If an employee is obliged on the basis of a stipulation in an agreement with his employer, or with a group company of his employer, to perform a transaction on the termination of his employment and suffers a financial loss because of that transaction, this loss must be attributed to the employment and consequently be regarded as a negative wage. This is what the Supreme Court of the Netherlands (Hoge Raad) ruled last Friday.
The case involved an employee who purchased depositary receipts for shares in his employer from 2004 to 2006. At the start of 2007, the employer was acquired by another company and the depositary receipts were converted into depositary receipts for shares in the acquirer. Pursuant to a Lock-Up Arrangement, the depositary receipts could not be sold for three years. An exception for leaving employment applied within the transfer restriction period, in which case the employee would be obliged to sell the depositary receipts to the acquiring company at the lower of a pre-determined price and the market value. The employment relationship ended in December 2009, thus within the three-year period. The employee suffered loss in connection with the compulsory sale because the selling price was less than the stock exchange price of the underlying share. The District Court, the Court of Appeal and Advocate-General Niessen all found that there was no question of a negative wage. The Supreme Court ruled otherwise. According to the Supreme Court, the deficit between the selling price and the stock exchange price is attributable to the employment (not the equity instrument as such) and therefore deductible as a negative wage.
The judgment of the Supreme Court is in line with earlier case law on employee participation plans. According to this case law, a distinction must be made between objective (financial/economic) and subjective factors. Objective factors affect the valuation of the equity instrument, while subjective factors are relevant only for taxation when the condition is fulfilled. The compulsory sale at a lower price than the stock exchange price relates entirely to the employee’s early departure from his employment and is such a subjective factor. The fact that the obligation to sell is towards the acquiring company and not the employer in this case does not preclude the loss from being attributed to the employment. After all, it is established case law that wage benefits enjoyed from another group company should be regarded as wages paid by the employer for tax purposes, provided that the employer is aware of their provision. It follows from last Friday’s judgment that this doctrine also applies to the mirror-image case of a negative wage. The general wording chosen by the Supreme Court for its decision substantiates this.