Germany - (Some) good news for leaver provisions

Tapestry Newsletters

14 January 2021

Most plans contain “good leaver” and “bad leaver” provisions. Globally, good leavers are generally allowed to keep their awards, whereas bad leavers lose their awards.

For many years it has been well known that German labour law is very employee friendly. There has always been a risk that companies could not rely on their bad leaver termination provisions in Germany. However, a recent case means that bad leaver termination provisions are now more likely to be enforceable. The case was decided by the Berlin-Brandenburg Regional Labour Court.

Key facts

The key facts were:

  • The incentive plan had been approved by the local German works council.
  • The incentive plan had a cut-off date – so that if an individual left before that date they lost their awards. This was a classic bad leaver provision.
  • The individual terminated their employment before the cut-off date set out in the plan rules.
  • The Court upheld the bad leaver provision.

Reasoning

In the Court's view, the cut-off date clause was legally valid and enforceable for two reasons:

  • Because it was not only related to the plaintiff's performance - but also to their loyalty. The plan was designed to increase retention. The Court made clear that if the payment had depended solely on performance they would not have upheld the provision; and
  • The plan had been approved by the works council. A previous decision in 2013 went the other way – but in that case the contract was an individual contract and was not agreed by the works council.

Tapestry Comment
This case is good news. It does not mean that bad leaver provisions will now always be enforced in Germany - but it does mean that those provisions are more likely to be enforced if:

  • The award is clearly to record loyalty as well as performance; and
  • If the plan is approved by the works council.

We understand that works council approval can be time consuming to obtain. However, if you have a significant German employee population, it may be worth the effort of getting works council approval to improve enforceability.
 
If you would like to discuss this update, or anything else, please do contact us. 

Sally Blanchflower and Sharon Thwaites

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