BAG: Is the forfeiture of „vested“ employee options in the event of voluntary resignation unlawful?

Is the forfeiture of „vested“ employee share options in the event of voluntary resignation unlawful? New ruling by the Federal Labour Court (BAG)

Virtual employee share schemes – so-called VSOP models – have become a popular tool in recent years for retaining skilled staff within the company in the long term. In a recent judgement dated 19 March 2025, (Ref. 10 AZR 67/24) The Federal Labour Court (BAG) has now caused a stir by departing from its previous case law: as a result of the ruling, various forfeiture clauses may be invalid and should be reviewed.

The claim was brought by an employee who had been allocated virtual shares as part of a virtual share scheme, subject to a fixed vesting schedule. The employment relationship was terminated before the end of the vesting period following the employee’s voluntary resignation.

However, when a trigger event occurred after the employment relationship had ended, the employer refused to pay the employee an exit payment, citing the contractually agreed forfeiture clauses.

The Federal Labour Court (BAG) subsequently ruled that the forfeiture clauses placed the employee at an unreasonable disadvantage and were therefore invalid. The grounds for the judgement also have implications for the drafting of future contracts.

Immediate forfeiture of vested shares following voluntary resignation is invalid

A clause which was ultimately invalid provided that the immediate and unconditional Provision for the forfeiture of virtual options or shares that have already vested in the event of voluntary resignation by the employee.

According to the Federal Labour Court (BAG), such a clause unduly makes it more difficult for the employee to resign of their own accord. The clause therefore places the employee at an unreasonable disadvantage and is invalid.

In support of its reasoning, the Federal Labour Court (BAG) – contrary to previous case law – argues that vested virtual shares form part of the employee’s remuneration. However, this would mean that the employee would face a significant financial loss if their vested virtual shares were to be forfeited upon voluntary resignation immediately and without replacement expired.

In the BAG’s view, therefore, the virtual shares are not merely an incentive for the employee to remain with the company. Rather, vesting represents an opportunity to acquire shares which the employee gains by performing their work. The BAG bases this view, amongst other things, on the fact that, under the contractual provisions, vesting is suspended in the event of unpaid leave, a sabbatical or during parental leave; from which the BAG deduces that, even in the employer’s view, the vesting of the virtual shares is linked to the performance of work. In that case, however, the principle applies: no work, no pay – and vice versa.

In this case, however, if the employee were to resign of their own accord, they would have components of their remuneration that they had already earned withdrawn, which would place them at an unreasonable disadvantage.

Furthermore, in the Federal Labour Court’s view, the forfeiture of accrued virtual shares without compensation constitutes a disproportionate restriction on the employee’s freedom to practise their profession, as the employee might feel compelled, in light of such forfeiture, to refrain from giving notice of termination.

Furthermore, in the view of the Federal Labour Court (BAG), the forfeiture clause was invalid simply because it did not distinguish between the various grounds for voluntary resignation. In particular, no distinction was made as to whether the voluntary resignation was based on conduct by the employer that breached the contract or not. Consequently, this would mean that, in the event of voluntary resignation, the vested virtual shares would lapse without compensation even if the reason for this was in fact conduct by the employer in breach of the contract. Here too, the BAG considers this to constitute an unreasonable disadvantage for the employee.

Gradual forfeiture of vested shares following the termination of employment (divesting)

The Federal Labour Court’s examination also focused on a forfeiture clause which provided for the staggered forfeiture of vested virtual shares following the termination of the employment relationship. The problem with the staggered forfeiture in this case was that the vested virtual options double should lapse as soon as they have been earned in accordance with the vesting schedule. In the view of the Federal Labour Court (BAG), such forfeiture clauses place the employee at an unreasonable disadvantage and are therefore invalid.

At the same time, the Federal Labour Court (BAG) fundamentally recognised the need for a staggered vesting period for vested virtual shares. The vested virtual shares reflect the employee’s indirect contribution to the company’s success. It should generally be assumed that the influence of this past contribution on the company’s success diminishes the longer the period between the termination of the employment relationship and the vesting event. In this respect, the BAG is generally open to staggered forfeiture clauses.

Clauses commonly used to date, which provide for immediate forfeiture without replacement, could, for example, be replaced by a staggered forfeiture (known as ‘divesting’). Divesting would mirror the vesting schedule of the employee in question and follow it in reverse – meaning that the vested virtual shares would lapse at the same rate at which they were earned by the employee. In this respect, the gradual reduction in the employee’s indirect contribution to the company’s success could be adequately taken into account without unduly disadvantaging the employee.

Implications for practice

The ruling is likely to have a significant impact on various existing employee share schemes. This applies in particular to start-ups and high-growth companies, where such schemes are frequently used. Many contracts still contain standard clauses which, in the event of termination – including by the employee themselves – result in the full or partial (irrevocable) forfeiture of vested shares.

Even in the wake of the Federal Labour Court’s ruling, forfeiture clauses are not to be regarded as invalid per se. In many cases, however, there is likely to be a need for further regulation – particularly where vested virtual shares are forfeited without compensation in the event of voluntary resignation.

In our view, the BAG also allows for the forfeiture of virtual shares in return for payment of a appropriate Severance pay.

In line with the classification of vested virtual shares as a component of remuneration, such a severance payment could be based on the employee’s gross annual income. It would also be conceivable to base it on the value of the company. In this context, the different dates of termination would need to be taken into account, striking a balance between the appropriateness of the severance payment and the employer’s interest in ensuring that an overly attractive severance payment does not encourage the employee to resign prematurely.

What you should do now

Companies should review their employee share ownership schemes. A number of arrangements and clauses may no longer be valid in light of the recent ruling by the Federal Labour Court.

Particularly in an environment where skilled staff are in short supply, a legally sound, transparent and fair share scheme sends an important signal – both to existing staff and to potential new recruits.

We would be happy to assist you with the ensuring your clauses are legally sound.