Sources of rules and practice

Overview

Provide an overview of the primary sources of law, regulation and practice that govern or affect executive compensation arrangements or employee benefits.

In Denmark, there is no single or general act covering executive compensation and employee benefits. Executive compensation and employee benefits are governed by a mixture of statutes, collective agreements and individual employment contracts between the parties. As a general rule, benefits are considered as forming a part of executive compensation.

Laws

Executive compensation may be governed by the following statutory instruments:

  • the Financial Business Act (including executive orders issued on the basis of the said Act) applies generally to all employees employed with a financial institution and to the members of its board of directors; however, the majority of the provisions apply only to ‘risk takers’, including members of the board of directors, employees registered with the Danish Business Authority as members of the company’s executive board, and other employees whose activities may have a material impact on the company’s risk profile. The Financial Business Act also contains provisions governing employees performing work within the scope of Directive 2014/65/EU on financial instruments;
  • the Companies Act applies to all members of a company’s board of directors and to employees who are registered with the Danish Business Authority as members of the company’s executive board;
  • the Salaried Employees Act applies to all salaried employees (ie, white-collar workers); and
  • the Stock Options Act applies to all employees who are considered ‘employees’ under Danish law.

As regards the Salaried Employees Act and the Stock Options Act, it should be noted that of all executives, it is normally only the CEO of a company who is not considered a ‘salaried employee’ or ‘employee’ (and only if the CEO has such managerial power and authority as to be deemed a CEO in practice). Other members of the company’s executive board will therefore normally be covered by these Acts. Members of the board of directors will, however, not be covered by these Acts.

Recommendations

The Corporate Governance Recommendations of November 2017 apply. These are recommendations only, and companies may generally choose to apply them or not, but companies listed on the Nasdaq OMX Copenhagen Stock Exchange must follow a ‘comply-or-explain’ principle with regard to the Recommendations. They apply to members of the board of directors and to employees registered with the Danish Business Authority as members of the executive board.

Collective agreements

Collective agreements may also apply to companies that are members of an employer organisation or companies that, on an individual basis, are a party to such agreements. Most often executives are not covered by the collective agreement.

Guidelines

There are various guidelines from European financial authorities (eg, the European Banking Authority) on remuneration within the financial sector, but these are not discussed in this chapter.

Enforcers

What are the primary government agencies or other entities responsible for enforcing these rules?

In Denmark, there is no specific government agency responsible for enforcing employment law in general. The Danish Ministry of Employment can introduce bills and issue executive orders, etc, in this field.

If the parties to a dispute are unable to resolve the dispute amicably, they can bring it before the courts or before a special employment tribunal with jurisdiction to decide certain employment-related claims for employees covered by collective agreements. If so agreed, the parties may also submit the dispute to arbitration.

Governance

Governance requirements and shareholder approval

Are any types of compensation or benefits generally subject to specific corporate governance requirements or approval by shareholders or government agencies? What is the general process for obtaining approval?

The Financial Business Act provides that a financial institution must have a remuneration policy that fulfils certain requirements set out in the Financial Business Act. The board of directors is responsible for preparing the policy and, when adopted by the board of directors, the policy must be submitted to the general meeting for approval. Whenever required and at least once a year, the board of directors must review the policy to ensure that it properly reflects the financial institution’s situation from time to time. If amended by the board of directors, the amended policy must be submitted to the general meeting for approval.

Further, the Companies Act provides that companies whose shares are listed on a regulated European Economic Area (EEA) market must also have a remuneration policy that fulfils a number of requirements. The remuneration policy must in detail set the framework for the remuneration, including both fixed and variable remuneration, which may be granted to members of the board of directors and the executive. The remuneration policy must be approved by the general meeting if the provisions of the policy are essentially changed and - in any event - at least every fourth year. The board of directors must also prepare annually a detailed remuneration report that must also be presented to the general meeting.

Finally, according to the Corporate Governance Recommendations, the board of directors should prepare a clear and transparent remuneration policy for the board of directors and the executive board.

Consultation

Under what circumstances does the establishment or change of an executive compensation or benefit arrangement generally require consultation with a union, works council or similar body?

It is usually not necessary to consult with unions or works councils, etc.

Prohibited arrangements

Are any types of compensation or benefit arrangements prohibited either generally or with respect to senior management?

Under the Companies Act, a limited liability company must not directly or indirectly advance funds, grant loans or provide security for its shareholders or management unless a number of conditions are met. The same applies to the shareholders or management of the company’s parent and other companies exerting a decisive influence on the company.

The Financial Business Act imposes a number of restrictions on the nature, structure and extent of any form of compensation that is considered to be variable remuneration under the Act.

Rules for non-executives

What rules apply to compensation and benefits of non-executive directors?

In Denmark, there is generally a two-tier system where the executive board manages the day-to-day operation of the company and the board of directors oversees the general management of the company’s affairs.

Members of the board of directors are not covered by the Salaried Employees Act and the Stock Options Act since they are not employed by the company. Generally, members of the board of directors will only be covered by the provisions of the Companies Act and the Financial Business Act (if the company is a financial institution).

Members of the executive board will in most cases be covered by the Salaried Employees Act and the Stock Options Act. However, the CEO will normally not be considered a ‘salaried employee’ or ‘employee’ under these Acts and will therefore normally not be covered by these Acts. Members of the executive board (including the CEO) will also be covered by the provisions of the Companies Act and the Financial Business Act (if the company is a financial institution).

The provisions of the Companies Act and the Financial Business Act that also apply to members of the board of directors are described below.

Disclosure

Mandatory disclosure of executive compensation

Must any aspects of an executive’s compensation be publicly disclosed or disclosed to the government? How?

The Financial Business Act provides that at least once a year after the end of the financial year, financial institutions must disclose various particulars regarding the remuneration policy and practices for risk takers, including members of the executive board and members of the board of directors, but this information must not be provided on an individual basis. The information must be posted on the institution’s website and some of the particulars must also be reported to the Danish Financial Supervisory Authority. Further, financial institutions are required by the Financial Business Act to disclose in the financial statements the remuneration paid to each individual member of the board of directors and the executive board. Certain exemptions do, however, apply.

The Financial Statements Act provides that for some companies, certain particulars regarding the incentive schemes and the total remuneration paid to members of the company’s board of directors and members of the company’s executive board must be disclosed in the company’s financial statements.

The Companies Act provides that companies whose shares are listed on a regulated EEA market must post its remuneration policy for remuneration to members of the board of directors and the executive board on their website. The same applies to the annual remuneration report for remuneration to members of the board of directors and the executive board.

Employment agreements

Common provisions

Are employment agreements required or prevalent? If so, what provisions are common? Are any terms prohibited or unenforceable?

CEOs are not covered by the Statement of Employment Particulars Act. Consequently, there is no legal requirement to provide CEOs with a service agreement, although it is normal to do so.

Employees working at least eight hours a week on average for an intended period of employment of at least one month must be notified in writing of all material terms and conditions of employment (the Statement of Employment Particulars Act).

The statement of particulars (which will often be a contract) must at least include:

  • name and address of employer and employee;
  • work address;
  • job description, job title or job category;
  • commencement date;
  • expected duration of employment (if not indefinite);
  • holiday and holiday pay;
  • notice periods (employee’s and employer’s);
  • applicable or agreed pay;
  • hours of work; and
  • specification of any collective agreements affecting the employment.

Also, any other material terms and conditions relevant to the specific employment relationship must be mentioned, for example:

  • variable remuneration and additional pay benefits;
  • data protection;
  • intellectual property rights;
  • confidentiality;
  • restrictive covenants, Including restrictions on outside employment and duties during the employment; and
  • reimbursement of expenses.

In addition to the above terms and conditions, a CEO’s service agreement will often include a change-of-control clause and clauses regarding mediation and arbitration.

It is generally not possible to impose a non-solicitation of employees’ clause (a non-poaching clause) (see question 33).

Incentive compensation

Typical structures

What are the prevalent types and structures of incentive compensation? Do they vary by level or type of organisation?

There are many types of incentive scheme. In Denmark, cash-based incentive schemes are the most prevalent. Equity-based incentive schemes are, however, also often used by listed companies as well as some non-listed companies. Incentive schemes will often be based on achievement of not only one or more financial performance criteria but also on one or more non-financial criteria. It is normal to apply both one-year and multiyear incentive schemes and often both types are used concurrently.

The types and structures of incentives depend on a number of factors, including level and type of organisation.

Restrictions

Are there limits generally on the amount or structure of incentive compensation? Are there limits that adversely affect the tax treatment of the compensation relative to the employer or the executive?

There are no general statutory limits on or guidelines governing the payment of incentive compensation and there are no limits that adversely affect the tax treatment of the compensation relative to the employer or the executive. Typically, incentives are agreed as part of the service agreement or employment contract.

Other than for individuals working in the financial sector who are regarded as risk takers, including members of the executive board and members of the board of directors, there are no rules limiting how much employers may offer their employees in incentives.

The level of incentives varies a great deal, from relatively small amounts up to millions of Danish kroner. For some years, there has been an increased focus on the level of and criteria for granting bonuses and incentives, and employers across many different sectors have reconsidered their incentive schemes.

Individuals working in the financial sector who are regarded as risk takers, including members of the executive board and members of the board of directors, may be awarded incentives only if the incentive scheme complies with a number of rules on variable remuneration. The rules in question provide, inter alia, that the amount of any variable remuneration must be subject to a certain maximum; that a certain part of any amount of variable remuneration must be paid out in various financial instruments; and that a certain part of any amount of variable remuneration must be deferred for later payment.

The Financial Business Act bans incentives to employees covered by the Markets in Financial Instruments Directive where such incentives are based on the employee achieving a certain volume of sales to retail customers.

Under the Companies Act, the amount of fixed or variable remuneration received by the management of a limited liability company must not exceed an amount deemed to be usual, taking into account the nature and extent of duties, and an amount deemed reasonable with regard to the financial position of the limited liability company.

In addition, the Corporate Governance Recommendations set out various recommendations, including that:

  • members of the board of directors should not be remunerated with stock options;
  • if members of the executive board receive equity-based compensation, the equity plans should be revolving plans and any rights under the plans should not be exercisable until at least three years after the grant; and
  • it must be ensured that variable remuneration not only consists of short-term incentive plans and that long-term incentive plans have an earning and maturity period of at least three years.
Deferral

Is deferral and vesting of incentive awards permissible? Are there limits on the length or type of vesting and deferral provisions?

Deferral and vesting of incentive awards are generally permissible and there are no limits on the length or type of vesting and deferral provisions.

The Financial Business Act contains certain provisions regarding vesting and deferral for individuals working in a financial institution who are regarded as risk takers, including members of the executive board and the board of directors. The Act provides, inter alia, that a certain part of the variable remuneration must be deferred for a vesting period of at least four years (and, in some cases, at least five years) for members of the board of directors and employees who are registered with the Danish Business Authority as members of the executive board and for a period of at least three years for other risk takers.

For employees covered by the Salaried Employees Act (and thus normally not CEOs), provisions having the effect that, on termination of employment, the employee will forfeit his or her entitlement to any cash-based incentive awards will normally not be valid.

Further, as regards equity incentive plans established before 1 January 2019, provisions having the effect that, on termination of employment, employees (and thus normally not CEOs) will forfeit the entitlement to any equity compensation awards will only be valid in those situations that, under the Stock Options Act, are considered bad-leaver situations (see question 16).

It should be noted that there may be a number of tax issues involved in deferral.

Are there limitations on the individuals or groups eligible to receive the compensation? Are there aspects of the arrangement that can only be extended to certain groups of employees?

There are no statutory restrictions and, thus, all employees can be awarded incentive compensation, including both cash and equity-based incentive compensation.

Except with regard to rights on termination of employment (see question 16), there are no aspects of the arrangements that can only be extended to certain groups of employees.

Recurrent discretionary incentives

Can it be held that recurrent discretionary incentive compensation has become a mandatory contractual entitlement? Is this rebuttable?

Yes. In Denmark, it does not take much for recurrent incentive compensation to become a contractual entitlement and it will thus be difficult to rebut when the employee has an expectation based on previous years’ practice.

Effect on other employees

Does the type or amount of incentive compensation awarded to an executive potentially affect the compensation that must be awarded to other executives or employees?

No, not in general.

Mandatory payment

Is it permissible to require repayment of incentive compensation under certain circumstances? Are there circumstances under which such repayment is mandatory?

In some situations, it is possible to require repayment (or clawback) of incentive compensation if the incentive compensation was awarded on the basis of data that have subsequently turned out to be misstated or inaccurate and if the employee knows or should have known this. To improve the chances of success in a claim for repayment, it is generally advisable to agree on a clawback clause in writing.

Incentive compensation awarded to individuals working in a financial institution who are regarded as risk takers, including members of the executive board and the board of directors, must be subject to a written clawback clause. In some situations, the financial institution will be required to enforce a clawback clause in order to be compliant with its obligations under the Financial Business Act.

Can an arrangement provide that payment is conditioned on continuing employment until the payment date? Are there exceptions?

For employees covered by the Salaried Employees Act (and thus normally not CEOs), a provision under a cash-based incentive plan pursuant to which payment is conditioned on continued employment until the payment date will generally not be valid. The Act provides that when employees leave their positions, whether following dismissal or resignation, the employees will be entitled to a pro rata part of the expected or agreed bonus for the relevant accrual year.

The Stock Options Act regulates the use of stock option plans for employees (and thus normally not CEOs). As regards stock option plans established before 1 January 2019, employees have certain rights on termination of employment in the absence of more favourable rights under a stock option scheme. An employee will retain his or her rights to any non-exercised options on the same terms as if he or she was still employed, if the employment is terminated (good-leaver situations):

  • by the employer other than for breach;
  • by the employee with immediate effect because of the employer’s material breach; or
  • because the employee has reached the usual retirement age in the industry or with the employer in question, or qualifies for the state old-age pension or a retirement pension from the employer.

Further, in these situations, the employee will be entitled, based on length of service in the financial year in question, to a pro rata part of the stock options that he or she would have received if still employed at the end of the financial year or at the date of the grant.

With effect from the effective date of termination, the employee will forfeit his or her rights to any non-exercised options if the employment is terminated (bad-leaver situations):

  • by the employee other than for the employer’s material breach or having reached retirement age; or
  • by the employer for the employee’s breach.

In these situations, the employee will also forfeit the right to receive any options granted after termination.

As regards stock option plans established after 1 January 2019, the employer and the employee will generally be free to agree on the terms applicable to non-exercised options in connection with termination of employment. Thus, the parties may inter alia agree that the employee’s rights to non-exercised options will lapse, notwithstanding the reason for the termination, or that non-exercised options may only be exercised for a short period of time after the effective date of termination and only in relation to the part of the options having vested at the effective date of termination. However, under Danish contract law, the provisions governing the employee’s rights on termination of employment may be set aside by a Danish court if, from a fairness perspective, the provisions are considered very unfair.

Depending on various factors, there is a risk that provisions on buy-back of shares acquired on exercise of options will not be enforceable.

The Stock Options Act applies not only to stock options but also to other forms of equity-based compensation where an employee has been awarded an entitlement to acquire shares at a later point in time (eg, deferred share awards free of charge (also, depending on their nature, known as restricted stock unit awards or performance share unit awards)).

For CEOs who are not covered by the Salaried Employees Act (see question 1), a provision pursuant to which payment is conditioned on continued employment until the payment date will generally not be valid - and this applies to both a cash-based and an equity-based incentive plan.

Equity-based compensation

Typical forms

What are the prevalent forms of equity compensation awards in your jurisdiction? What is a typical vesting period? Must the arrangements be offered to a broad group of employees, or can the employer select the participants?

The prevalent forms of equity compensation are stock option awards (see question 10) and deferred share awards free of charge (also, depending on their nature, known as restricted stock unit awards or performance share unit awards) (see also question 16). The typical vesting period varies a great deal, but three to four years is quite normal. Equity-based compensation can be offered to only selected participants provided the selection criteria do not violate employees’ rights under discrimination legislation.

Must equity-based compensation be granted by the company’s board of directors (or its committee) or can the authority be delegated to officers or employees of the company? Are there limitations or requirements that apply to delegation?

Equity-based compensation to members of the executive board must be granted by the company’s board of directors.

For equity-based compensation to other employees, the authority to grant any awards can be delegated to the members of the executive board. However, for grants in the form of warrants (ie, a right to subscribe for new shares), the board of directors must determine the total number of warrants that may be granted and generally also all the terms and conditions governing the award.

Tax treatment

Are there forms of equity compensation that are tax-advantageous or disadvantageous to employees or employers?

Equity based compensation in the form of shares, share options and warrants awarded to employees in the course of their employment may be taxed under the 7P tax scheme. Under the 7P tax scheme, equity based compensation will not be taxable for the employee until when the employee sells the shares acquired. When the employee sells the shares, the proceeds will be taxable as capital gains and not as personal income. The tax is thus capped at 42 per cent and not at approximately 56 per cent, if taxed as employment income. The relatively low taxation is counterbalanced by the fact that the value of the equity-based remuneration is not deductible for the employer.

In order to qualify for the 7P tax scheme, a number of conditions must be met. The overall content of these conditions are as follows:

  • at the time when the equity-based compensation is awarded, the employer and the employee must agree in writing that the award is subject to the 7P tax scheme. The terms of this agreement must comply with a number of conditions;
  • the value of the equity-based compensation awarded may - as a starting point - not exceed 10 per cent of the employee’s annual pay (annual pay being the sum of the employee’s cash remuneration plus any employer pension contributions and the taxable value of any benefits). However, if the equity-based compensation is offered on equal terms to at least 80 per cent of the employer’s employees, the value of the equity-based compensation awarded may not exceed 20 per cent of the employees’ annual pay. If the value exceeds the 10 or 20 per cent threshold, the excess will be taxable under the less favourable general rules;
  • the equity-based compensation must be awarded by the employer company or one of its group companies;
  • the equity-based compensation must consist of either shares - or share options and warrants entitling the holder to acquire shares - in the employer company or one of its group companies;
  • share options and warrants may not be transferred to a third party, except on the holder’s death; and
  • the employer must report various particulars about the equity-based compensation to the Danish tax authorities.

For equity-based compensation not being subject to the 7P tax scheme, the value of the awards will be taxed in the same way as other forms of employment income. Awards of stock options and warrants will normally meet various requirements in order to be taxed on exercise but some awards may be taxed on grant, which will generally be tax-disadvantageous to the employee. Depending on the terms governing the award, deferred share awards will either be taxed on grant or on vesting, in practice, most often on vesting.

Registration

Does equity-based compensation require registration or notice? Are exemptions, or simplified or expedited procedures available?

No, but when an award becomes taxable, the employer must report the award and its taxable value to the Danish tax authorities. Further, if equity-based compensation is to be taxed under the 7P tax scheme (see question 19), the employer must also report the award to the Danish tax authorities when the award is made.

Withholding tax

Are there tax withholding requirements for equity-based awards?

No, but certain reporting requirements apply (see question 20).

Inter-company chargeback

Are inter-company chargeback agreements between a non-local parent company and local affiliate common? What issues arise?

Inter-company chargeback agreements between a foreign parent company and a Danish affiliate are quite common. From a group perspective, and when considering the relevant tax legislation applicable to both foreign parent companies and Danish affiliates, it may be tax-advantageous to apply an inter-company chargeback agreement. When such an agreement is applied, the chargeback amount will - depending on the nature of the relevant equity compensation award - normally be based on the value of the award at the time of either vesting or exercise.

Stock purchase plans

Are employee stock purchase plans prevalent or available? If so, are there any frequently encountered issues with such arrangements?

It is possible to apply employee stock purchase plans but such plans are not common. From a legal perspective, employee stock purchase plans are generally treated as stock option plans and there are no frequently encountered issues that apply specifically to employee stock purchase plans.

Employee benefits

Mandatory and voluntary employee benefits

Are there any mandatory benefits? Are there limits on changing or discontinuing voluntary benefits that have been provided?

The Salaried Employees Act and the Holiday Act do not apply to CEOs and members of the board of directors. Consequently, their entitlement to paid holiday, salary during maternity, paternity and parental leave and sickness absence, etc, will be subject to agreement with the employer.

Employees who are covered by the Salaried Employees Act and the Holiday Act (and thus not CEOs or members of the board of directors) are entitled to at least 25 days of paid holiday in each holiday year in addition to public holidays. Employees covered by the Salaried Employees Act are also entitled to receive full pay during sickness absence.

The Danish Act on Entitlement to Leave and Benefits in the Event of Childbirth governs the entitlement of men and women to pregnancy, maternity, paternity, parental and adoption leave. In outline, the Act entitles women to start their pregnancy leave four weeks before the expected date of birth and to take 14 weeks’ maternity leave after the birth. Men or spouses are entitled to 14 days’ paternity leave after the birth. On top of this, each of the parents is entitled to 32 weeks’ parental leave, which can be extended to 46 weeks. Employees covered by the Danish Salaried Employees Act are entitled to at least 50 per cent pay while on pregnancy and maternity leave (until 14 weeks after the birth).

Employees who are covered by a collective agreement may be entitled to other benefits such as extra holidays, extra payment during maternity, paternity and parental leave, or extra overtime. Such extra entitlements may also be, and often are, provided under the individual employment agreement.

There is no general legislation on other benefits such as company cars, mobile phones, newspaper subscriptions, internet connection and computers, which are therefore subject to agreement with the employer in each individual case.

The Danish healthcare system is tax-funded and, as such, employers are not required to contribute other than through payment of tax. However, some employers have taken out supplementary private health insurance for CEOs and employees. Unemployment insurance contributions are paid by the CEO and employee only.

If the employer has provided the CEO or employee (or both) with voluntary benefits, it may constitute a material change to the terms and conditions of employment if the employer then wants to change or withdraw such benefits. All material changes to terms and conditions must be notified to the CEO or employee by at least the same notice as their individual notice of termination.

Typical employee benefits and incentives

What types of employee benefits are prevalent for executives? Are there tax or other financial incentives or disincentives for such employee benefit arrangements?

The most common benefits are as follows:

  • supplementary health insurance;
  • company car or car allowance;
  • fixed-line telephone at home and mobile phone;
  • home computer;
  • home internet connection;
  • contractual maternity and paternity pay in addition to the statutory entitlements;
  • contractual holiday with pay in addition to the statutory requirements; and
  • newspaper subscriptions.

For employees, there are, in practice, some minor tax incentives linked to fixed-line telephone at home and mobile phone, home computer, home internet connection and newspaper subscriptions.

Termination of employment

Rules for termination

Are there prohibitions on terminating executives? Are there required notice periods? May executives be dismissed without cause?

Notice periods

For CEOs the notice period is subject to individual agreement with the employer. Often, the notice will be six months for the CEO and 12 months for the company.

Employees covered by the Salaried Employees Act are entitled to a notice of between one and six months depending on length of service. During a probationary period of up to three months, the parties may agree to reduce the notice to two weeks.

Dismissal protection

For CEOs, there are no general fairness or ‘cause’ requirements.

For employees covered by the Salaried Employees Act who have been continuously employed by the same employer for at least one year before the date of notice, the dismissal must be reasonably justified by the conduct of the employee or the circumstances of the employer. Similar provisions are found in most collective agreements.

Mandatory severance pay

Are there statutory or mandatory minimum severance requirements? Are there any other mandatory, post-employment benefits?

Severance pay

There are no general statutory rules on severance pay.

Employees covered by the Salaried Employees Act (and thus normally not CEOs) are entitled to severance pay if they have been continuously employed with the same employer for at least 12 years. The severance pay - which is payable in addition to the employee’s pay during the notice period - amounts to one month’s pay. After 17 years of continuous employment, the amount is three months’ pay. This entitlement cannot be waived.

With regard to employees covered by collective agreements, some collective agreements contain rules on severance pay based on length of service.

The amount of severance pay is generally calculated on the basis of the value of the employee’s total remuneration (ie, base pay, pension contributions, taxable value of benefits and cash-based incentive compensation). However, it is generally not necessary to include the value of any equity-based compensation covered by the Stock Options Act (see question 16).

Other mandatory post-employment benefits

There are generally no other mandatory post-employment benefits. However, for employees covered by the Salaried Employees Act, in the event of the employee’s death during employment with the company, his or her dependants will be entitled to receive a set amount. It is usual to provide a similar right in CEOs’ service agreements. In addition, it is not unusual for CEOs’ service agreements to include a provision to compensate the CEO post-termination for any post-termination covenants. Unlike CEOs, employees covered by the Salaried Employees Act are entitled to such compensation under the Salaried Employees Act (see question 33).

Typical severance pay

What executive severance payment level is typical?

For CEOs, the severance payment level varies depending on the agreement between the parties and will often be an amount equal to three to twelve months’ pay on top of their notice entitlement (see question 27).

For employees covered by the Salaried Employees Act (and thus normally not CEOs), the statutory severance pay level for employees having been employed for a minimum of 12 years is one to three months’ pay on top of their notice entitlement (see question 27). Additional compensation for unfair dismissal may also apply if the employee is dismissed and the dismissal is not reasonably justified by the conduct of the employee or the circumstances of the employer, in which situation the level will normally be one to four months’ pay. However, if the dismissal is in violation of employees’ rights under discrimination legislation, the additional compensation will normally be six to 12 months’ pay.

Reasons for dismissal

Are there limits on dismissal for ‘cause’? Are there any statutory limits on ‘constructive dismissal’ or ‘good reason’? How are ‘cause’ or ‘constructive dismissal’ defined? Are there legal or customary rules relating to effecting a termination for ‘cause’ or ‘constructive dismissal’?

Salaried employees (and thus normally not CEOs) are entitled to compensation for unfair dismissal if they have been continuously employed with the same employer for at least a year before the date of notice and the dismissal is not reasonably justified by the conduct of the employee or the circumstances of the employer.

‘Circumstances of the employer’ generally means for economic reasons (eg, cutbacks). Similarly, ‘conduct of the employee’ means sickness absence, underperformance and breach of obligations. In most cases, it will be a requirement that one or more written warnings have been given before the dismissal to allow the employee an opportunity to remedy the situation and thus avoid dismissal. In the event one or more warnings should have but have not been given, the termination will still be valid but the lack of any warning may result in the employee being entitled to compensation for unfair dismissal (see question 28).

Gardening leave

Are ‘gardening leave’ provisions typically used in employment terminations? Do they have any special effect on benefits?

The employer can unilaterally decide whether the CEO or employee should be released from the duty to work during notice period (or a part thereof) and it is not required or common to include any provisions in the employment contract on this right for the employer. CEOs will normally be released from the duty to work during the notice period. It is also quite normal to release employees from the duty to work when the employee’s duties, responsibilities and tasks have been properly transferred to their replacement. In both cases, salary will still be paid monthly until the end of the notice period and not as a payment in lieu of notice.

Until the end of the notice period, the CEO or employee will still be subject to all usual employee obligations, including the obligation not to engage in any competitive activities, and they will be entitled and required to seek suitable alternative non-competing employment.

The release from the duty to work will generally not affect the CEO’s or employee’s right to any benefits. However, if the employment contract contains a provision thereon, the employer may be entitled to withdraw some or all of the benefits against payment of compensation equivalent to their taxable value until the end of the notice period.

Waiver of claims

Is a general waiver or release of claims on termination of an executive’s employment normally permitted? Are there any restrictions or requirements for the waiver or release to be enforceable?

As a general rule, statutory rights cannot be waived. Even if the employer offers the employee higher pay in return, employees cannot waive their statutory rights.

On termination, however, an employee will sometimes be allowed to waive certain rights in return for compensation. For example, the employer and employee may enter into a severance agreement in full and final discharge of any claims relating to the employment and its termination; however, if the severance agreement is unfair, it may be set aside or changed by the courts.

Post-employment restrictive covenants

Typical covenants

What post-employment restrictive covenants are prevalent? What are the typical restricted periods?

In Denmark, the following post-termination covenants are available:

  • non-compete clauses (to prevent the employee from taking employment with competitors or engaging in competing activities in general);
  • non-solicitation of customers clauses (to prevent the employee from approaching and having any dealings with former customers or other business partners); and
  • combined non-compete and non-solicitation of customers clauses.

Typically, the restricted period is six months to one year.

Under the Post-Termination Restrictions Act, it is not possible to impose a non-solicitation of employees clause (a non-poaching clause). However, if the non-solicitation of employees clause was imposed prior to 1 January 2016, it may be possible to enforce it until 1 January 2021.

Enforceability

Are there limits on, or requirements for, post-employment restrictive covenants to be enforceable? Will a court typically modify a covenant to make it enforceable?

The Post-Termination Restrictions Act governs all such covenants between an employer and an employee entered into from 1 January 2016 and forward, imposing strict limitations on their use.

A non-compete clause is only enforceable if the employee holds a very special position of trust, is informed why it is necessary to enter into a non-compete clause, has been employed for more than six months and is informed in writing of all terms and conditions relating to the non-compete clause.

A non-solicitation of customers clause is only enforceable if the clause concerns customers or other business partners with whom the employee has had business dealings within the last 12 months before the notice of termination of employment, the employee has been employed for more than six months and is informed in writing of all terms and conditions relating to the non-solicitation clause.

The maximum duration of non-solicitation and non-compete clauses is 12 months, while the maximum duration is six months if the employee is asked to accept both clauses.

The employee is entitled to compensation for not being allowed to set up in business, seek employment with a competitor or approach or deal with former customers or other business partners. The compensation must amount to 16 to 60 per cent of the employee’s remuneration at the effective date of termination (including benefits), depending on the duration and scope of the restriction and whether the employee has obtained alternative employment. The first two months’ compensation is always payable as a lump sum at the effective date of termination.

If the employee is bound by either a non-compete or a non-solicitation clause with a maximum duration of six months, the employee is entitled to at least 40 per cent of his or her remuneration in compensation. If the employee finds suitable alternative employment during the notice period, the amount is reduced to 16 per cent of the employee’s remuneration.

If the employee is bound by either a non-compete or a non-solicitation clause with a maximum duration of 12 months or a combined clause with a maximum duration of six months, the employee is entitled to at least 60 per cent of his or her remuneration in compensation. If the employee finds suitable alternative employment during the notice period, the amount is reduced to 24 per cent of the employee’s remuneration.

If a non-compete clause is too broad or onerous, the Danish courts may overrule or modify it. In the decision, the Danish courts may take into consideration whether the employer has used wording so general as to go beyond what is necessary to safeguard its legitimate interests.

The requirements for non-compete clauses and non-solicitation of customers clauses under the Post-Termination Restrictions Act do not apply to CEOs. This means that such covenants may be valid without any obligation for the employer to pay compensation during the restricted period. Such covenants may be overruled or modified by the Danish courts only if they are unfair or unreasonable from a freedom of contract point of view.

For both CEOs and employees, the Post-Termination Restrictions Act provides that a non-compete clause is not enforceable if the employment is terminated by the employer other than for reasonable cause or if the CEO or employee terminates the employment for reasonable cause.

Remedies for breach

What remedies can the employer seek for breach of post-employment restrictive covenants?

If the CEO or employee is in breach of a covenant, the employer may apply for an interim injunction against the CEO or employee, or claim damages, or both.

It is often difficult for the employer to prove a loss and to ensure compliance. Therefore, the covenant will often provide for an agreed penalty. If the CEO or employee disputes the amount of the agreed penalty, the Danish courts will decide whether the amount of the penalty is reasonable.

Furthermore, a CEO or employee who has engaged in competing activities, including breach of a covenant, and in so doing has caused the employer a loss will be liable for the loss in accordance with the general law of damages in Denmark. It will often, however, be difficult for the employer to show that a quantifiable loss had been suffered, as is necessary in order to be awarded damages.

Pension and other retirement benefits

Required retirement benefits and incentives

Are there any required pension or other retirement benefits? Are there limits on discontinuing or modifying voluntary benefits that have been provided?

State pensions

In Denmark, all Danish citizens are entitled to the basic state pension when they reach retirement age. The state pension scheme is tax-funded.

The state pension scheme is supplemented by the mandatory Labour Market Supplementary Pension Scheme (ATP). The ATP scheme is a pension scheme for all CEOs and employees based on contributions made during their working lives. Employers in Denmark must contribute a specific (small) amount per employee to the pension scheme for all CEOs and employees who are subject to the Danish social security system.

Supplementary pensions

Employers are not subject to any statutory obligation to set up private pension schemes for CEOs or employees, apart from the ATP; however, such an obligation may be imposed by some collective agreements. Even though there is no statutory obligation to do so, it is very common for employers to set up private pension schemes for CEOs and employees.

If the employer has provided the CEO or employee with voluntary benefits, it will constitute a material change to the terms and conditions of employment if the employer then wants to change or withdraw the benefits. All material changes to terms and conditions must be notified to the CEO or employee by at least the same notice as their individual notice of termination.

Typical retirement benefits and incentives

What types of pension or other retirement benefits are prevalent for executives? Are there tax or other financial incentives or disincentives for such employee benefit arrangements?

Employers commonly provide access and contribute to supplementary pension schemes with a pension institution for their CEOs and employees.

Pension schemes are usually defined-contribution schemes with a pension account in the name of the individual employee where the employer and employee contributions normally amount to a certain percentage of the employee’s salary. Therefore, these pension schemes usually provide pensions the value of which is dependent on the agreed size of the employer and employee contributions and on the investment return on those contributions.

If the supplementary pension scheme meets the conditions for tax approval, the employer’s contributions are tax-exempt. The supplementary pension scheme can be structured to ensure that the employer’s contributions are tax-exempt regardless of the amount of the contributions. All pension contributions are, however, subject to labour-market tax of 8 per cent.

If the supplementary pension scheme meets the conditions for tax approval in order for the employer’s contributions to be tax-exempt, the employee’s contributions will be deductible. Like the employer’s, however, the employee’s contributions are also subject to labour market tax.

Supplemental retirement benefits

May executives receive supplemental retirement benefits?

Yes, although this is unusual (see question 27).

Indemnification

Directors and officers

May an executive be indemnified or insured for claims related to actions taken as an executive, officer or director?

It is possible to take out professional liability insurance for members of the board of directors and executive board for any liability that may be incurred, but this is not a statutory requirement.

Change in control

Transfer of benefits

Under what circumstances will an asset sale in your jurisdiction result in an automatic transfer of benefit obligations to the acquirer?

There is no law protecting CEOs in the event of a transfer of undertaking.

For employees, the Transfer of Undertakings Act provides that employees will automatically transfer with the undertaking and the acquirer will automatically enter into all of the transferor’s rights, duties and obligations under the employment relationship, including benefits. The Act applies to any transfer of an undertaking or part of an undertaking where the entity to be transferred is located within the EEA and the employees affected by the transfer are subject to Danish law.

Executive retention

Is it customary to provide for executive retention or related arrangements in connection with a change in control?

Sometimes, CEOs and other executives will be offered a retention bonus in connection with a change of control in order to incentivise the CEO or employee to stay. However, for employees covered by the Salaried Employees Act (and, thus, normally not CEOs), cash-based retention bonus will be subject to the same employee rights for a pro rata bonus on termination of employment as those that apply to a bonus under a cash-based incentive plan (see question 16).

Also, change-of-control clauses are quite customary in employment contracts for CEOs and other executives. These are often structured so as to give the CEO etc. an extraordinary severance payment if the company terminates the agreement within a specified period after the change-of-control event.

Expedited vesting of compensation

Are there limits or prohibitions on the acceleration of vesting or exercisability of compensation in a change in control? Are there restrictions on ‘cashing-out’ equity awards?

The issue on whether it is legally possible to apply provisions either on acceleration of vesting or exercisability of or on ‘cashing out’ equity compensation awards in connection with a change in control has not been clarified in case law. It is, however, generally likely that such provisions will apply without any limits.

Are there adverse tax consequences for the employer or the executive relating to benefits or payments provided pursuant to a change in control?

There are generally no adverse tax consequences for either the employer or the executive relating to payments or benefits provided pursuant to a change in control. Such payments will generally be tax deductible for the employer and taxable for the executive in the same way as other employment income. However, if an executive is awarded a bonus as a reward for the employer (or its parent company) being acquired by a third party, such a bonus will often not be tax deductible for the employer.

Multi-jurisdictional matters

Exchange controls

Do foreign exchange controls rules apply to the remittance of funds, or the transfer of employer equity or equity-based awards to executives?

No exchange controls rules apply.

Local language requirement

Must employment agreements, employee compensation or benefit plans, or award agreements be translated into the local language?

Under Danish law, there is no statutory requirement that an employment contract be in Danish. Thus, if the corporate language is English and the CEO or employee is required to operate in English (and has been informed of this requirement), an English-language service agreement or employment contract will be permissible.

With regard to some forms of equity compensation awards, however, the Stock Options Act requires that some particulars about the award be given to the employee in Danish. The Stock Options Act only applies to employees (and thus normally not to CEOs).

Net salary arrangements

Are there prohibitions on tax gross-up, tax indemnity or tax equalisation payments?

There are no statutory prohibitions on such payments. Provisions on such payments are in some cases applied to secondments and to the employment of foreign executives.

Choice of law

Are choice-of-law provisions in executive employment contracts generally respected?

Choice-of-law provisions are generally respected for CEOs. However, for executives considered employees under employment legislation, choice-of-law provisions may be set aside under the rules on applicable law in international private law.

Update and trends

Key developments of the past year

What were the key cases, decisions, judgments and policy and legislative developments of the past year?

Key developments of the past year47 What were the key cases, decisions, judgments and policy and legislative developments of the past year?Remuneration policy - amendment of the Danish Companies Act

As mentioned in question 3, the Companies Act provides that companies whose shares are listed on a regulated EEA market must prepare a remuneration policy that fulfils a number of requirements. The remuneration policy must rather set the detailed framework for the remuneration, including both fixed and variable remuneration, which may be granted to members of the board of directors and the executive board. This requirement came into force on 10 June 2019 and is part of the implementation of Directive (EU) 2017/828 on the encouragement of long-term shareholder engagement. The amendment replaces the former requirement to prepare guidelines for incentive-based remuneration.

#MeToo - amendment of the Danish Act on Equal Treatment of Men and Women

As a result of the #MeToo movement, the Danish parliament enacted an amendment to the Danish Act on Equal Treatment of Men and Women, which came into force in January 2019. The amendment has specified that ‘casual’, ‘informal’ or ‘bantering’ workplace behaviour or language does not mean that employees must generally put up with offensive behaviour or language that would otherwise have been regarded as unacceptable had the tone of communication or conduct at the workplace been more professional or restrictive. Consequently, CEOs and other executives should be more focused on employees’ well-being in order to prevent cases on sexual harassment, and should consider implementing or changing internal policies on the behaviour at the workplace.

The new Danish Holiday Act

The Danish parliament has adopted a new act on holidays which implements a concurrent holiday system (thus abolishing the current discrepancy between the period of holiday accrual and the actual holiday period). From 1 September 2020, the accrual year and the holiday year are placed in the period from 1 September to 31 August. Further, employees will have the opportunity to take holidays in an additional four months’ period (until 31 December), which means that the holiday period will cover 16 months. A transition period applies for the period 1 September 2019 to 31 August 2020, and holiday pay accrued during this period must generally be paid to a special holiday fund and not to the FerieKonto (ie, the normal holiday fund) nor to the employee. Owing to numerous questions and problems that the new holiday system gives rise to, most employers will have to implement a new holiday policy prior to 1 September 2020.