Post-contractual non-competition clause: BAG decides on compensation for non-competition.

 Employer-friendly ruling regarding restricted stock options.

Post-contractual non-competition clause: BAG decides on compensation for non-competition.

Restricted stock acquisition rights to shares in a parent company often serve as a financial incentive to attract employees to a startup. To what extent do these restricted stock options need to be considered when calculating compensation for a post-contractual non-compete obligation? The German Federal Labor Court reached the following decision with its ruling dated August 25, 2022 (Ref.: 8 AZR 453/21).

By signing a post-contractual non-competition clause, employees agree not to compete with the company for a maximum of two years after the end of the employment relationship. In return, the employer provides financial compensation known as compensation for non-competition. The minimum amount of the compensation is legally regulated in Section 74 (2) of the German Commercial Code (HGB): It amounts to half of the benefits last received by the employee. For example, a company car and variable compensation components also have to be considered.

Which variable compensation components have to be factored in?

Up until now, it was often unclear whether share allocations by a group parent company which is not part of the employment relationship also had to be included. Corresponding stock options for shares in larger corporate parent companies can provide a key financial incentive to join a young subsidiary.

In this specific case, the plaintiff was employed by the defendant with a monthly base salary of approximately 11,000 euros per month. The defendant is part of a corporate group whose parent company is a U.S. company. In the employment contract, the plaintiff agreed to a nine-month post-contractual non-competition clause. In return, he should receive compensation for non-competition at the end of the employment relationship “which would equal half of the benefits last received by the employee as per the contract for each year of the prohibition”.

Participation in the restricted stock options program of the parent company

During the employment relationship, the plaintiff participated in the parent company’s restricted stock options (RSU) program. After leaving the company, he complied with the non-competition agreement, and demanded that his former employer also factor in the value of the restricted stock options when calculating the compensation. He received these options on the basis of “Global Restricted Stock Unit Award Agreements”, which he had concluded separately with the U.S. parent company. The plaintiff argued that in view of the employer’s deciding influence and discretionary powers regarding the number of RSUs to be signed in the future, which would have been determined during the annual performance evaluation each year, the company owing these benefits was not relevant.

Contract with parent company – no entitlement to higher compensation for non-competition

As with the previous instances, the Federal Labor Court did not share this opinion: The term “contractual benefits” in accordance with Section 74 (2) of the German Commercial Code (HGB) only encompasses those benefits based on the exchange character of the employment contract, and which the employer owes the employee as compensation for the work performed. The highest labor court judges in Erfurt ruled that if the parent company rather than the employer grants restricted stock options, these do not belong to the contractual benefits pursuant to Section 74 (2) of the German Commercial Code HGB. At the same time, the judges also clearly stated that the situation is different if the contractual employer explicitly or implicitly enters into a shared obligation for restricted stock options. This needs be considered on the basis of the specific circumstances of the individual case.

The plaintiff also failed to convince the BAG with the argument that the non-competition agreement applies for the entire corporate group. At best, this could lead to reduced restrictions imposed on the plaintiff as per Section 74 a (1) of the German Commercial Code (HGB).

The Federal Labor Court creates greater clarity concerning restricted stock options within corporate groups, such as when employees at startups are granted restricted stock options for a group parent company. These options only need to be considered when calculating post-contractual non-competition compensation if the contractual employer explicitly or implicitly agrees to grant these stock options. Otherwise, stock options rights can quickly become an incalculable risk for startups which cannot influence how the RSUs are granted by the parent company.