The Executive Remuneration Review, 10th Edition

Employment law

i Severance termsFair reasons for dismissal

Executives who are exempted from the legislation are not protected against unfair dismissal. They would instead usually have agreed to longer notice periods and maybe even certain severance benefits enhanced compared with those following from the legislation.

Executives subject to the Salaried Employees Act are protected against unfair dismissal after 12 consecutive months of employment, and it is often seen that executives by virtue of agreement apply the Salaried Employees Act to their terms of employment. This agreement will not automatically imply that the remainder of the legislation applies. An employee is treated as dismissed if the employer gives notice of termination or invokes misconduct by the employee as reason for considering the employment relationship as terminated. No third-party consent is required.

In cases of gross misconduct (e.g., theft or acts of disloyalty), the employer may summarily dismiss the executive. Otherwise, the fairness of a termination with notice depends on the materiality of the misconduct of the employee. In many cases, a prior written warning is required to ensure a fair termination procedure, but at executive level warnings are not used.

The entitlement to dismiss for business-related reasons is very broad (e.g., in cases of lack of work or restructurings, it is essentially a management assessment of how many employees and whom to dismiss). An executive is typically employed at will, but as mentioned with enhanced notices.

Notice period

Unless no notice period applies – which is typically due to short seniority or special regulation in individual employment contracts – employees are entitled to be provided with a notice of termination.

The notice period would follow from:

  1. the Salaried Employees Act;
  2. a collective bargaining agreement; or
  3. the individual employment contract.

For executives, the notice will typically be agreed in the contract. Depending on seniority, the Salaried Employees Act provides that notices can be given by a company with up to six months to the end of a month. An executive subject to the Salaried Employees Act may terminate the employment with one month's notice to the end of a month, regardless of seniority. It may, however, be agreed in writing that a longer notice must apply, provided the notice to be given by the company is extended correspondingly. Such prolongation is commonly agreed for senior executives.

The Salaried Employees Act also provides for statutory severance pay. A salaried employee who has been employed for 12 and 17 years respectively is entitled to severance pay corresponding to one- or three-months' salary when the employment is terminated by the company.

A salaried employee who is dismissed without reasonable cause, and who has been employed for at least one year at the time of dismissal, is entitled to compensation for unfair dismissal.

Provided the executive has reached the age of 30, the maximum compensation equals three months' salary. The maximum compensation is increased to four- and six-months' salary after 10 and 15 years' seniority, respectively. Maximum compensation is rarely awarded but is within the range of two-thirds of the maximum level.

Collective bargaining agreements rarely apply to executives.

For executive management not subject to the legislation, both the length of the notice periods and the right to severance pay (if any) are based solely on agreement. Usually, it will also read from the contract if the executive is entitled to garden leave during the entire or part of the notice period.

ii Right to bonus in connection with termination of employment

Under Danish employment law, variable remuneration is generally governed by two separate sets of rules: Section 17a of the Salaried Employees Act and the Stock Options Act. Neither of these sets of rules applies to executive management being exempted from the legislation. Section 17a of the Salaried Employees Act applies to cash bonus schemes and similar benefits (such as a discounted share price, phantom shares and shares granted free of charge) and provides that executives are entitled to pro rata bonuses for the qualifying bonus period in which termination is effective – that is, subject to the Salaried Employees Act, payment of bonuses and the like cannot be contingent on continuous employment at the date of payment, but are always contingent on the criteria for the bonus otherwise being met.

The Supreme Court has with only one very special deviation confirmed that the pro rata principle applies also to stay-on bonuses.

When calculating the length of employment, the entire notice period (including periods of garden leave) is included. The right to a pro rata bonus applies irrespective of whether the employment is terminated by the company or the executive and irrespective of whether the termination is considered fair. Even in cases of gross violation, the pro rata principle applies.

In some executive contracts for executives not subject to the legislation, it is not unusual that there is an entitlement to a bonus if the executive is terminated by the company, whereas if the executive terminates the employment, the bonus entitlement lapses.

The Stock Option Act applies to stock option schemes in which the time of the grant and the time of exercise are not identical. The Act presupposes that the exercise of an option results in ownership of an actual share meaning that, for example, phantom shares are not governed by the Act.

The Stock Options Act no longer includes a statutory distinction between good leavers and bad leavers. The former rules entailed that executives who terminated their employment or whose employment was terminated due to misconduct would forfeit outstanding options at the end of employment.

Executives whose employment was terminated by an employer or who would terminate the employment due to breach by the employer would have a mandatory right to retain their outstanding options and to exercise them on the terms under which they were originally granted.

The new rules that apply for programmes established after 1 January 2019 no longer distinguish between good and bad leavers. There is now a hypothetical3 increased freedom of contract in relation to leaver rules and enforcement of buy-back clauses.

The amended Stock Option Act now has a prohibition on agreements that entitles the employer to buy back shares acquired pursuant to the exercise of options under the Act at a price lower than market price.

iii Restrictive covenants

The Danish legal regulation of restrictive covenants not only comprises white-collar workers, but all kinds of employees save for executives with a few exceptions.

During a business sale, and when hiring temporary workers through a temporary employment agency, no-hire clauses are recognised; however, on a more general basis, no-hire clauses have been prohibited since 1 January 2016. No-hire clauses (entered prior to 1 January 2016) were enforceable until 1 January 2021 and are also now invalid.

Covenants are enforced through injunction, liquidated damages (if agreed to) and payment of damages for any financial loss suffered.

Non-competition and non-solicitation of customer covenants can typically be enforced after the cessation of employment, but may also apply during the ordinary course of employment, where violation of this clause will also typically constitute a material breach of the employment relationship.

The length of the covenant depends on what has been agreed, but for non-competition or non-solicitation of customer clauses, the maximum duration which can be agreed by the parties is 12 months after the effective date of termination. For combined covenants, the maximum duration is six months after the effective date of termination.

Non-competition clauses become null and void if the employment relationship is terminated unfairly or because of reasons attributable to the employer, including gross violation of contract on behalf of the employer.

As a peculiarity, other personal non-competition restrictions agreed outside of employment relationships, for example, in a shareholder agreement or in a managing director contract, will under the same circumstances become null and void.

The employer must pay the employee compensation in the period after cessation of employment during which the covenant applies.

For covenants with a duration of up to six months, the monthly compensation payable amounts to 40 per cent of the employee's monthly salary level immediately prior to resignation.

For covenants with a duration of up to 12 months, the monthly compensation payable amounts to 60 per cent of the employee's monthly salary level immediately prior to resignation.

For combined covenants with a duration of up to six months, the monthly compensation payable amounts to 60 per cent of the employee's monthly salary level immediately prior to resignation.

Compensation for the first two months is paid upfront at resignation. If the employee has other income during the period in which the restriction applies, this income can be set off in the compensation; however, the minimum compensation is 24 per cent and 16 per cent, respectively, depending on the duration of the covenant or whether it is a combined covenant.