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Amount of Compensation Payment in Case of Post-Contractual Non-Compete Obligation
German Federal Labour Court as of 25 August 2022 – 8 AZR 453/21
When an employment relationship ends, so does the employer's non-compete obligation. Employees are then able to use their practical knowledge for a competitor. In order to prevent a competitive set-up later down the line, employers often opt for a post-contractual non-competition obligation. The condition precedent is, most notably, a compensation payment for the time of the obligation, a non-competition compensation ("Karenzentschädigung"). Again and again, disputes arise in connection with the post-contractual non-competition obligation and with the amount of the non-competition compensation. Now the German Federal Labour Court was asked to decide whether so-called Restricted Stock Units ("RSUs") granted by the parent company have to be considered when it comes to the amount of the non-competition compensation.
Case Background
The claimant was employed by the company from 2012 until January of 2020. In the employment agreement, the parties agreed on a nine-month post-contractual non-competition obligation according to which the employer undertook to pay a non-competition compensation. The amount of non-competition compensation agreed was "half of the last contractual benefits received". Under a separate agreement, the employee took part in a share ownership programme (RSU programme) of the US parent company. The employer took on the calculation of RSUs already transferred and settled everything with the parent company internally. Under the title "Summary of the Personal Remuneration", the employer informed the employee about the expected amount of remuneration for the year of 2019, which consisted of a basic salary and the current value of the RSUs expected to become due in the calendar year. In an "informative overview", the employer explained that the RSUs are provided by the parent company and will not be considered for the calculation of the post-contractual non-competition compensation. In October of 2019, the employment relationship was terminated by means of a settlement agreement. In deviation from agreements between the employee and the parent company, it provided that all RSUs still due for 2019 will be transferred to the employee despite the release from work. After leaving the company, the employer received the agreed non-competition compensation.
By means of the action, the employee sought a non-competition compensation which was calculated by taking into consideration the RSUs granted in the three-year period before leaving.
The Decision
The Federal Labour Court decided that the employee does not have any claim to a higher non-competition compensation. The court held that RSUs were no "contractual benefits" as defined in the contractual agreement. The term "contractual benefits" only covered benefits which are based on the interchangeability of the employment contract und which the employer owes the employee as remuneration for performed work. The agreements on the granting of the RSUs were made with the parent company. Taking the RSUs into account when calculating the non-competition compensation requires that the employer has assumed an (co-)obligation. Such an obligation does not arise, in particular, from the fact that the employer took care of all taxation and administrative matters for the parent company with regard to the RSUs.
Practical Implications
The amount of the non-competition compensation must reach half of the last contractual benefits received by the employee for each year of the obligation. Here, the following principally applies: the more far-reaching the obligation, the higher the compensation payment in order to be fully binding. All remuneration payments actually received by the employee for the work performed, i.e. all benefits in cash and in kind (e.g. annual remuneration, bonus payments, holiday allowances) are taken into account when calculating the compensation payment. Depending on whether fixed wages or variable remuneration components are concerned, different points in time or periods are decisive for the calculation. After this judgment it is clear that when the amount of the non-competition compensation is calculated, benefits paid by third parties, like, in particular, RSUs granted by the parent company, are not taken into account, unless the parties have agreed otherwise.
Practical Advice
Offering the prospect of RSUs is a popular means to motivate employees to stay with the group, create financially attractive incentives for company loyalty and, at the same time, also enough performance incentive. Employers should be careful to not assume liability for RSUs granted by third parties - in particular the parent company -, as this can have significant financial consequences. Liability is not accepted already when the employer has influence on the content of the "if" of the granting, the criteria or the amount of the remuneration (e.g. by assessments or propositions). If the contractual obligation only exists between the employee and the parent company, it is a difficult process for the employee to enforce claims, especially because in many cases parent companies, like here, have their seat abroad and therefore other jurisdictions apply.