Post-contractual non-compete clause – consideration of virtual stock options in the calculation of compensation for non-competition

Judgment of the Federal Labour Court of 27 March 2025 - 8 AZR 63/24

Introduction

If the employer and employee agree on a post-contractual non-competition clause, the employer must pay the employee compensation for the duration of the non-competition clause - known as compensation for non-competition -. For each year of the non-competition clause, the compensation amounts to at least 50 % of the contractual benefits last received by the employee (Section 74 (2) of the German Commercial Code (Handelsgesetzbuch – HGB)). If these contractual benefits are in the form of variable remuneration, they are to be included in the compensation for non-competition based on the average of the last three years (Section 74b (2) HGB).

In its judgment of 27 March 2025, the Federal Labour Court has now clarified the question of how virtual stock options are to be taken into account when calculating compensation for non-competition. The decisive factor here is the point in time at which the options were exercised.

Facts of the case

The plaintiff was employed by the defendant from 1 October 2019 with a fixed gross annual salary of EUR 100,000.00. A post-contractual non-competition clause within the meaning of Sections 74 et seq. HGB was agreed between the parties. The defendant granted the plaintiff virtual stock options, which in principle did not constitute an entitlement to the transfer of shares, but to a payment in cash. The virtual options initially had to be "earned" gradually over a period of up to four years by working during a "vesting period". After expiry of the vesting period, the options could be exercised provided that an exercise event occurred in the form of a share deal, asset deal or IPO. After the occurrence of such an event in September 2021, the plaintiff exercised already vested options. The defendant settled these options in October 2021 calculated with a gross amount of EUR 161,394. The employment relationship between the parties ended on 30 June 2022 due to a termination agreement. After the termination of the employment relationship, the plaintiff exercised further option rights, which the defendant settled in October 2022 with a gross amount of EUR 17,706.32.

The Federal Labour Court had to decide whether or not the payments from the virtual stock options program were part of the relevant remuneration within the meaning of Section 74 (2) HGB and therefore had to be taken into account when calculating the compensation for non-competition.

Decision of the Federal Labor Court

In its judgment of 27 March 2025, the Federal Labor Court decided that payments from a virtual stock option program are only to be taken into account when calculating the compensation for non-competition if the options were exercised by the employee during the current employment relationship. Options exercised after termination of the employment relationship, on the other hand, are not taken into account. The decisive factor is therefore when the options were exercised. In detail:

The benefits provided by the defendant in the current employment relationship from the virtual stock option program are part of the contractual benefits last received by the plaintiff pursuant to Section 74 (2) HGB in the form of variable remuneration within the meaning of Section 74b (2) HGB. They represent consideration for the work performed by the plaintiff in the employment relationship. They must therefore be taken into account - just like fixed salaries, bonuses or other non-cash benefits - when calculating the compensation for non-competition. When calculating the compensation for non-competition, they are to be taken into account in accordance with Section 74b (2) HGB at the average of the last three years or the duration of the relevant contractual provision – in this case 33 months. The decisive factor here is that the option rights were exercised during the existing employment relationship in the period covered by Section 74b (2) HGB.

On the other hand, benefits paid by the defendant due to the exercise of stock option rights after the termination of the employment relationship do not fall under the last contractual benefits received within the meaning of Section 74 (2) HGB. They are therefore not to be included in the calculation of the compensation for non-competition.

Practical note

The judgment of the Federal Labour Court provides a degree of legal certainty with regard to the calculation of the compensation for non-competition in relation to virtual stock options. However, it remains unclear whether the judgment can also be applied to remuneration models that are aimed at granting "genuine" shareholdings.

Employers should take this judgment of the Federal Labour Court as an opportunity for the following:

• Before agreeing a post-contractual non-compete clause, it should be checked whether the compensation to be paid is offset by an appropriate economic benefit of the post-contractual non-compete clause, even taking into account benefits from virtual stock options.
• In the case of employees with whom a post-contractual non-competition clause has already been agreed, the economic viability of the post-contractual non-competition clause should be regularly reviewed. If it is no longer economically viable, a waiver of the post-contractual non-compete clause should be considered.
• When creating programs for (virtual) stock options, their impact on compensation for non-competition should also be taken into account. For example, consideration could be given to specifying certain exercise periods in relation to limited quotas as part of the participation program in order to limit the impact on compensation for non-competition.
• The allocation, vesting and exercise of the options should be explicitly documented so that the settlement of the compensation for non-competition can later be made transparent.