BAG: Bad leaver clauses for vested virtual options are invalid

Virtual options have become a popular means of incentivising employees. Among other things, they are intended to retain employees and reward and remunerate them for their loyalty to the company. Clauses in employment contracts that stipulate that virtual options expire in the event of voluntary resignation are therefore invalid due to unreasonable discrimination (BAG, ruling of 19 March 2025, ref.: 10 AZR 67/24).

Employee share ownership and vesting

Start-ups in particular use share ownership programmes to incentivise and retain employees.

Virtual options are often the preferred option in such cases: employees receive a certain number of these options. They simulate a share in the company’s value on a contractual basis without actually transferring company shares. The employee acquires these virtual options gradually over a defined period of time during their current employment (known as the vesting period).

‘Vested’ options then entitle the holder to exercise the options upon the occurrence of a specific event, e.g. an initial public offering, and thus realise the equivalent value.

Such participations are usually based on clauses in employment contracts that define, among other things, what happens to the options if employees leave the company (‘leavers’) before the exercise event occurs: According to ‘bad leaver clauses,’ the options may expire if employees resign of their own accord. In addition, devesting may be provided for: after leaving the company, virtual options expire gradually.

Until now, whether employees resigned of their own accord had a significant influence on whether the virtual options continued to exist or not. This is because, according to the case law of the Federal Labour Court (BAG), bad leaver clauses were previously considered lawful.

Options held in trust should expire

In the current case before the Federal Labour Court, an employee had been employed by a company for around two years before resigning. During his employment, he had been granted virtual option rights.

The rules for virtual employee stock options said that virtual options could be exercised in stages after a minimum waiting period of twelve months within a vesting period of four years. In addition, vested but unexercised virtual options were to expire in the event of voluntary termination, among other things. Last but not least, vested but unexercised virtual options were to expire gradually within two years of the end of an employment relationship (devesting clause).

After resigning, the employee claimed the option rights that had already been established. He argued that the bad leaver clause was invalid because he had earned the right to exercise the options during the vesting period and had therefore fulfilled the incentive function.

The employer rejected the claim, citing this ‘bad leaver clause.’ The purpose of the virtual options was to reward loyalty to the company until an exercise event occurred; however, they did not constitute remuneration.

BAG rules in favour of employee: Bad Leaver clause invalid

However, it was only before the Federal Labour Court that the employee was proven right.

‘The immediate expiry of “vested” options upon termination of employment does not adequately take into account the interests of the employee who has already performed his work and is contrary to the legal principle of Section 611a (2) of the German Civil Code (BGB),’ the court ruled. The same applies to the devesting provision, which stipulated that virtual options expire twice as quickly as they arose within the vesting period.

This provision is invalid because the provisions governing the employee participation programme are general terms and conditions (AGB) pursuant to Section 305(1) sentence 1 of the German Civil Code (BGB) and are therefore subject to review of their content pursuant to Section 307(1) sentence 1, (2) no. 1 BGB, including the bad leaver and devesting clauses: AGB may not unreasonably disadvantage consumers – in this case employees.

The ‘vested’ virtual options are also consideration for the work performed in the employment relationship. This is supported by the provision that the vesting period is suspended during phases in which the employee does not acquire any entitlement to remuneration (e.g. leave of absence for sabbatical).

180-degree turnaround by the Federal Labour and Employment Agency on bad leaver clauses

This ruling represents a complete reversal of the Federal Labour Court’s previous case law. In its ruling of 28 May 2008 (Ref. 10 AZR 351/07), the Senate had deemed the immediate expiry of ‘vested’ options that had not been exercised after termination of the employment relationship to be permissible, but it no longer adheres to this view.

(Note: At the end of June 2025, the grounds for the ruling were not yet available.)