I. Introduction and Recap

In our newsletter dated 16 July 2025, we discussed two decisions by the BAG regarding employee participation programs. At that time, the written judgments with full reasoning had not yet been published, and a conclusive assessment could not be provided. With this follow-up article, we now aim to provide such assessment.
Employee participation programs granting option rights (VSOPs / ESOPs) aim to promote long‑term employee retention and incentivize performance and commitment. In addition to monthly remuneration, the employee typically is granted the right to receive a future payment from the company, the amount of which is linked to the company’s performance and depends on the occurrence of certain exercise events. The number of options earned generally depends on how long the employee has been working for the company. Over a certain period, and upon completion of defined intervals (for example, monthly or quarterly), the employee gradually “earns” option rights. These earned (or “vested”) option rights may later be exercised upon the occurrence of an agreed event, such as a company “exit” or an IPO, thereby giving rise to a payment claim.

II. Invalidity of Forfeiture Clauses

The first decision (BAG judgment of 19 March 2025 – Az. 10 AZR 67/24) concerned agreements under which the employee could earn option rights over a total period of four years. The dispute concerned the validity of the forfeiture clauses for the option rights. Among other things, it was agreed that the employee would lose all option rights in the event of resignation. It was further agreed that, following termination of employment, the vested option rights would begin to lapse gradually after three months and would fully expire after twenty‑four months. The BAG deemed both clauses to be invalid.
With regard to the first forfeiture clause, the BAG concluded that the provision unreasonably disadvantages the employee and does not sufficiently take the employee’s interests into account; the clause does not consider the reason for the employee’s resignation and would also apply in cases where the resignation was prompted by a breach of contract on the part of the employer. The court considered this a restriction on the employee’s right to terminate the employment relationship.
According to the court, the vested option rights earned are remuneration within the meaning of Section 611a para 2 of the German Civil Code (Bürgerliches Gesetzbuch – BGB) for work performed by the employee. Once the work has been performed, the employer owes the agreed remuneration, regardless of whether the employee continues to be employed by the company. The court reached this conclusion because of the close connection between the vesting of option rights and the employee’s entitlement to remuneration; for example, periods of incapacity for work, parental leave, or unpaid leave are disregarded for vesting purposes. This conclusion is not contradicted by the fact that the employee’s work only indirectly influences the company’s value. The same applies to other forms of remuneration such as profit-based bonuses or profit-sharing arrangements. In those cases, too, a direct impact on the company’s success is not required, even though the special remuneration depends on it. By contrast, it can be assumed that the forfeiture of option rights that are not yet vested is permissible, since no work has yet been performed by the employee for such option rights.
However, the court emphasized that forfeiture provisions for vested options are not per se unreasonable. The employer’s interest in limiting or precluding an employee’s claims arising from option rights, where there is no longer a connection between the work performed and the company’s success, is justified. This might be the case, for example, when an employee leaves the company several years before the trigger event that gives rise to the payment claims from option rights occurs. However, according to the BAG, there is not yet such a lack of connection between the work performed and the company’s success at the moment of termination. Immediate forfeiture of vested options upon resignation therefore disproportionately interferes with the employee’s constitutionally protected freedom to choose an occupation (article 12 para. 1 of the German Constitution (Grundgesetz – GG), as it unduly restricts the employee’s ability to exercise their right to termination.
The court also considered the gradual forfeiture of vested options unreasonable. As mentioned above, the court recognizes the employer’s legitimate interest in not granting option rights for an indefinite period, as the influence of a former employee’s work performance on the company’s success diminishes over time. However, it must be ensured – and this is what the court takes issue with in the present case – that the respective periods for acquiring the option rights and their expiry are proportionate to each other. The BAG held that there is an unreasonable disadvantage to the employee if option rights can only be exercised after one year, but expire just three months after leaving the company. The same applies to the overall time frame for vesting and expiry of option rights. If, as in the present case, the option rights are vested over a period of 48 months but expire within 24 months of leaving the company, i.e., twice as fast as they were vested, this violates the principle of proportionality. Employees must retain their consideration for at least as long as it took them to acquire it.

III. Consideration of Virtual Options in Non-Compete Compensation

The second decision (BAG judgment of 27 March 2025 – Az. 8 AZR 453/21) involved a similar employee participation program. Here too, the employee had to remain employed at this employer for a four-year vesting period and was then entitled to exercise vested options in the event of a company sale. The dispute, however, concerned whether and to what extent the option payments should be included in calculating non-compete compensation. The parties had agreed on a post-contractual non-compete clause for which the employer owed compensation under section 74 para. 2 of the German Commercial Code (Handelsgesetzbuch – HGB). Under this provision, the employee is entitled, for the duration of the restriction, to half of the remuneration last received under the employment contract. The employee exercised option rights both before and after the termination of his employment and received payments on each occasion. However, the employer did not take into account such payments for the calculation of the non‑compete compensation. The employee challenged this and was partially successful, succeeding only with regard to the options exercised before termination.
The BAG held that, when calculating non‑compete compensation under sections 74 et seqq. HGB, benefits from virtual stock options are to be considered only to the extent that the corresponding options were exercised during employment. Payments received for options exercised after termination must be disregarded. The BAG did not consider a payment received after termination to constitute contractual remuneration within the meaning of section 74b para. 2 HGB.
In its reasoning, the BAG relied on the wording of section 74 para. 2 HGB as well as on the purpose of the non‑compete compensation. Under section 74b para. 2 HGB, the amount of compensation in cases of variable remuneration is determined on the basis of the average earnings of the last three years of employment. The purpose of the compensation is to secure the standard of living that the employee has attained through previous employment. If an option right has only been vested but not yet exercised, it has not yet affected the employee’s standard of living. Whether the employee will be able to exercise the option rights in the future and whether they will in fact result in income depends on unforeseeable factors. Moreover, the exact value of the option rights at the end of the employment relationship would be difficult to determine.

IV. Outlook and Practical Implications

As discussed in our previous article, these decisions are of considerable practical importance. Employee participation programs are a popular tool, particularly in the start-up and venture capital sectors, offering attractive incentives for all parties involved. The recent rulings once again underscore the importance of sound and careful structuring of participation plans. Existing employee participation programs should be reviewed in light of the new case law, and vesting provisions adjusted where necessary.
At the same time, some questions remain unanswered, for example, whether the new case law also applies to option rights granted in group structures, where employees of a domestic subsidiary receive options from a foreign parent company with which they have no direct employment relationship. Further developments in this area will therefore be followed with interest.