Judgment: Federal Labour Court rules on vesting clauses in VSOP schemes
1. Background
In its judgement of 19 March 2025 (Case No. 10 AZR 67/24) the Federal Labour Court (BAG) handed down a landmark ruling on vesting clauses in employee share ownership schemes based on virtual options (Virtual Stock Option Plan, VSOP).
In the case in question, a former employee brought an action against a company that had set up such a VSOP programme, seeking a declaration that the virtual share options she had earned remained valid.
The terms of the VSOP programme provided that virtual options would vest in stages over a period of four years (the so-called vesting period). In the event of the employee resigning of their own accord (a so-called ‘bad leaver’), all options were set to lapse, including those that had already vested.
In addition, a so-called ‘de-vesting’ clause was provided for, i.e. following the termination of the employment relationship, the virtual options were to lapse at twice the rate at which they had vested.
2. Decision of the Federal Labour Court
The Federal Labour Court (BAG), in line with its previous case law (BAG, judgment of 28 May 2008 – 10 AZR 351/07), classified the terms of the VSOP programme as general terms and conditions. As such, they were subject to a review of their validity.
Although the above-mentioned clauses were neither surprising nor lacking in transparency, they were invalid pursuant to Section 307(1), first sentence, and (2)(1) of the German Civil Code (BGB). The BAG found that the ‘Bad Leaver’ clause constituted an unreasonable disadvantage contrary to good faith, as – unlike the wording of the VSOP programme – regarded the virtual options as consideration for work performed, which could not simply be revoked in the event of voluntary resignation.
The BAG also deemed the de-vesting clause to be invalid on the grounds of disproportionate disadvantage to employees.
3. Implications for practice
3.1 Applicability to other provisions
Firstly, the judgement should serve as a reminder that VSOP programmes constitute general terms and conditions within the meaning of Sections 305 et seq. of the German Civil Code (BGB), are subject to special scrutiny of their content as such, and that particular attention should be paid to their transparency when drafting them. In particular, frequently encountered written-form clauses should be reconsidered against this background.
3.2 Regulatory options
The Federal Labour Court (BAG) does not declare ‘bad leaver’ clauses to be fundamentally invalid, but rather describes a scenario in which they may be valid – namely, in the case of clauses under which the shares vested by ‘bad leavers’ only lapse after a considerable period following their departure.
Furthermore, in future, efforts will need to be made to achieve the regulatory objective of ‘bad leaver’ clauses – namely, to promote the employee’s loyalty to the employer – through other mechanisms. Options to be considered here include longer cliff periods (periods after which options vest), non-linear vesting – which allocates more options towards the end of the vesting period than at the start – or ‘grey leaver’ provisions.
Furthermore, the Federal Labour Court’s ruling has removed an important argument against performance vesting. Performance vesting links the earning of virtual options not to the passage of time (so-called ‘time vesting’), but to the achievement of specific targets. In practice, this approach has often been discouraged so as not to make the virtual options appear to be an vested component of remuneration. However, if this argument now also applies to time vesting, in many cases one can, in good conscience, recommend performance vesting, whereby employees are rewarded not merely for simply not terminating their employment contract, but for the genuine added value they bring to the company.