These virtual options are typically subject to a so-called vesting period. The term “vesting,” originating from English, refers to the acquisition or non-forfeitability of a right. In employee participation programs, vesting describes the gradual acquisition of rights to virtual stock options or bonus entitlements. The vesting period is the timeframe over which granted virtual shares are "earned" until they become non-forfeitable. This structure serves to incentivize employees, ensuring they do not gain full access to their options immediately but only after a period of employment or upon achieving company goals. Only after this period can the options be exercised.
Many companies also include Good Leaver / Bad Leaver clauses in their agreements to define under what conditions employees may retain their virtual shares:
BAG: Virtual Options as a Component of Compensation
The German Federal Labor Court (BAG) has now taken a clear stance on the validity of forfeiture clauses. In its ruling of March 19, 2025 (Ref. 10 AZR 67/24), the BAG clarified that already vested virtual options are a form of remuneration for work performed. Therefore, a clause that causes the complete forfeiture of vested options upon voluntary resignation is invalid.
The plaintiff was employed by the defendant from April 2018 to August 2020. In 2019, he received 23 virtual options subject to a vesting plan. At the time of his resignation, 31.25% of the options had already vested and thus were non-forfeitable. The VESOP agreement stipulated that all vested options would be forfeited without compensation in the event of the employee's voluntary resignation.
The BAG ruled that such a clause unreasonably disadvantages the employee and is therefore invalid under Section 307 (1) Sentence 1 and Section 307 (2) No. 1 of the German Civil Code (BGB). The reasoning:
Furthermore, according to the BAG, clauses stipulating that vested options expire faster than they were earned are also invalid. The press release does not specify under what conditions a gradual reduction of vested options might still be permissible. Further clarity may emerge from the full reasoning, which is not yet available.
This decision marks a departure from the BAG’s earlier case law (ruling of May 28, 2008, Ref. 10 AZR 351/07), which considered the forfeiture of vested options upon resignation permissible. At that time, the BAG held that employees were not being deprived of already earned compensation but only of the opportunity to earn further benefits. The principle that earned wages cannot be withdrawn was seen as unaffected. Allowing employees to exercise stock options after termination or departure would, in the BAG’s previous view, contradict the intended long-term behavioral and retention incentives tied to stock option programs.
Note on Taxation:
From an economic standpoint, virtual option benefits are considered compensation for past work. For tax purposes, the key question is when the employee gains economic control over the benefit—in other words, when the benefit is actually received (e.g., upon profit sharing or an exit event). This means that taxation does not occur when the virtual options are granted, but rather when they are fulfilled (deferred taxation). This differs significantly from the tax treatment of typical equity-based interests, such as those held via asset-managing partnerships (e.g., KG structures), as reflected in recent rulings by the Federal Fiscal Court (BFH rulings of Dec 14, 2023, VI R 1/21 and VI R 2/21).
Employers should ensure that employee participation programs are thoroughly reviewed from a tax perspective before implementation, and that any payments are properly classified for wage tax and social security purposes. This is especially crucial in cross-border scenarios, where allocating the tax base can be highly complex and error-prone.
What Applies to Unvested Virtual Options?
The BAG’s new case law likely does not change the treatment of unvested options. These are not yet earned and thus do not qualify as compensation under Section 611a (2) BGB. Employees have no legal entitlement to these options until the vesting conditions (e.g., minimum tenure) are met. Unvested options are not remuneration for work already performed. Therefore, companies may still stipulate in vesting plans that unvested options lapse upon termination of employment.
Note on Taxation:
The forfeiture of unvested options generally has no tax consequences. However, companies should document that the entitlements never came into effect and that the employee received no payments from them in order to avoid future disputes with domestic or foreign tax authorities.
Virtual Options Granted by Foreign Entities: Jurisdiction and Applicable Law
Virtual stock options are often granted not by the employer directly, but by a foreign group company. Such arrangements typically involve a choice-of-law clause in favor of the foreign legal system and a jurisdiction clause pointing to the general legal venue of the foreign parent company. The prevailing legal view has considered such provisions to be valid.
In a decision dated December 5, 2018 (Ref. 8 U 50/17), the Higher Regional Court (OLG) of Hamm ruled that German courts do not have international jurisdiction over a former employee’s lawsuit against a foreign parent company for the transfer of stock options, provided the stock option agreement is legally independent from the employment relationship with the German subsidiary. A contract is considered independent if its terms are not part of the employment contract and the granting entity is not the direct employer. Where German courts do have jurisdiction, such disputes fall under civil courts, not labor courts.
Whether this interpretation still holds in light of the BAG’s recent case law is uncertain. Under Article 8 (1) Sentence 2 of the Rome I Regulation (Regulation (EC) No. 593/2008), employees may not lose the protection of mandatory labor law provisions of their habitual place of work. If vested options are deemed compensation under German labor law, VESOPs granted by foreign group companies may also fall under German labor law protections, and German labor courts could have international jurisdiction.
Cross-Border Taxation of International VESOPs
Virtual options granted by foreign group entities almost always raise cross-border tax questions. Not only must both domestic and foreign tax laws and procedural rules be considered, but the interpretations of tax authorities in different jurisdictions may vary significantly. As such, thorough tax planning is essential. Questions of withholding tax and the applicability of double tax treaties (DTAs) should also be carefully evaluated in these cases.
Conclusion
The BAG’s ruling of March 19, 2025, strengthens employee rights: Vested virtual options are part of remuneration, and their complete forfeiture in the event of voluntary resignation is impermissible. Companies should carefully review and adapt their employee participation programs in light of this case law. Particular attention should also be given to participation programs granted by foreign group companies to assess whether the BAG’s new ruling applies to them as well.
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