Danish Bonus Schemes: Pro-rated Payments on Termination

Transcription

1 Copenhagen December 2014 Danish Bonus Schemes: Pro-rated Payments on Termination By Mette Klingsten Introduction A bonus is typically a sum awarded to an employee in addition to their normal salary as a reward for good performance. Most bonus schemes will be subject to the employers wide discretion with maximum discretion being reserved as to the amount (if any) paid and the timing and conditions of payment. Many bonus schemes contain an express clause stating that employees will not be entitled to a bonus if they leave their employment part way through the bonus year. The question is, however, whether such bonus clauses are valid as a matter of Danish law? The answer to this question is almost invariably no - certainly if the bonus clause affects a salaried employee 1. The Danish labour market is characterised by the combination of a relatively high degree of social benefits and social protection on the one hand, and an employer s flexibility with regard to the straightforward and low cost dismissal of employees on the other hand (the Danish flexicurity model). However, whilst it may be relatively simple to hire and fire employees as a matter of Danish law, there is one employee friendly concept which often takes foreign employers by surprise: in Denmark employees are to a wide extent entitled to a pro-rated share of their bonus if they resign or are dismissed (for whatever reason) before the end of the bonus year. This is the case irrespective of a contractual clause to the contrary. The legislation governing an employee s rights to receive a bonus payment on the termination of their employment often comes as a surprise to foreign employers operating in 1 A specific concept under Danish law roughly describing an employee, as opposed to an autonomous director or a blue-collar worker. See further the description below under the heading The Legislative Protection. København Langelinie Allé København Ø Danmark Aarhus Værkmestergade Aarhus C Danmark Shanghai Suite 1818, 18/F No. 699 Nanjing West Road Jing an District, Shanghai, T F E [email protected] Advokatfirma CVR-nr

2 2/5 Denmark and the purpose of this article is to explain this peculiar piece of legislation and to identify the pitfalls which foreign employers often encounter. The Legislative Protection Section 17a of the Danish Salaried Employees Act contains a mandatory provision which employees and employers comprised by the Act are unable to contract out of. Section 17a provides all salaried employees who are partly remunerated in the form of a bonus, share of profits or similar payments with an entitlement to receive a pro rated share of their bonus (having regard to the length of service during the financial year) where their employment ends part way through the financial year. In order to qualify as a salaried employee, and thus be comprised by the Salaried Employees Act, the employee must work a minimum of 8 hours a week and be employed to do clerical work or trade (e.g. office workers such as secretaries, administrative staff, lawyers and IT staff or shop assistants), inventory processing, technical or clinical work (e.g. nurses, doctors and engineers), management etc. Blue collar workers are not protected by the provisons of the Act and the same applies to executives who are not subject to supervision (for example a CEO). Conversely, executive officers who report to and receive instructions directly from another high-ranking officer will fall within the scope of the Act and this will be the case even if they have other employees reporting directly to them 2. The vast majority of senior employees will therefore be protected by the mandatory provisons of section 17a. The amount of the pro rated bonus which a salaried employee is entitled to is calculated by reference to the bonus payment which he would have received if he had been employed with the company at the end of the financial year, or at the time when the payments are made. The purpose of section 17a is to protect employees who receive a certain amount of their regular wages based on their employer s turnover or profits, personal performance or even a more discretionary bonus. Section 17a seeks to ensure that employees receive the remuneration they would have been entitled to if they still were employed by the employer at the time of the pay-out. The aim behind the provision is to ensure that employees are able to confidently budget their outgoings and make financial provisions irrespective of their employment being terminated 3. 2 Judgement dated 1 March 2005 of the Danish High Court (Eastern Division). Cases No B , B and B Submitted report from the Committee About The Danish Act on Exercise of Options or Subscription Rights for Shares etc. in Employment Relationships, page 34, Published 14 September 2003 by The Danish Ministry of Employment.

3 3/5 Case Law and Limitations to the Operation of Section 17a One thing which is often overlooked is that section 17a only applies (i.e. entitles the employee to a pro rata payment) if the bonus can be regarded as an anticipated regular part of the employees wages. This is interpreted strictly by the Danish Courts and the case law set out below describes the factors which the Courts will take into consideration when determining whether an employee is entitled to a pro rated amount of their bonus. The Courts will not attach any importance to what the bonus scheme seeks to promote. A case from 2008 illustrates this 4 : In this case the employer offered its employees an attendance bonus to discourage absenteeism and award employees who did not take any sick leave. Under the terms of the scheme a bonus was awarded to any emploees who did not have any sick days in the relevant calendar year. On the fourth year of the scheme an employee resigned part-way through the calendar year. The Danish High Court ruled that the employee was entitled to receive a pro rated share of the attendance bonus. The question often arises as to whether Section 17a applies to retention bonuses. Employers going through a tumultuous time perhaps fearing that key personnel will be poached by competitors often offer their senior employees a retention bonus so as to encourage them to remain in employment up until a certain date. Due to section 17a such retention bonus schemes are notoriously difficult to uphold and employers are often ordered to make pro rata payments to departing employees, even if they leave their employment early in breach of the retention bonus scheme. This is illustrated by a case from 2001 heard by the Danish High Court (Eastern Division) 5. In this case an employee entered into an agreement with his employer whereby he was awarded a bonus if he remained in employment at the end of a 3 year period. During the first year of the operation of the bonus scheme the Employee handed in his notice of termination, but the Danish High Court still granted him a pro rata share of the retention bonus 6. In very rare cases retention bonuses may, however, be upheld if the Courts are convinced that the bonus cannot be regarded as an anticipated regular part of the employee s wages. The bonus scheme must therefore make it very clear to the employee that the retention bonus is, in fact, a reward and a payment made solely as a consequence of remaning employed by the employer: It is not just the wording of the scheme which the Courts will have regard to, however. It is also the specific circumstances which the employer encoun- 4 Judgement dated 17 January 2008 of the Danish High Court (Eastern Division). Case No B Judgement dated 17 February 2001 of the Danish Supreme Court. Case No. B This methodology was also followed in the 2009 judgement of the Danish High Court (Eastern Division) (Case No B ) and the judgement of the Maritime and Commercial Court dated 28 August 2009 (Case No F 10-08). In both cases the employees were granted a pro rata share of their respective retention bonuses

4 4/5 tered when the agreement was entered into. This is illustrated by the following 2012 Danish Supreme Court case 7 where a retention bonus was introduced as a result of the long induction process required to train new employees to perform the work carried out by the departing employee. In this case the Supreme Court held (on the specific facts) that the employer s retention bonus could not be regarded as an anticipated regular part of the employee s wages and that section 17a did not, therefore, apply, meaning that the employee was not entitled to a pro rated bonus on his termination of employment. The retention bonus had been offered to an employee who undertook specialised technical duties which were nigh on impossible for any other (untrained) employees to do. Indeed, the induction process enabling untrained employees to carry out the duties was very lengthy. It was therefore imperative for the employer to ensure that it had sufficient manpower in place to carry out the work and it was for this reason the employee had been offered a retention bonus. These circumstances were known to the employee when he agreed to the bonus scheme. In reaching its decision that section 17a did not apply the Supreme Court had regard to the fact that the bonus was not dependent on how the employee carried out his work, but rather was dependant on him remaining employed during a particularly important period for the employer during which stability was imperative. Perhaps most importantly this case shows that clear wording of a bonus scheme will not be sufficient. The circumstances which applied at the time the retention bonus was entered into will also be crucial. The operation of section 17a is subject to a further exception. The general rule (giving employees a right to a pro rated share of a bonus) does not apply to options to purchase or subscribe for shares etc. at a later point in time which are comprised by the Danish Act on Exercise of Options or Subscription Rights for Shares etc. in Employment Relationships 8. Ordinary good leaver and bad leaver provisions are therefore allowed though options or subscription rights which have already been exercised will not be affected. In order for employers to operate within the provisions of the Salaried Employees Act it is recommended that they fix financial and other measurable goals so as to ensure that the financial and actual situation of the employing company allow for a payout of a bonus even if the employee has resigned. It is important that the bonus scheme is designed so that it can be amended each year with respect to the then applicable financial circumstances and the employee s personal targets. The scheme should preferably be drafted in such a way that the employee is not over-compensated if he or she is released from their duty to work during their notice period (garden leave). This is because employees are entitled to their normal bonus payments even during garden leave periods. 7 In case no. 243/ The Salaried Employees Act, section 17A

5 5/5 Time of Payout Whilst section 17a protects a departing salaried employee and affords him a right to a pro rated share of an otherwise accrued bonus, it does not afford employees with preferential treatment as regards the timing of payment. An employee is therefore not entitled to receive his pro rata share of a bonus before the end of the company s financial year. This means that if an employee who would otherwise be entitled to a $100,000 bonus at the end of the financial year (31 December 2014) resigns with his last day of employment being on 31 June 2014, he will be due a pro-rated payment of $50,000 (taking him up until his effective day of termination). This bonus payment will not, however, be payable on the employee s last day of employment but rather at the end of the financial year. In this example, the bonus payment would not fall due until 31 December Conclusion In conclusion, by understanding the peculiar rules governing the payment of bonuses on the termination of an employee s employment, foreign companies operating in Denmark are less likely to fall foul of Danish mandatory employment legislation. As has been illustrated by this article foreign employers should not assume that a discretionary bonus clause however widely drafted will restrict an employee s right to a bonus payment on the termination of employment. When drafting bonus schemes which are intended to operate in Denmark regard should therefore always be had to the operation of section 17a: otherwise an employer may find himself defending a myriad of claims in the Danish Courts for the non payment of a bonus.