Germany: No consideration of Restricted Stock Units (RSUs) when calculating compensation for a post-contractual non-compete period

Authors: Verena Braeckeler-Kogel, MAES (Basel) and Meike Christine Rehner

After the termination of his employment, a former employee was faced with a non-compete period due to a corresponding clause in his contract. He received 50% of his salary as compensation for the time of the non-compete period, as mandatory under German law for an effective post-contractual non-compete. As he had been granted RSUs by the parent company of the employing entity during the time of the employment, he claimed that the value of these RSUs must also be considered for the calculation of the compensation, therefore entitling him to a higher compensation.

Sec. 74 (2) of the German Commercial Code requires the employer to pay at least 50% of the “contractual remuneration” as compensation for the time of a post-contractual non-compete period. Otherwise, the non-compete is null and void. Therefore, the decisive question in the case at hand was whether the RSUs granted to the employee by the parent company had to be considered as “contractual remuneration” in terms of the law and consequently be taken into account when calculating the amount to be paid to the employee as compensation during the post-contractual non-compete period.

The Federal Labour Court ruled that RSUs in this case were not part of the employee’s contractual remuneration because they were granted to the employee by the parent company who wasn’t a party to the employment contract. As the employer didn’t have any obligations regarding the granting of the RSUs, they didn’t need to be considered for calculating the compensation for the post-contractual non-compete.

“Practical Point”

• When implementing a groupwide employee benefit program on parent company level, a clear differentiation between the regulation on the benefit in question and the individual employment contract should be made to avoid triggering contractual claims of the employees towards their employing entity, not only with regard to the case of a post-contractual non-compete.
• If the employing entity has contractual obligations towards its employees regarding the granting of such groupwide benefits, they can be considered contractual remuneration and therefore need to be taken into account when calculating the compensation for a post-contractual non-compete.