Most bonus schemes contain specific wording to the effect that employees will not be entitled to a bonus if they leave their employment part way through the bonus year. As a matter of Danish law, however, such bonus clauses are almost invariably invalid – certainly if the bonus clause affects a ‘salaried employee’ (a specific concept under Danish law – roughly describing an employee, as opposed to an autonomous director or a blue-collar worker).
Danish legislation protecting an employee’s rights to a bonus payment on the termination of employment often comes as a surprise to foreign employers operating in Denmark and the purpose of this article is to summarise the pitfalls of Danish bonus legislaton.
The Pro Rata Principle
Section 17 a of the Danish Salaried Employees Act (funktionærloven) contains a mandatory provision which provides all salaried employees who are partly remunerated in the form of a bonus, share of profits or similar payments with a right to receive a pro rated share of their bonus (having regard to their length of service during the bonus year) in circumstances where their employment terminates before the end of the bonus year.
In order to qualify as a salaried employee the employee must work a minimum of 8 hours a week and be employed to do trade or clerical work (for instance office workers such as lawyers, IT staff, secretaries, administrative staff or shop assistants), inventory processing, technical or clinical work (such as doctors, nurses and engineers), management etc. Blue collar workers and executives who are not subject to supervision (for instance a CEO) are not protected by the provisons of the Act, but executive officers who report to and receive instructions directly from another high-ranking officer will fall within the scope of the Act – even if they have other employees reporting directly to them (Cases No B-542-04, B-547-04 and B-0522-04). The vast majority of senior employees will therefore be protected by the mandatory provisons of section 17 a.
The pro rated bonus payment is calculated by reference to the amount which the employee would have received by way of bonus had he been employed by the company at the end of the bonus year, or at the time when the payments are made.
Limitations to the Pro Rata Principle
Section 17 a only entitles an 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.
The courts will almost invariably disregard any arguments as to what the bonus scheme seeks to promote: For example, in a case from 2008 the employer offered its employees an “attendance bonus” to discourage absenteeism and reward employees who did not take any sick leave. Under the terms of the scheme a bonus was awarded to any employee 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 still entitled to receive a pro rated share of the attendance bonus.
Retention bonus schemes are similarly difficult to uphold due to section 17 a and employers are often ordered to make pro rata payments to departing employees, even if they leave their employment early in breach of the terms of the retention bonus scheme. In a case from 2001 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, but the Danish High Court still granted him a pro rata share of the retention bonus.
Retention bonuses may, however, be upheld in very rare cases 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 purely as a consequence of remaining employed by the employer: However, it is not just the wording of the scheme which the Courts will have regard to: the specific circumstances encountered by the employer when the agreement was entered into will also be considered by the Courts.
In a case from 2012 a retention bonus had been offered to an employee who undertook specialised technical duties which were almost impossible for any other untrained employee to do. The induction process enabling untrained employees to carry out the employee’s duties was very lengthy. It was therefore imperative for the employer to ensure that it had sufficient manpower in place for the work to be carried out and the employee had been offered a retention bonus for this very reason. These circumstances were known to the employee when he agreed to the bonus scheme. On these specific facts the Danish Supreme Court held that the employer’s retention bonus could not be regarded as an “anticipated regular part of the employee’s wages” and that section 17 a did not, therefore, apply. This meant that the employee was not entitled to a pro rated bonus on his termination of employment. In reaching its decision the Supreme Court considered the fact that the bonus was not dependent on how the employee carried out his work, but rather was dependent on him remaining employed during a particularly important period for the employer during which stability was of the utmost importance. Perhaps most importantly this case shows that clear wording of a bonus scheme will not be sufficient. The circumstances which applied at the time when the retention bonus was entered into will also be crucial.
The operation of section 17 a is subject to one 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 at a later point in time.
Timing of Payment
Whilst section 17 a protects a departing salaried employee and gives 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 the bonus payment. An employee is therefore not entitled to receive his pro rated share of a bonus before the end of the company’s bonus year
Foreign employers operating in Denmark should not assume that a discretionary bonus clause – however widely drafted – will enable them to withhold payments of bonuses if an employee has left their employment, or is serving notice, at the time the bonus becomes payable. Specific advice should always be obtained on the operation of section 17 a: otherwise an employer may find itself defending a plethora of claims in the Danish Courts for the non payment of a bonus.
Partner Mette Klingsten specialises in labour and employment law at the Danish law firm Bech-Bruun