies that virtual options are generally only "earned" for periods during which the employee is also entitled to remuneration. Vesting is thus directly linked to the exchange of work for remuneration (Section 611a BGB).

In the proceedings, the employer argued that the benefit was "voluntary" and that the allocation letter expressly excluded any entitlement to remuneration. The BAG did not concur with this: interpreting the contractual clauses, the court concluded that vested options represent consideration for work performed during the vesting period.

This assessment was based, inter alia, on section 3.4 of the agreed ESOP plan, according to which vesting is suspended if the employee is on unpaid leave, for example during parental leave or an unpaid sabbatical. The BAG thus makes it clear that options only accrue if there is a claim to remuneration, which substantiates their character as wages.

In this context, the term "voluntary" merely means that the employer is not obliged to make the payment under statutory or collective law. However, this does not mean that entitlements already earned can be unilaterally excluded.

Specific case: 143.75 options after voluntary resignation

In the case at hand, the plaintiff was employed from 1 April 2018 to 31 August 2020 and had terminated his employment relationship on ordinary terms. At the time of his leaving, 7.1875 virtual options had been vested based on his employment period of one year and three months, which corresponds to 143.75 virtual options after a subsequent split.
The employer invoked two forfeiture clauses: 

1. Virtual options expire if the employment relationship ends before an exercise event due to termination by the beneficiary – complete immediate forfeiture in case of voluntary resignation (4.2 ESOP).
2. In addition, a staggered expiry provision stipulated that exercisable options expire gradually after termination of the employment relationship: 12.5% after 3 months up to 100% after 24 months (4.4.3 ESOP).

BAG: Violation of remuneration principles and freedom of occupation

In the opinion of the BAG, a forfeiture clause contradicts the main principles of Section 611a (2) BGB in that it deprives the employee of the opportunity to participate in economic success even if he has contributed to this through his work performance. Upon completion of the vesting period, the beneficiary acquires vested options that represent an opportunity to participate in an increase in value, depending on an exercise event.

Such a clause also disproportionately restricts freedom of occupation as protected under Article 12(1) of the German Basic Law (GG), because it makes it inadmissibly difficult to exercise the right of termination. In order to avoid a possible loss of assets, the option holder would have to maintain their employment relationship for a maximum period of 15 years.

Two-year expiry after four-year vesting is disproportionate

The provision for staggered forfeiture within two years of leaving the company is also disproportionate if the vesting period is four years.

According to the BAG, there is no empirical evidence that the employee's contribution to the company's success loses relevance twice as quickly after leaving as it was built up.

The court thus applies the principle of proportionality as a benchmark: if the share is an economic expression of work performance, the entitlement must at least correspond in time to the effort required to acquire it.

Principle of proportionality as a new benchmark

If the opportunity to participate in profits is in a synallagmatic relationship to the work performed, it is in line with the principle of proportionality to maintain this income opportunity for the employee at least as long as he or she has spent on acquiring the vested options.
Long-term employee loyalty is already achieved through vesting and the additional performance of work until the end of the employment relationship. Behavioural control also occurs if the employee must observe a forfeiture period corresponding to the vesting period after the end of their employment relationship.

Practical consequences for companies

If forfeiture clauses are invalid due to the prohibition of reduction to maintain validity, they cannot be upheld with legally permissible content and are therefore omitted without replacement. As a result, employees are entitled to vested shares in companies, which could lead to a devaluation of the company.

Impact on ESOP structures:

This has far-reaching consequences for companies: They must urgently review existing ESOP regulations and design expiry clauses in such a way that their term is at least proportional to the vesting period. An expiry period corresponding to the vesting period would be legally appropriate and proportionate.

For employees, the ruling means significantly stronger protection for acquired option rights. Existing agreements should be reviewed for invalid clauses.

If employees receive vested shares in the company, this can influence the company's valuation and management. In the case of virtual shareholdings in particular, this means that option rights remain with the company even after the employee leaves and can no longer be simply restricted by expiry clauses. This can lead to increased capital commitments for the company and potentially limit flexibility in employee retention.

Conclusion: Not a "fringe benefit" but genuine remuneration

With its ruling, the BAG significantly strengthens the position of employees. Virtual stock options are more than an incentive; they are part of the remuneration for work carried out. They must therefore not be devalued by blanket expiry clauses.

Overall, the ruling illustrates that virtual stock options are not only incentive instruments, but also components of remuneration for work already performed. Companies must develop fair and proportionate regulations that protect employee rights.

Nevertheless, it should be emphasised that it always depends on the specific terms of the respective participation agreement and the circumstances of the individual case. Due to the considerable legal and economic risks for option holders and employers, individual advice on employment law is strongly recommended.