HR Legal

Employee entitled to retention bonus despite resignation

22 January 2018

The Supreme Court has established that a company was obliged to pay a prorated part of a retention bonus to one of its senior employees who resigned before the expiration of the three-year bonus period, because the bonus plan was subject to the Salaried Employees Act’s rules on proration of bonus in the event of termination. The court also established that the bonus was to be settled proportionally regardless of the special criteria of the bonus plan.

In connection with an acquisition of a laboratory company, the company entered into a bonus agreement with its marketing manager. According to the company, the bonus plan was extraordinary and the purpose was to retain the employee in his position after the transfer of the business. However, this specific purpose was not mentioned in the agreement.

The bonus was to be paid at the end of the three-year term, provided that the conditions for bonus were achieved. The plan was based on a system, where the employee each month could accrue a number of points, determined by three criteria: The size of the bonus pool, the length of employment and the employee’s performance. The accruement of bonus points gradually increased during the bonus period, entailing that the employee accrued more bonus in year three than in year one and two.

Nearly two years after the bonus plan was agreed, the marketing manager resigned and the company paid out a part of the total bonus amount, which was calculated based on the point system. The marketing manager claimed that the point system should be set aside and that he was entitled to a proportionate share of the total bonus for all three years. He therefore demanded that the difference between the two amounts should be paid.

Hereafter, one of the issues in the case was whether the bonus even constituted a part of the salary which should be prorated according to the Salaried Employees Act. Additionally, the Supreme Court had to decide whether the calculation of the prorated bonus could be based on the criteria of the bonus plan or if the calculation should rather be proportional based on the total bonus period.

The Supreme Court: The situation was not extraordinary

In another verdict from 2012, the Supreme Court found that a company had had such weighty reasons for entering into an agreement about retention bonus with a number of key employees that their bonus plan did not fall within the scope of the special rule on proportionate payment in the Salaried Employees Act. This judgment introduced a very narrow possibility to enter into agreements on retention bonuses.

The circumstances in the case at hand did not have the same extraordinary character as in the verdict from 2012. The Supreme Court took into account that the marketing manager was being made redundant with a need for him to attend to his position during the entire bonus period. Furthermore, the bonus plan had been offered to other employees and its conditions had not been discussed in further detail with the marketing manager. Since, according to the Supreme Court, the retention purpose could have been achieved by offering a bonus without deferred payment and since the criteria of the bonus plan partially depended on his performance, the bonus plan fell within the scope of the Salaried Employees Act.

A proportional part of the total bonus

During the proceedings, the laboratory company claimed that if the bonus plan was subject to the Salaried Employees Act, it had to be comparable to a temporary salary increase without deferred payment. In that case, the bonus should be calculated after the special bonus point system in which case the bonus only gradually increased.

However, the Supreme Court established that the marketing manager was entitled to a proportional share of the total bonus to be calculated as if he had remained in the company until the expiration of the bonus period. Hence, the Supreme Court affirmed the judgment of the Maritime and Commercial Court.

IUNO’s opinion

With this Supreme Court judgment it has been established anew that companies only have a very narrow access to enter into agreements on retention bonuses with its employees, which are not subject to the Danish Salaried Employees Act. The judgment is based on the specific circumstances of the case and it is therefore not clarified whether other situations than a business closing will be accepted as an extraordinary situation which qualifies for a retention bonus.

The judgment also shows that bonus agreements with special accruement criteria will not be enforceable in a termination situation. Even if the employee is not with the company for the entire bonus term, the employee will be entitled to a prorated part of the total bonus amount.

Companies with a need to retain its key employees should consider alternatives to retention bonuses in Denmark.

In connection with an acquisition of a laboratory company, the company entered into a bonus agreement with its marketing manager. According to the company, the bonus plan was extraordinary and the purpose was to retain the employee in his position after the transfer of the business. However, this specific purpose was not mentioned in the agreement.

The bonus was to be paid at the end of the three-year term, provided that the conditions for bonus were achieved. The plan was based on a system, where the employee each month could accrue a number of points, determined by three criteria: The size of the bonus pool, the length of employment and the employee’s performance. The accruement of bonus points gradually increased during the bonus period, entailing that the employee accrued more bonus in year three than in year one and two.

Nearly two years after the bonus plan was agreed, the marketing manager resigned and the company paid out a part of the total bonus amount, which was calculated based on the point system. The marketing manager claimed that the point system should be set aside and that he was entitled to a proportionate share of the total bonus for all three years. He therefore demanded that the difference between the two amounts should be paid.

Hereafter, one of the issues in the case was whether the bonus even constituted a part of the salary which should be prorated according to the Salaried Employees Act. Additionally, the Supreme Court had to decide whether the calculation of the prorated bonus could be based on the criteria of the bonus plan or if the calculation should rather be proportional based on the total bonus period.

The Supreme Court: The situation was not extraordinary

In another verdict from 2012, the Supreme Court found that a company had had such weighty reasons for entering into an agreement about retention bonus with a number of key employees that their bonus plan did not fall within the scope of the special rule on proportionate payment in the Salaried Employees Act. This judgment introduced a very narrow possibility to enter into agreements on retention bonuses.

The circumstances in the case at hand did not have the same extraordinary character as in the verdict from 2012. The Supreme Court took into account that the marketing manager was being made redundant with a need for him to attend to his position during the entire bonus period. Furthermore, the bonus plan had been offered to other employees and its conditions had not been discussed in further detail with the marketing manager. Since, according to the Supreme Court, the retention purpose could have been achieved by offering a bonus without deferred payment and since the criteria of the bonus plan partially depended on his performance, the bonus plan fell within the scope of the Salaried Employees Act.

A proportional part of the total bonus

During the proceedings, the laboratory company claimed that if the bonus plan was subject to the Salaried Employees Act, it had to be comparable to a temporary salary increase without deferred payment. In that case, the bonus should be calculated after the special bonus point system in which case the bonus only gradually increased.

However, the Supreme Court established that the marketing manager was entitled to a proportional share of the total bonus to be calculated as if he had remained in the company until the expiration of the bonus period. Hence, the Supreme Court affirmed the judgment of the Maritime and Commercial Court.

IUNO’s opinion

With this Supreme Court judgment it has been established anew that companies only have a very narrow access to enter into agreements on retention bonuses with its employees, which are not subject to the Danish Salaried Employees Act. The judgment is based on the specific circumstances of the case and it is therefore not clarified whether other situations than a business closing will be accepted as an extraordinary situation which qualifies for a retention bonus.

The judgment also shows that bonus agreements with special accruement criteria will not be enforceable in a termination situation. Even if the employee is not with the company for the entire bonus term, the employee will be entitled to a prorated part of the total bonus amount.

Companies with a need to retain its key employees should consider alternatives to retention bonuses in Denmark.

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Anders

Etgen Reitz

Partner

Søren

Hessellund Klausen

Partner

Kathrine

Skøtt Jespersen

Senior associate

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