FAQ - German employment law for executives

1. What do I have to check before signing a German employment contract?

2. Post contractual non-compete

3. My employment contract contains a cut-off period / forfeiture clause. What does this mean?

4. I want to resign. What do I have to do?

5. I have received a termination letter. What can I do?

6. Under which conditions is a termination valid?

7. Do I get a severance payment in case of a termination?

8. My employer offered me a termination agreement. Should I accept?

9. My employment contract terminates during the year. What happens with my bonus?

10. What happens with (virtual) stock options when my employment contract ends?

1. What do I have to check before signing a German employment contract?

The employment contract must contain the general terms and working conditions A full-time job is usually 40 hours per week. The statutory minimum vacation entitlement is 20 days per calendar year in a 5-day-week. For executive employees, however, 25-30 days per calendar year are common. Executive employees are often entitled to a variable remuneration component. It should be check what the conditions for the payment are. Overtime payment is usually excluded for executive employees with an above-average remuneration. A probationary period of up to six months is possible and common. During this period the employment relationship can be terminated by both parties with a notice period of minimum two weeks. For the notice period after the end of the probationary period employment contracts often refer to the statutory notice periods which get longer the longer the employment relationship lasts, starting with four weeks to the 15^th or the end of a calendar month. For executive employees usually longer notice periods are agreed on, e.g. three months to the end of a calendar month. For executive employees it is important to check whether there is a title defined in the contract and also a reporting line. You should also check whether there is a post-contractual non-compete provision (for details see no. 2)

We can check your employment contract at a fixed fee.

2. Post contractual non-compete

a) Under which conditions is a post-contractual non-compete provision valid?

A post-contractual non-compete provision prevents you from working for a competitor for a certain period of time after the termination of your employment contract. But it is only valid if the following is observed:

The post-contractual non-compete provision has to be in writing and has to be handed over to you. The maximum duration is two years from the termination date. During this period of time the employer has to pay a compensation to you in the amount of at least half of your previously earned remuneration (however, any other income during this period or income which you maliciously failed to earn will be counted against this compensation). In terms of content, the prohibition must correspond to the legitimate interest of the employer. This might not be the case if the competitor is operating in another country or if you will work in a completely different business area of the competitor.

If you are unsure whether your post-contractual non-compete provision is valid, contact us.

b) What happens if one of the above conditions is not fulfilled?

If a post-contractual non-compete provision does not comply with the above mentioned conditions it can either be void (to be treated as non-existing) or non-binding (employee can chose whether he/she wants to comply with the non-compete and get the compensation payment or whether he/she wants to work for a competitor).

The post-contractual non-compete provision is void if

• Not in written form
• No compensation payment is agreed

The post-contractual non-compete provision is non-binding if

• The agreed compensation payment is to low
• The duration is longer than two years
• It is not in the legitimate interest of the employer.

c) What are the consequences if I violate the post-contractual non-compete provision?

If you violate a valid post-contractual non-compete provision you will not receive the compensation payment. You will have to pay a contractual penalty as agreed. And the most relevant consequence is that your former employer can apply for an injunction to stop the competition. You would then have to terminate your competing employment contract.

Let us help you check before you start a new employment relationship.

3. My employment contract contains a cut-off period / forfeiture clause. What does this mean?

Cut-off periods / forfeiture clauses (in German: Ausschlussfristen / Verfallklausel) are common in German employment contracts. The background is that the parties should have clarity on claims arising from the employment as soon as possible. Therefore, such clause state that any claims arising from the employment must be asserted in text form within a certain period (usually three months) after becoming due. If the clause requires you to assert the claims in writing it is invalid (unless it is a very old contract). In a second step you are usually required to file a claim at the labour court within a specific time frame (usually another three months). If you miss these deadlines, your claims will forfeit. However, such cut-off period / forfeiture clause is only valid if it explicitly states that the clause is not applicable to claims arising from liability for intentional breaches of duty, for damages arising from injury to life, body or health and for claims to minimum wages in accordance with MiLoG.

If you have a claim, don’t wait to long! Let us check and react in time.

4. I want to resign. What do I have to do?

A termination or resignation is only valid if it is in writing. This means wet ink signature. A scan, copy or email is not sufficient. If you are resigning, you have to consider your notice period according to the employment contract. The resignation letter should refer to a termination at the next possible date. During the notice period you are in general obliged to work, unless you employer is releasing you from the duty to work. Please note that in case you do not have a new job right now and want to apply for unemployment benefits there can be a blocking period in case of a resignation.

Don’t forget to check whether a post-contractual non-compete provision applies! (for details see no. 2)

5. I have received a termination letter. What can I do?

If you do not agree with the termination, you have to file a claim against it at the labour court within three weeks after the receipt of the letter. If you miss this deadline, your termination will be deemed to be valid.

Please contact us ASAP, so that we can check your chances at court.

6. Under which conditions is a termination valid?

A termination is only valid if it is in written form, i.e. wet ink signature. A scan, copy or email is not sufficient.

If your employer employs more than 10 employees and your employment existed longer than 6 months, a termination is only valid if there is a justifying reason for it. This is the case if there is a reason in your behaviour (e.g. violation of duties), in your person (e.g. sickness) or if there are operational reasons. Please note that the termination letter usually does not mention the reason for the termination.

Please contact us ASAP, so that we can check your chances at court.

7. Do I get a severance payment in case of a termination?

There is no legal entitlement to a severance payment in case of a termination. But if you go to court, most claims are settled with a severance payment. The amount of the payment depends on the chances to win the case (i.e. risks for the employer that the termination is invalid). A realistic severance payment is between 0.5 and 1 monthly salary for each year of employment. In case of obviously invalid terminations, it can also be higher.

Please contact us, so that we can start negotiating with your employer.

8. My employer offered me a termination agreement. Should I accept?

A termination agreement terminates the employment relationship in a mutual way. Often severance payments are included. A termination agreement typically also states that apart from the claims mentioned in the termination agreement there are no further mutual financial claims between the parties arising from the employment relationship. Therefore, you have to carefully check whether everything is included (e.g. vacation, bonus, stock options etc.).

We can check your termination agreement and renegotiate if necessary.

9. My employment contract terminates during the year. What happens with my bonus?

A bonus which is paid not only to honour your loyalty but also your working performance (which is the case for most bonuses), has to be paid on a pro-rated basis if the employment relationship ends during the bonus year. Some employment contracts contain different provisions which are mostly invalid and only have deterred effect for employees.

Don’t be afraid of employment contract provisions which state that you lose your bonus. Have it checked by us. There is a good chance to get a pro-rated bonus.

10. What happens with (virtual) stock options when my employment contract ends?

Other than bonuses (see above No. 9) (virtual) stock options can forfeit when the employment relationship ends. Stock option programs usually differentiate between good leaver and bad leaver. Most of the times the stock option program is provided by a foreign parent company and is governed by a foreign law. But even if German law applies, the Federal Labour Court decided that due to the highly speculative character of stock options, a forfeiture can be possible.

(Virtual) stock options can be part of the negotiations about a settlement. Therefore, it makes sense to have a closer look at it.