5 March 2012

Employee not entitled to pro rata share of retention bonus

The Supreme Court has recently ruled that an employee, who terminated his position himself, was not entitled to a pro rata share of a retention bonus. Based on the very special circumstances of the case, the Court found that the retention bonus was not covered by section 17 a of the Salaried Employees Act.

Retention bonus was only a rewarding of the employee to stay with the company

The Court reached this somewhat unusual result based on what the majority of the Court found to be very special circumstances. The Court therefore took into account that the retention bonus was in fact only a rewarding of the employee to stay with the company until the end of 2008, while it was not to be considered remuneration of performance of work in the same way as salary. As such bonus could not be considered remuneration covered by section 17 a (1) of the Salaried Employees Act, the Court found in favour of the company.

Background

In 2004-2005, it was decided politically that four energy companies were to merge into the company E, which was to be responsible for the electricity and gas supply in Denmark. At the same time, it was decided that the functions of the control rooms - which in relation to 50 % of the country had so far been handled by a control room in Ballerup - were to be united with the result that the aggregate functions were to be handled from a control room in the Triangle Region (Trekantsområdet) from the summer of 2008.

To avoid that the employees of control room El Øst resigned from their positions prior to 30 June 2008 - which was decisive to the security of supply in Eastern Denmark - the company E and the employees entered into retention agreements stating that a retention bonus equivalent to 12 months' salary was to be paid in the following instalments: two months' salary on 30 June 2006, four months' salary on 30 June 2007, and six months' salary on 30 June 2008. According to the agreement, it was, however, an explicit condition for the payment of the bonus that the employee was a full-time employee until 30 June 2006, 30 June 2007 and 30 June 2008, respectively. Any employees terminated by the company ion the period would be entitled to a pro rata share of the bonus.

The case concerned an MSc engineer who had himself terminated hos position with El Øst for expiry at the end of February 2008, and who was of the opinion that he was entitled to a pro rata share of the bonus equivalent to 26/30 as he had worked with company E for 26 months out of the 30 months of the retention period.

The Court found that, based on the agreement, the employee could not expect to be entitled to a pro rata share of the bonus in case he terminated his position for expiry prior to the dates stated in the agreement. Whether the employee could claim the bonus therefore depended on whether such claim could be supported by section 17 a (1) of the Salaried Employees Act, see section 21 (1).

One Supreme Court judge found - as did the Maritime and Commercial Court in Copenhagen - that the remuneration which an employer pays to its employee in order for the employee to stay with the company for a more specific period - a so-called retention bonus - must be considered covered by section 17 a (1) of the Salaried Employees Act in those cases where the employee is "partly remunerated in the form of commission on profits, bonus or similar payments". The judge stated that in his opinion, the opposite result could not easily be consistent with the case law of the Supreme Court in relation to employers' granting of stock options and the like to employees as such grants - prior to the implementation of the exemption provision of section 17 a (2) of the Salaried Employees Act - were considered covered by section 17 a applicable at that time, also in those cases where the purpose of the grant was to retain the employee in the period until the stock option, etc. could be applied, see the recent Supreme Court ruling of UfR 2006, p. 2887 and UfR 2007, p. 2766. Finally, the judge found that the question as to whether retention bonus is covered by section 17 a (1) should be decided upon in general and not based on the circumstances of the employer, which circumstances had motivated the arrangement in the specific case.

Comments

The ruling is surprising, particularly taking into consideration the Court's very clear statements in cases concerning stock options granted before the coming into force of the Stock Option Act. The ruling is also contrary to the starting point of many advisers ever since the Eastern High Court awarded pro rata bonus to an IT employee, which he had been promised in 1998 if he was still employed with the company at the turn of the millennium when many people feared an IT breakdown, see UfR 2001.1178/2Ø. The Court's reference to the very special circumstances of the case sends the signal that if a bonus is called a retention bonus, it cannot be expected to be exempted from section 17 a of the Salaried Employees Act. But at the same time, the ruling leaves substantial uncertainty as to where to make future distinctions.

The content of this Newsletter is not, and should not replace, legal advice.

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