Background

The Labour Chamber of the Spanish Supreme Court determined early this decade that the profit obtained from the exercise of stock options should be considered as part of an employee’s remuneration for the services provided in the company and, therefore, that it should be taken into account when calculating the severance package in cases of unfair dismissal. However, the regional Superior Courts of Justice have had given no firm direction on exactly what part of this profit should be included as part of the remuneration of the 12 months prior to the dismissal, and have come up with several different formulae, some of which are extremely sophisticated.

Facts

In this Labour Chamber case, and for the first time, our Supreme Court has had the opportunity to establish a definitive criteria. It has declared that the profit obtained (i.e. the difference between the share’s market value at the time when the option is exercised and the price paid by the employee) must be distributed proportionally for the period between when the stock option was granted and when it is exercised by the employee, which is, effectively, the period of service that is being remunerated by the company.

Effect on employers

This ruling brings legal certainty when calculating severance packages and avoids the latest practice of grossing up the remuneration when the employee envisages that the relationship may be terminated shortly.

Judgment of the Labour Chamber of the Supreme Court of 3 June 2008