Consideration of Virtual Stock Options in Non-Compete Compensation

Employers may agree on post-contractual non-compete clauses with their employees in the employment contract. In return, the employer is obligated under Section 74 (2) of the German Commercial Code (Handelsgesetzbuch, HGB) in conjunction with Section  110 of the German Trade, Commerce and Industry Regulation Act (Gewerbeordnung, GewO) to pay compensation for the duration of the prohibition. This so-called non-compete compensation amounts to at least 50% of the employee’s last contractual earnings for each year of the prohibition. If these contractual earnings are variable, they are to be calculated according to the average of the last three years pursuant to Section 74b (2) sentence 1 of the German Commercial Code.

The German Federal Labor Court had to consider the specific determination of this non-compete compensation in its recent decision.

Case History

The plaintiff had been employed by the defendant since October 1, 2019. The parties had agreed on a post-contractual non-compete clause pursuant to Section 74 et seq. of the German Commercial Code. In addition to his six-figure gross annual salary, the plaintiff received the option for virtual stocks. This virtual stock program did not entitle the employee to the transfer of stocks but only to a monetary claim. During the so-called vesting period, the employee could earn this participation through his work. Only after the vesting period and the occurrence of an asset deal, share deal, or an initial public offering (IPO) could these option rights be exercised.

The plaintiff first exercised his option rights in September 2021 and received EUR 161,400 gross from the defendant. The parties terminated the employment relationship on June 30, 2022, through a termination agreement. The employee also exercised further option rights after the termination, for which the defendant accounted EUR 17,700 gross.

The plaintiff requested that both amounts paid be included in the calculation of his non-compete compensation. He argued that all of the defendant’s services should be considered in calculating the amount of his non-compete compensation.

The German Federal Labor Court’s Ruling

The German Federal Labor Court ruled that benefits from the virtual stock option program are generally to be considered as “contractual benefits” under Section 74 (2) of the German Commercial Code. Therefore, they are included in the calculation of the average of the last three years or the duration of the employment relationship for the non-compete compensation pursuant to Section 74b (2) of the German Commercial Code.

However, the German Federal Labor Court clarified that benefits from the virtual stock option program are only “contractual benefits” under Section 74 (2) of the German Commercial Code if the corresponding option rights are exercised during the ongoing employment relationship. If the option rights are exercised only after the end of the employment relationship, the benefits provided for this purpose are not to be considered in the calculation of the non-compete compensation. Accordingly, the German Federal Labor Court rejected the consideration of the second amount of EUR 17,700 gross in the present case for the calculation of the non-compete compensation.

Conclusion

Employers might want to consider that benefits from virtual stock option programs are to be included in future non-compete compensation when agreeing on post-contractual non-compete clauses. The attractiveness of such employee participation programs could be significantly reduced for employers in this context. The decisive factor is the timing of when an employee exercises their virtual stock options.

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