Are RSUs relevant when calculating restrictive covenant compensation in Germany?
The German Federal Labour Court (“BAG”) has recently decided that RSUs do not need to be considered when calculating the compensation to be paid to enforce group-wide post-contractual restrictive covenants if the underlying agreement which awards the restricted stock units (RSUs) is concluded between the employee and the group parent company issuing the shares and not with the employing entity. The court based its decision on the argument that RSUs, being awarded by the group parent company, represent a benefit that is provided by a third party and not by the employer. However, the BAG clarified that the assessment may be different if the employing entity has entered, explicitly but also implied, into a commitment of its own regarding the award of the RSUs.
There are limited options to employers under German law who want to prevent their employees from competing against them after the end of the employment relationship. Besides a longer notice period, employers may consider implementing restrictive covenants in the employment agreement. However, a post-contractual restrictive covenant must meet strict statutory requirements to stand any chance of being valid. For example, it must be agreed in writing, serve legitimate business interests of the employer, and cannot exceed two years. More importantly, the employee is entitled to receive a compensation during the post-contractual non-compete period and waiving the post-contractual non-compete is subject to a 12-month waiver period.
Statutory law provides for a minimum amount of such compensation, i.e., at least 50% of the last “contractual contributions” that the employee received. As a general rule, components are regarded as contractual if they are based on the reciprocal nature of the employment contract and are rendered as remuneration for the work performed. This not only includes the base salary, but all remuneration components which are paid to the employee in return for his work. In practice, this can range from variable remuneration components (e.g., bonus, royalties, profit sharing) to benefits in kind (e.g., company car). It is irrelevant in this context whether the benefit is paid voluntarily by the employer or whether the employee has a legal entitlement to it.
What is less clear is whether benefits granted by the group parent, such as RSUs, also need to be factored into the calculation. Like other forms of equity compensation schemes, RSUs enable employees to participate in the economic success of a company or a group by receiving shares after a vesting period. The rules regarding the RSUs will generally be laid down in an RSU plan that is predefined by the company issuing the shares (in most cases the group parent company). RSUs are usually granted based on agreements concluded, in most cases, directly between the employee and the group parent company issuing the shares. Therefore, two separate contractual relationships need to be considered: the employment relationship between the employer and the employee on the one hand and the relationship between the group parent company issuing the shares and the employee on the other hand. According to case law, the employee cannot assert a claim against the employer concerning the RSUs if the latter one has not undertaken a (joint) obligation in this regard to ensure that the employee will be provided with RSUs issued by the group parent company. This is also where the new BAG ruling becomes relevant.
From a practice perspective, this clarification is welcomed, but the risk remains that even benefits provided not by the employer, but by another group entity, are deemed to be part of the employment agreement and therefore relevant when calculating the restrictive covenant compensation due.
