Judgment regarding bonus programme with a retention element in relation to the Danish Salaried Employees Act section 17a

01 June 2016

Soeren Narv Pedersen, Mia Boesen

On 27 May 2016, the Danish Maritime and Commercial Court passed a judgment regarding questions on whether a bonus programme with a retention element was a payment covered by the rules in the Danish Salaried Employees Act section 17a and whether the accrual principle in the programme was in conflict with section 17a.

Background

The employee A was hired as a General Manager Europe in the company B with effect from 1 October 2010. As of 1 January 2013, A became part of a 3-year bonus programme to end on 31 December 2015. According to the programme, the bonus would be paid out in January 2016 if the employee fulfilled criteria set out in the programme. The bonus programme was introduced as part of an integration process as a result of B being purchased by an American concern. This acquisition entailed that a lot of changes were taking place in B for which reason the management was seeking to hold on to a number of key employees. In other words, the bonus programme had a strong element of retention in it.

Inter alia, it appeared from the bonus programme that the employee's entitlement to bonus was dependent on three criteria:

  1. the size of the bonus pool;
  2. the seniority and;
  3. the performance.

From A's bonus programme it appeared that the bonus pool totalled 1.2 million DKK and was based on a point system according to which A each month accrued a certain number of points. The number of points increased during the period so that for the first month (January 2013), the number of total points was 100 and for the last month (December 2015), the number of total points was 250. For the entire period, the number of points was 5.990.

On 30 August 2014, A gave notice of termination of his employment, the resignation to be effective on 31 October 2014. He was paid DKK 662.604,35 in bonus based on the point system. However, A claimed that he was entitled to DKK 733.333,33 plus holiday allowance as he claimed that the calculation should be made proportionally based on the period during which he was employed in B, i.e. based on  22 months out of 36 months of the bonus period.

On this basis, A raised a claim of DKK 162.395,65 which was the difference between calculation of the bonus based on the point system and the calculation based on a forthright proportional accrual arrangement. 


The case

The Danish Maritime and Commercial Court was to answer to main questions:

  1. Should A's right to bonus in accordance with the parties bonus agreement be considered as pay in accordance with the Danish Salaried Employees Act section 17a (1)?
  2. If so, the court should decide whether the accrual arrangement that was based on a progressive point system, cf. above, and not a forthright proportional accrual arrangement was in accordance with the wording of the Danish Salaried Employees Act section 17 a(1): "… having regard to the length of his service during the financial year of the payment…"?

As support for his claim, A argued that only payments which expressly by law are excepted from the specific act's scope or are of another character in terms of law of obligations e.g.  loans, gifts or lease payments are excepted from the employment law payment term. Further, A argued that bonus payments as the absolute main rule are covered by the employment law payment term, including the payment term which is acknowledged by the courts in relation to the scope of the Danish Salaried Employees Act in e.g. section 2 a and 17 a (1) of the act.

In relation to the accrual principle (question 2), A claimed that progressive arrangements will undermine the purpose of protection in the Danish Salaried Employees Act, section 17 a (1), if these are not included as the principle of the right to a proportional payment in this way can be circumvented by shifting the payment in the bonus programme to the programme's last phase.

In judgment no. U2012.1315H, the Supreme Court passed a judgment regarding a bonus programme with a retention element. The bonus was paid with the purpose of retaining the employees who were able to secure that an energy company's control room was manned with the employees who had experience with this specific kind of work until the shutdown of the company. Thus, in the judgment the employees' work place was to be shut down for which reason these employees undoubtedly had a reason to search for other jobs and the company had a particular need to retain the employees until the company was closed down. The Supreme Court stated that on this basis and under these very special circumstances, the bonus programme was not covered by the Danish Salaried Employees Act section 17 a.

A claimed that progressive bonus arrangements may have the consequence that payments covered by the Danish Salaried Employees Act section 17 a (1) can be changed to de facto bonus programmes with retention elements in which way the exception in U2012.1315H becomes the main rule.

B, on the other hand, invoked the judgment U2012.1315H and pleaded that Danish law entails a possibility to give a salaried employee a bonus programme with a retention element as an incentive to stay with the employer for a certain period if this is reasoned in the consideration of a successful completion of e.g. a restructuring of the employer. Thus, B pleaded that also the bonus programme in question was a bonus programme which was extraordinary and specifically reasoned in the extensive integration process which B went through in relation to the sale to the American group.


Judgment from the Danish Maritime and Commercial Court

The Danish Maritime and Commercial Court found that payments that an employer pays to his employees to keep such employees in their positions for a certain period, i.e. a bonus programme with a retention element, are covered by the Danish Salaried Employees Act section 17 a (1).

The Danish Maritime and Commercial Court noted that it did not find that the very narrow exception in U2012.1315H for a deviation from the main rule in section 17 a (1) could be considered as fulfilled with the bonus programme in question. Thereby, the Danish Maritime and Commercial Court emphasised the existence of a performance evaluation according to the agreement and furthermore that the size of the bonus was dependent on the size of the bonus pool and the employee's seniority.

In relation to the accrual principle of the bonus programme, the Danish Maritime and Commercial Court found that A was entitled to a proportional payment for the financial year in which he resigned. Thus, the progressive accrual principle was not in compliance with the Danish Salaried Employees Act section 17 a (1) which cannot be deviated from to the detriment of A, cf. the Danish Salaried Employees Act section 21.


Bird & Bird's comments

The Danish Maritime and Commercial Court confirms with this judgment that bonus programmes as a predominant main rule – also if it is a bonus programme with a retention element – will be covered by the Danish Salaried Employees Act section 17 a (1) and that the exception to this main rule in judgment no. U2012.1315H may be considered as a very narrow exemption.

Furthermore, the judgment states that the proportional principle in the Danish Salaried Employees Act section 17 a (1), cannot be deviated from, cf. the Danish Salaried Employees Act section 21, for which reason a salaried employee is entitled to a proportional bonus payment in proportion to his/her seniority and not in accordance with other progressive accrual principles.

Authors

Mia Boesen

Junior Associate
Denmark

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