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ESOP (Employee Stock Ownership Plan) – Opportunities and risks of employee participation

Raphael Lugowski,
If you have any questions about this topic, please contact me by phone at 040 524 717 830 or by email to lugowski@smart-arbeitsrecht.de

An ESOP (Employee Stock Ownership Plan) allows employees to participate in the company's financial success and thus directly participate in its success. While this may initially seem like an attractive tool for long-term employee retention, it raises complex labor law issues.

As beneficial as employee participation models can be for both sides, without a thorough legal review there is a risk of disputes or ill-considered decisions.

Our firm supports companies and management teams in the legally compliant introduction and implementation of ESOPs. We analyze draft agreements, examine potential liability risks, and provide practical recommendations on tax and social security aspects – always tailored to the specific company situation and the desired goals.


What awaits you:

  1. What is an ESOP? – Employee participation with employment law implications
  2. Types of ESOPs: Phantom Shares and Real Employee Participation
  3. Difference between ESOP and VSOP – correctly classifying employee participation
  4. How does an ESOP work? – Process, structure, and employment law aspects
  5. The benefits of an ESOP for companies – employee retention, productivity and tax incentives
  6. Disadvantages and risks of an ESOP for companies – act with good advice under labor law
  7. Benefits of an ESOP for employees – participation, wealth creation and motivation

What is an ESOP? – Employee participation with employment law implications

A Employee Stock Ownership Plan (ESOP) is a participation model that allows companies to share their employees' financial success – usually in the form of company shares. This is intended to strengthen motivation, loyalty, and long-term identification with the employer.

Definition: ESOP in the context of employment law
Essentially, an ESOP grants employees the right to acquire shares in the company at a later date – often under specified conditions such as a so-called Vesting periodOnly after this waiting period has expired do claims arise, which are often linked to performance or loyalty to the company.

Unlike traditional stock options, an ESOP is often based on a trust model: A fund holds the shares on behalf of the employees. Participation is thus not achieved through the direct purchase of shares, but rather through a gradual transfer of shares. This structure brings with it specific labor, tax, and corporate law issues.

Financing ESOPs: Opportunities and Risks
In practice, ESOPs are often financed through company loans. The company takes out a loan to purchase shares and deposit them in a trust fund for the employees. This model carries risks, particularly if:

  • the company valuation decreases,
  • the shares lose value or
  • economic difficulties arise.

Especially in such constellations, a legally secure design of the buyback provisions, distribution of voting rights and termination consequences is crucial to avoid conflicts.

Types of ESOPs: Phantom Shares and Real Employee Participation

Not all ESOPs are created equal. Depending on the objectives and company structure, different models are used – some of which have significant implications under labor law.

Phantom Shares: Virtual participation without share transfer
Phantom shares—also known as "virtual shares"—are among the most commonly used options. Employees do not receive actual company shares, but rather a contractually guaranteed payment entitlement whose value is tied to the company's performance. In effect, this is similar to a bonus based on the fictitious share price.

This model has advantages for companies:

  • no dilution of the company capital,
  • flexible design options,
  • usually easier implementation.

At the same time, questions arise regarding employment contracts, tax and social security law, which require careful legal review.

Classic ESOPs: Participation with real share ownership
In "true" ESOPs, however, employees acquire actual company shares – either directly or through a trust fund. This not only provides employees with a financial advantage but can also have consequences under corporate law, for example, regarding co-determination or voting rights.

Choosing the right ESOP structure is crucial, especially during growth phases or for exit-oriented startups. Only a legally compliant structure ensures long-term success and minimizes risks for both companies and employees.

Difference between ESOP and VSOP – correctly classifying employee participation

Employee participation is playing an increasingly important role, especially in start-ups. Two of the most common models are Employee Stock Ownership Plan (ESOP) and the Virtual Stock Option Plan (VSOP)Both aim to allow employees to participate in the company's success, but differ significantly in their legal structure, implementation, and employment law consequences.

What is a VSOP?
A Virtual Stock Option Plan is a form of virtual participation. Employees do not receive actual company shares, but rather virtual options that replicate the economic value of stocks. In the event of success—for example, an IPO or company sale—the corresponding value is compensated with a cash payment.

Legal difference to ESOP
While a VSOP merely provides a financial entitlement, an ESOP typically results in the actual acquisition or receipt of company shares – often through a trust fund. This creates more complex corporate structures, but also a stronger commitment and the opportunity to build long-term investments.

Advantages of the VSOP model

  • lower legal and tax costs,
  • no co-determination rights due to lack of share ownership,
  • flexible design options, especially for dynamically growing start-ups,
  • Performance-related compensation: Payment is often tied to target achievement.

How does an ESOP work? – Process, structure, and employment law aspects

A Employee Stock Ownership Plan (ESOP) The program goes through several phases – from allocation to final vesting or expiration of the options. The goal is to retain employees long-term while simultaneously creating performance-based incentives.

1. Offer phase
Initially, certain employees are offered stock options or company shares. The terms and conditions for the allocation are precisely defined in the contracts—depending, for example, on position, length of service, or individual target agreements.

2. Vesting period
A central element of every ESOP is the Vesting periodThis is a waiting period during which employees must meet certain requirements in order to acquire final benefits.

  • Time-based vesting: e.g. over four years with annual release of shares.
  • Performance-based vesting: Commitment to concrete company or individual goal achievements.

The vesting rule is an important tool for employee retention and must be clearly defined under labor law.

3. Exercise or expiration
After the vesting period, employees can exercise their options and acquire shares. If they fail to do so or the conditions are not met, the rights expire. Clear deadlines and contractual specifications are essential to avoid legal disputes.

4. Regulations upon leaving
The treatment of employees who leave the company is particularly sensitive:

  • Good Leavers: Those who leave the company due to retirement, illness or redundancy, for example, often retain acquired shares or receive severance pay.
  • Bad LeaversIn the event of breach of duty or termination for misconduct, the options are generally forfeited completely or reclaimed.

This differentiation protects the company and at the same time ensures transparency and fairness in the offboarding process.

The benefits of an ESOP for companies – employee retention, productivity and tax incentives

A Employee Stock Ownership Plan (ESOP) is much more than an instrument for employee participation – it offers companies a strategic opportunity to retain talent in the long term, increase motivation and at the same time take advantage of tax benefits.

Employee retention through participation
An ESOP strengthens employees' identification with the company. Shareholders think in terms of long-term goals, demonstrate greater loyalty, and identify more strongly with the company's strategy. Studies confirm that companies with share ownership programs experience lower turnover, lower recruitment costs, and a more stable workforce.

More productivity and personal responsibility
With an ESOP, employees develop a stronger entrepreneurial mindset. The prospect of directly benefiting from the company's success encourages initiative and innovation. Employees act not only as employees, but also as co-entrepreneurs—a crucial factor for efficiency and competitiveness.

Tax advantages for companies
The new Future Financing Act opens up additional flexibility: Small and medium-sized enterprises, in particular, can defer the taxation of employee share ownership plans for up to 15 years. This preserves liquidity while simultaneously creating attractive incentive models for employees – a clear win-win situation for both sides.

Disadvantages and risks of an ESOP for companies – act with good advice under labor law

A Employee Stock Ownership Plan (ESOP) can be an effective tool for employee retention and performance improvement. However, companies should not underestimate the legal, tax, and organizational challenges.

High administrative effort and ongoing costs
Setting up and maintaining an ESOP involves considerable organizational effort. Accounting, tax registration, and legal documentation require ongoing maintenance. Small and medium-sized businesses in particular often underestimate the time and financial resources required for an ESOP.

Tax risks and adjustment obligations
Alongside the opportunities, an ESOP also presents tax pitfalls. The valuation of shares, the treatment of allocations, and subsequent disposal by employees must be handled correctly and in a legally compliant manner. Incorrect or incomplete regulations can lead to significant tax burdens. Furthermore, ongoing tax advice is often required, which incurs additional costs.

Share price risks and liquidity bottlenecks
Another risk factor is the dependence on the share price. Fluctuations in the capital market not only affect the company's value but also employee motivation. At the same time, buyback obligations or payouts to departing employees can lead to liquidity problems and strain the company's financial position.

Benefits of an ESOP for employees – participation, wealth creation and motivation

A Employee Stock Ownership Plan (ESOP) Not only does it offer companies strategic opportunities, it also creates attractive benefits for employees. Direct participation in the company's success strengthens both the bond with the employer and one's personal financial future—an aspect that must also be precisely regulated under labor law.

Financial participation and wealth creation
By allocating company shares, employees can participate in the company's economic success. If the company's value develops positively, they benefit from asset increases, which can be particularly significant during growth phases. Many models also offer tax planning options, for example, when allocating or later selling shares. This makes the ESOP an attractive building block for retirement planning and long-term wealth planning.

Motivation and identification
Employees who participate often feel more valued and identify more strongly with the company's goals. This emotional connection increases motivation and job satisfaction. Studies show that companies with participation programs benefit from lower turnover and higher team performance.

Participation with restrictions
Even though ESOPs enable financial participation, this doesn't automatically equate to comprehensive voice rights. In many cases, a trustee exercises voting rights. Employees thus benefit financially without directly influencing company decisions. Nevertheless, the prospect of participating in the company's success creates a lasting bond—and is therefore a clear advantage for both sides.

Are you planning to introduce a participation model or have existing structures legally reviewed? We provide comprehensive advice on the legally compliant design of ESOPs. Schedule your consultation now!





Does the reason for termination have to be stated in the termination letter?

Raphael Lugowski,
If you have any questions about this topic, please contact me by phone at 040 524 717 830 or by email to lugowski@smart-arbeitsrecht.de

Many employees are irritated when they receive a termination letter without any explanation. But is this permissible? The answer depends on who is issuing the termination and the type of termination.


What awaits you:

  1. Ordinary termination under employment law – What employers should know
  2. Protection against dismissal and social justification – When a dismissal can be ineffective
  3. Extraordinary (immediate) termination – What employers and employees should consider
  4. Dismissal before the Labour Court – How the reason for dismissal is examined
  5. Termination of collective agreements and special regulations – What you should know

Ordinary termination under employment law – What employers should know

In German labor law, the following applies to ordinary termination:
Employers can terminate an employment relationship by observing the statutory or contractually agreed notice period – and do not have to state a reason for termination in the letter itself.

It must be distinguished from extraordinary (immediate) termination, which is only considered in the case of serious breaches of duty and terminates the employment relationship immediately.

Important: Even ordinary terminations are subject to legal limitations. The Dismissal Protection Act (KSchG) protects many employees from socially unjustified dismissals – for example, if there is no comprehensible reason for termination or if formal errors have been made.

Our experienced employment law attorneys can provide expert support with questions regarding ordinary termination, protection against dismissal, severance pay, and continued employment. Get a free initial assessment now – we'll enforce your rights.

Protection against dismissal and social justification – When a dismissal can be ineffective

Even though a letter of termination in Germany does not have to contain a reason, this does not mean that every termination is legally effective.

The Dismissal Protection Act (KSchG) protects employees from unjustified dismissals – provided the employment relationship lasts longer than six months and the employer regularly employs more than ten employees.

In these cases, dismissal is only permissible if it is socially justified. The employer must provide plausible evidence that one of the following reasons applies:

  • Dismissal for operational reasons: e.g. due to job cuts, restructuring or relocation of tasks
  • Termination for personal reasons: for example, in the case of permanent illness or lack of qualifications
  • Dismissal for misconduct: in the event of repeated misconduct or breaches of contractual obligations

If such a reason for termination is missing – or the justification is insufficient – the termination may be ineffective.

Our employment lawyers will carefully examine whether your dismissal is socially justified and represent you in unfair dismissal claims, severance pay negotiations, or disputes over continued employment. Get your free initial assessment now – we'll fight for your rights.

Extraordinary (immediate) termination – What employers and employees should consider

Extraordinary termination—often referred to as termination without notice—is only permitted under labor law in exceptional cases. Unlike ordinary termination, the employment relationship ends immediately, without observing a notice period.

The prerequisite is an important reason within the meaning of Section 626 of the German Civil Code (BGB). This means that the person terminating the employment contract—whether employer or employee—cannot reasonably be expected to continue the employment relationship until the end of the regular notice period.

Typical reasons for termination without notice include:

  • Grand theft or fraud
  • Gross breaches of duty (e.g. persistent refusal to work, physical attacks, serious insults)
  • Breach of trust or disclosure of secrets
  • Significant disruption of industrial peace

Dismissal without notice is legally tricky – and often contestable. Our employment lawyers will examine whether there is a valid reason, whether all formal requirements have been met, and whether a wrongful termination lawsuit has a chance of success. Let us assess your situation now.

Dismissal before the Labour Court – How the reason for dismissal is examined

If you have doubts about the legality of a termination, you can have it reviewed by a court.

In the context of a wrongful termination lawsuit, the labor court examines whether the termination complies with legal requirements—in particular, whether, in the case of a regular termination, there is a socially justified reason under the Protection Against Dismissal Act (KSchG) or, in the case of a termination without notice, whether there is good cause. If the employer cannot convincingly explain or prove the reason for termination, the court will declare the termination invalid. In this case, the employment relationship will continue—or a severance payment will be negotiated.

 Our experienced employment law attorneys will represent you in unfair dismissal proceedings – with the goal of securing your continued employment or obtaining a fair severance package. Contact us now and receive a free initial assessment.

Termination of collective agreements and special regulations – What you should know

Not every termination is based exclusively on general legal requirements. Often, additional Collective agreements, works agreements or special employment contractswhich provide their own regulations.

These may include, for example, special notice periods, extended termination rights or additional protection against dismissal – for example in public service, in care, in crafts or in industry.

Before making a legal assessment, it is therefore essential to to carefully examine the contractual and collective bargaining basesThis is particularly relevant for:

  • Dismissals in collective bargaining companies
  • Industry-specific special regulations
  • Contractual clauses with different notice periods or reasons

Our employment law attorneys analyze your contract and collective agreement terms in detail and represent you competently in terminations, unfair dismissal claims, or severance pay negotiations.

Request an initial legal assessment now – we will examine whether your termination is legally valid.





Restricted Stock Units (RSUs) – a modern form of performance-related compensation for management and employees

Raphael Lugowski,
If you have any questions about this topic, please contact me by phone at 040 524 717 830 or by email to lugowski@smart-arbeitsrecht.de

In Germany, too, restricted stock units (RSUs) are becoming increasingly important as share-based compensation instruments for management boards and employees of stock corporations.
While they have been used in the US for years as a proven means of retaining talent and providing performance-based compensation, they are still much less widespread in Germany – especially compared to traditional stock options.


What awaits you:

  1. Pregnancy: Disclosure only permitted with consent
  2. Unauthorized disclosure of pregnancy: Fines possible in labor law: The 10 most important success factors
  3. Advantages of Restricted Stock Units (RSUs) – Flexible compensation element for public companies
  4. Conclusion: Restricted Stock Units as a flexible instrument for employee compensation

What are Restricted Stock Units?

Restricted Stock Units (RSUs) are virtual commitments to company shares that are usually only converted into real shares after certain periods of time or when certain conditions are met.
Their value is usually based on the stock's market price, making RSUs a performance-based form of compensation that directly participates in the company's success.

Disadvantages of stock options from conditional capital or treasury shares – legal limits and labor law challenges

The issue of stock options from conditional capital requires a capital increase resolution in accordance with Section 193 (2) No. 4 of the German Stock Corporation Act (AktG).
This must contain detailed regulations in advance, including:

  • Allocation of subscription rights between the Board of Directors, management and employees
  • Determination of concrete key performance indicators
  • Definition of acquisition and exercise periods
  • Minimum waiting period of four years until the option is exercised for the first time

Similar requirements apply to programs that are carried out using treasury shares pursuant to Section 71 (1) No. 8 Sentence 3 of the German Stock Corporation Act (AktG).
In addition, both the conditional capital and the repurchase of own shares are subject to an upper limit of 10% of the share capital (Section 192 (3) Sentence 1 AktG; Section 71 (2) Sentence 1 AktG).

In practice, these legal requirements lead to several disadvantages:

  • Limited flexibility in the design of stock option programs
  • Long waiting times that prevent short-term compensation
  • High administrative and legal effort for structuring and approval
  • Competitive disadvantages in international comparison, especially in the competition for skilled workers from countries such as the USA, where significantly shorter vesting periods are common

This can pose a significant problem for internationally active companies or those with ambitious growth targets – especially in the global “war for talent”.

Advantages of Restricted Stock Units (RSUs) – Flexible compensation element for public companies

Restricted stock units generally represent payment claims whose value is based on the price development of the company's shares.
The granted entitlement is converted into a specific number of RSUs by dividing the amount by the current stock market price.
Unlike traditional stock options, RSUs retain their value even when prices fall – a total loss is impossible.
Advantage: RSUs offer a stable investment with a predictable effect and are therefore particularly suitable for short- and medium-term incentive systems.

Greater legal certainty and fewer regulatory restrictions
The strict requirements of Section 193 Para. 2 No. 4 AktG or Section 192 Para. 3 Sentence 1 AktG do not apply to RSUs, as they are not classic subscription rights.
The company can design the programs much more freely and flexibly.
Advantages:

  • Shorter vesting periods possible (e.g. 12 months)
  • No mandatory performance targets required
  • Individually adaptable regulations in the event of employees or board members leaving the company

Targeted design options for companies
RSU programs can be tailored precisely to company-specific requirements.
They can be designed with or without performance targets, have a short-term or long-term duration, and contain individual vesting arrangements, exit clauses, or holding periods.
Advantage: Tailor-made programs for different employee groups – from the operational level to the board.

Flexible service – in cash or shares
RSUs can be settled either in cash or through the allocation of shares.
The shares come either from authorized capital or from the company's own holdings.
For the issue of shares, only an authorization for a capital increase is required – thus the implementation remains manageable.
Advantage: Adaptation of the service model to liquidity, company phase and strategic goals.

Conclusion: Restricted Stock Units as a flexible instrument for employee compensation

Restricted Stock Units (RSUs) offer public companies an extremely flexible compensation element that can be precisely adapted to corporate goals and different employee groups.
Neither statutory minimum waiting periods nor mandatory performance targets restrict the design.
Thanks to this legal freedom, RSUs are particularly attractive – especially for listed companies that want to modernize their compensation mix while ensuring legal certainty.

Would you like to use restricted stock units as part of your compensation strategy? Our employment law firm offers comprehensive advice on legally compliant introduction and implementation. Contact us now.





Pregnancy: Can the employer inform colleagues about it?

Raphael Lugowski,
If you have any questions about this topic, please contact me by phone at 040 524 717 830 or by email to lugowski@smart-arbeitsrecht.de

As soon as a woman learns she is pregnant, the Maternity Protection Act requires her to inform her employer about the pregnancy and the expected date of delivery. While there is an obligation to notify, there are no legal consequences for late or omitted notification.

Many expectant mothers deliberately inform their employers of their pregnancy early on, but initially don't want this sensitive information to be shared with colleagues. But how far does the employer's duty of confidentiality extend? Is it permissible to share this information without consent—and what does the law say about it?

What awaits you:

  1. Pregnancy: Disclosure only permitted with consent
  2. Unauthorized disclosure of pregnancy: Fines possible in labor law: The 10 most important success factors

Pregnancy: Disclosure only permitted with consent

Employers may not disclose a pregnancy to third parties without the express consent of the affected employee. This confidentiality obligation applies to all persons within the company who are not directly involved in the maternity protection process.

According to the Maternity Protection Act, every employer is required to conduct a risk assessment for all workplaces. The goal is to define and implement appropriate protective measures in the event of pregnancy.

These include, among other things, working time restrictions and restrictions on certain activities: For example, pregnant women are not allowed to stand for more than four hours a day from the fifth month onwards. Also prohibited are heavy lifting, frequent bending, and working in noisy, dusty, or polluted environments.

In order for the employer to ensure this protection, it is permissible to inform certain persons – for example, direct superiors, company doctors or occupational safety specialists.

Unauthorized disclosure of pregnancy: Fines possible in labor law: The 10 most important success factors

If a manager discloses an employee's pregnancy to colleagues without her express consent, this can have legal consequences. Such unauthorized disclosure of confidential information can be considered a data protection violation—and, in the worst case, punishable by a fine for the employer.

Was your pregnancy disclosed without your knowledge or consent? We will examine the legal situation, clarify your claims, and support you in consistently enforcing your rights – including potential fines against your employer.




Employment law for executives: What managers need to know – a ten-point plan

Raphael Lugowski,

Managers bear not only professional responsibilities, but also legal ones. To avoid labor law disputes, it is essential to know and correctly implement legal requirements. Our specialized lawyers are at your side – whether for the rapid clarification of labor law issues or for professional representation in court and out-of-court proceedings.

If you have any questions about this topic, please contact me by phone at 040 524 717 830 or by email to lugowski@smart-arbeitsrecht.de

Employment law for managers: What really matters

In today's professional world, knowledge of employment law is essential for managers. Only those who know and adhere to the legal framework can minimize risks and avoid legal conflicts.

Especially in senior positions, managers have a duty to make decisions not only strategically but also on a sound legal basis. A competent employment law attorney can help answer difficult questions with legal certainty and prevent potential conflicts from the outset – both through consultation and in legal disputes.

Our lawyers specializing in employment law will show you which employment law aspects are particularly relevant for managers – in a practical, understandable, and solution-oriented manner.

What awaits you:

  1. Executive consulting in employment law: draft contracts wisely, confidently avoid conflicts
  2. Executive consulting in employment law: The 10 most important success factors

Executive consulting in employment law: draft contracts wisely, confidently avoid conflicts

Senior employees – whether as department heads, division managers or in management (CEO, CFO, CTO) – are often confronted with complex employment law issues.
Qualified employment law advice is therefore indispensable for managers: It supports the drafting of legally sound contracts and helps to identify potential conflicts at an early stage through preventative strategies and, ideally, to resolve them out of court.

Executive consulting in employment law: The 10 most important success factors

1. Forward-looking contract design
 Clear, individually tailored employment contracts provide legal certainty and strengthen your negotiating position. Our experienced employment lawyers will help you identify and avoid risks early on.

2. Personnel interviews & termination agreements
 When faced with unexpected termination negotiations, careful action is required. We assess your legal situation and outline which steps your employer may or may not take.

3. Protection against dismissal also for managers
 Senior managers also enjoy protection under labor law. We review the validity of terminations and negotiate specifically regarding severance pay, time off, or variable compensation.

4. Strategy for change notices
 If working conditions are to be unilaterally worsened, we will support you in defending against unlawful changes – with a clear legal plan.

5. Transfer & withdrawal of duties
 Internal restructuring or role changes can be stressful. We review your legal position and help you defend against unfair measures.

6. Bonus, target agreement & remuneration
 Unclear or non-compliance with bonus regulations often lead to disputes. We enforce your claims – even when targets are missing or variable compensation is not paid.

7. Regulate foreign assignments in a legally secure manner
 For assignments abroad, we clarify all legal framework conditions – especially return agreements and tax aspects.

8. Cleverly manage early contract termination
 Whether partial retirement, early retirement, or severance pay arrangements: We will show you what options are available – legally secure and tax-advantageous.

9. Secure liability & compliance
 Executives are sometimes personally liable. We advise on liability risks, claims for damages, and coverage through D&O insurance.

10. Change of employer & non-competition clause
 We review post-contractual non-competition clauses and ensure that you do not suffer any unnecessary restrictions or financial disadvantages.

This 10-point plan shows what is important in employment law for managers – whether in contract drafting, in termination negotiations, or in the next career step.

With sound employment law advice, you can protect your interests – now and in the future.




LAG awards Muslim woman AGG compensation – discrimination due to neutrality requirement

Raphael Lugowski,

The Berlin-Brandenburg Regional Labor Court (LAG) has ruled that a Muslim employee will receive compensation under the General Equal Treatment Act (AGG) because the neutrality requirement enshrined in the employment contract has a discriminatory effect.

If you have any questions about this topic, please contact me by phone at 040 524 717 830 or by email to lugowski@smart-arbeitsrecht.de

The background: The headscarf had no impact on the employee's professional activity. In such cases, a blanket requirement of neutrality represents an impermissible restriction of religious freedom. The ruling underscores that employers may not use neutrality requirements to prohibit religious expression without objective reason.

The decision is part of a series of important rulings on discrimination based on religious clothing and clearly demonstrates how sensitive contract drafting must be in employment law.

Find out here how the AGG protects those affected and which legal standards apply in cases of religiously motivated discrimination.

What awaits you:

  1. Neutrality requirement as discrimination: LAG Berlin-Brandenburg awards compensation
  2. Why the neutrality requirement in the employment contract was inadmissible
  3. Court confirms discrimination: headscarf ban violates fundamental rights
  4. LAG Berlin-Brandenburg: Blanket headscarf ban is disproportionate

Neutrality requirement as discrimination: LAG Berlin-Brandenburg awards compensation

In its judgment of November 12, 2024 (case no. 11 Sa 443/24), the Berlin-Brandenburg State Labor Court (LAG) ruled that presenting an employment contract with a neutrality clause to a Muslim applicant violated the General Equal Treatment Act (AGG). The plaintiff had applied for a position as a student employee at a social welfare organization. Her work was to consist exclusively of research work—without any customer contact. Nevertheless, the employment contract contained a clause prohibiting the wearing of visible religious symbols. The employer justified this with potential internal conflicts.

The court considered this to be unlawful discrimination based on religion. Since the headscarf had no connection with her job duties, the plaintiff was awarded compensation amounting to two months' salary. The Berlin Labor Court had previously dismissed the claim (judgment of April 18, 2023, case number 38 Ca 5915/23). In its ruling, the Higher Labor Court clarified that the neutrality requirement violated Section 7 of the General Equal Treatment Act (AGG) and that the plaintiff's discrimination because of her headscarf was not justified by objective reasons.

In its justification, the court also referred to landmark decisions of the Federal Labor Court (BAG, judgment of August 27, 2020, case no. 8 AZR 62/19) and the European Court of Justice (ECJ, judgment of October 13, 2022, case no. C-344/20). These confirm that both direct and indirect discrimination can occur – particularly when religious characteristics are restricted without any specific reference to the job. The LAG concluded that the neutrality requirement was not necessary for the student worker's activity and therefore constituted impermissible discrimination.

Discrimination in the workplace is often difficult to prove – yet it is prohibited by law. Our attorneys specializing in labor law will provide you with expert support in asserting your rights. We examine discrimination cases under the General Equal Treatment Act (AGG), advise on potential lawsuits, and resolutely enforce compensation claims.

Why the neutrality requirement in the employment contract was inadmissible

The plaintiff's employment contract contained a clause prohibiting the wearing of visible religious symbols. The employer made it unequivocally clear that employment would only be possible if the applicant refrained from wearing her headscarf.

The Berlin-Brandenburg State Labor Court (LAG) ruled this condition inadmissible. The student worker's activity was limited to research and did not require any external neutrality. The court clearly stated: "The proper performance of this activity does not depend on whether the employee wears an Islamic headscarf or not." The neutrality clause thus unreasonably interfered with the plaintiff's religious freedom and violated the General Equal Treatment Act (AGG).

Court confirms discrimination: headscarf ban violates fundamental rights

In its ruling, the Berlin-Brandenburg State Labor Court (LAG) once again referred to established case law on headscarf bans. It made it clear: blanket bans on religious clothing in the workplace are only permissible under strict conditions – otherwise, they violate the fundamental right to freedom of belief and religion (Article 4, Paragraphs 1 and 2 of the Basic Law).

The Federal Constitutional Court (BVerfG) had already made it clear that blanket headscarf bans are inadmissible – for example, for teachers (BVerfG, decision of January 27, 2015, case no. 1 BvR 471/10) or kindergarten teachers (BVerfG, decision of October 18, 2016, case no. 1 BvR 354/11).

The Federal Labor Court (BAG) confirmed that neutrality requirements are only lawful if concrete operational disruptions caused by wearing a headscarf can be proven (BAG, judgment of August 27, 2020, case number 8 AZR 62/19).

The European Court of Justice (ECJ) also specified its requirements: A headscarf ban must serve a legitimate aim, be proportionate, and take into account national fundamental rights standards – such as the freedom of religion guaranteed in Germany (ECJ, judgment of 13 October 2022, case no. C-344/20; ECJ, judgment of 15 July 2021, case no. C-804/18 and C-341/19).

The LAG’s ruling is in line with established case law that sets clear limits for neutrality requirements in employment relationships.

LAG Berlin-Brandenburg: Blanket headscarf ban is disproportionate

In the case decided, the Berlin-Brandenburg Regional Labor Court (LAG) made it clear: The blanket ban on headscarves within the framework of a neutrality clause is disproportionate and constitutes discrimination within the meaning of the General Equal Treatment Act (AGG).

Do you suspect discrimination at work? Our employment law services will help you assert your rights – with sound assessments, legally sound arguments, and the goal of fair working conditions. Get a free, no-obligation consultation now!




Legally secure for the 2026 works council elections – with legal support in employment law

Raphael Lugowski,

Works council elections strengthen co-determination within the company. Clear structures, legally compliant preparation, and careful implementation by the election committee are essential for a legally compliant process. Our labor law attorneys demonstrate what's important.

If you have any questions about this topic, please contact me by phone at 040 524 717 830 or by email to lugowski@smart-arbeitsrecht.de

Legally secure for the 2026 works council elections – with legal support in employment law

Preparation for a works council election should begin early—ideally well before the scheduled election date. This is because the legal requirements of the Works Constitution Act (BetrVG) and the Election Regulations (WO) are complex and often difficult to understand for non-lawyers. However, as an election committee, you are obligated to comply with all legal regulations. Even minor formal errors can lead to the election being contested and declared invalid.

A structured process and in-depth knowledge of labor law are therefore crucial for a successful works council election. Our experienced labor law attorneys will support you every step of the way – from initial planning to legally compliant implementation. This minimizes risks and ensures that all formalities are correctly observed.

We've compiled a clear overview of the steps you'll face in the regular election process. Rely on our labor law expertise to ensure your works council election is on a sound legal footing.

What awaits you:

  1. Initiate works council elections – legally secure with legal support in employment law
  2. Election announcements for works council elections – these contents are required by law
  3. Submitting nominations – deadlines, requirements and legally compliant implementation
  4. Announcement of candidates – timely and accurate information
  5. Preparing for election day – legally compliant and organized
  6. Counting of votes and announcement of the election results
  7. Constituent meeting – handover of responsibility

Initiate works council elections – legally secure with legal support in employment law

The works council election officially begins with the issuance of the election notice by the election committee. This step marks the start of the normal election procedure: The election notice must contain all legally required information and be posted throughout the company. This provides the workforce with binding information that a works council election is taking place.

Before publishing the election announcement, an important legal step is required: In consultation with the representatives of the senior management, it must be clarified which employees belong to the group of senior management within the meaning of Section 18a of the Works Constitution Act (BetrVG). Only those who are not considered senior management are entitled to vote or be elected. Only on this basis can you correctly compile the electoral register.

You should allow at least two weeks for the review and allocation process – as required by law. Then, you should compile the electoral roll, which includes all eligible and eligible employees. This roll must be publicly posted in the company along with the election notice.

Our specialized labor law attorneys advise election boards during all phases of the works council election and ensure that every step is carried out with legal compliance – from the initiation to the counting of the votes. Request advice on your works council election now – we'll provide you with legal support from the very beginning!

Election announcements for works council elections – these contents are required by law

The election announcement is a central element of the works council election and forms the basis for a legally compliant process. The minimum information it must contain is legally regulated in Section 3 of the Election Regulations (WO). As the election committee, you are obligated to provide this information completely and accurately – otherwise, the election may be contested.

The most important mandatory information in the election notice includes:

  • Number of works council members to be elected
  • Specifications for nominations and nomination lists
  • Information on the gender quota (minority gender) and all relevant deadlines
  • Election day (date of voting)
  • Place, date and time of the public vote count
  • Information on the possibility of voting by mail

A flawless election announcement is crucial to avoid legal risks. Our experienced employment law attorneys will review your documents and guide you through every step of the works council election – with legal certainty, practical expertise, and reliability.

Submitting nominations – deadlines, requirements and legally compliant implementation

As soon as the election announcement is published in the company, binding deadlines begin. Employees can file objections to the electoral roll within two weeks – and nominations must also be submitted to the election board within this period.

  • No list submitted? Note the deadline!
    • If no valid nomination has been submitted after the two-week period, the electoral board must grant a one-week grace period. 
    • If no valid proposal is submitted within this grace period, the works council election is deemed to have failed – a special case that, however, rarely occurs in practice.
  • Examination of nominations by the electoral board
    • After the deadline has expired, the electoral board will examine the submitted proposals for formal and substantive validity. 
    • If a nomination has deficiencies, the responsible list leader must be informed. 
    • As long as the submission deadline is still running, corrections or resubmissions can be made to ensure validity.
  • Order on the ballot paper – by lot
    • Immediately after the deadline for submitting nominations has expired, the Electoral Board invites the list leaders to determine the order on the ballot paper. 
    • If there are several valid lists, the order will be determined by drawing lots. 
    • If there is only one valid list, this step is omitted – in this case, the election is conducted as a majority vote, with the votes being awarded directly to the candidates on the single electoral proposal.

The deadlines and formal requirements surrounding nominations are prone to errors – and can jeopardize the election. Our employment law firm supports election boards in legally compliant review and implementation. Have your election documents reviewed now – to ensure your works council election is a success!

Announcement of candidates – timely and accurate information

The valid nomination lists or the nomination proposal must be made public within the company at least one week before election day. This announcement is required by law and ensures that all employees are informed in a timely manner about the candidates standing for election.

However, especially in larger companies—and especially with regard to postal voting—it is advisable to post the lists early. Postal voting documents may only be sent out once the official nominations have been announced within the company.

Those who make the announcement too late risk delays in the dispatch of postal voting documents – and thus possibly a challenge to the election.

Allow sufficient time and publish the candidate lists early. This will ensure that mail-in voters also receive their documents on time. Have your election documents reviewed now by our labor law experts – for a safe and effective works council election.

Preparing for election day – legally compliant and organized

  • Establishment of a suitable polling station or several polling stations
  • Provision of a sealed and tamper-proof ballot box
  • Verification of eligibility to vote based on the electoral roll
  • Provision of voting materials and aids for accessible voting

Counting of votes and announcement of the election results

Immediately after the polling stations close, you conduct the public vote count and announce the preliminary election results. This must be documented—including an election record, which must be prepared by the electoral board.

Constituent meeting – handover of responsibility

Once the election results are known:

  • Notify the elected employees immediately.
  • Make the names of those elected known within the company.
  • Call for an inaugural meeting of the new works council within one week of election day.
  • Hand over all election documents to the new committee – this will end your term as election committee.

Legal pitfalls also lurk in the final phase. Rely on legal advice to ensure the election is completed correctly and on time. Have the final steps reviewed now – we'll support your election committee until the handover!




Maternity protection and parental leave at a glance: What parents should know

Raphael Lugowski,

Expectant parents often face many unanswered questions about maternity protection and parental leave. The differences between the two regulations are not always clear.
Added to this are uncertainties regarding legal requirements and their practical implementation in everyday life. This makes it all the more important to be well-informed and familiar with the current legal framework.

Do you have any questions about the topic? Please contact me by phone at 040 524 717 830 or by email to lugowski@smart-arbeitsrecht.de

Maternity leave or parental leave? The difference explained clearly

To clearly distinguish between maternity protection and parental leave, it is helpful to take a closer look at both terms.

Maternity protection applies exclusively to pregnant women and mothers shortly before and after childbirth. During this time, they enjoy special legal protection, as stipulated in the Maternity Protection Act. These regulations primarily concern working conditions and health protection during this sensitive phase.

Are you unsure about your rights as an expectant mother? Feel free to schedule a consultation at my employment law firm – I will provide you with competent and reliable support.

What awaits you:

  1. Maternity protection and parental leave: Important regulations at a glance
  2. Maternity protection and parental leave: Is an overlap possible?
  3. Re-pregnancy during parental leave – what should be considered?

Maternity protection and parental leave: Important regulations at a glance

 The Maternity Protection Act (MuSchG) guarantees special rights for pregnant women and young mothers. The most important provisions include:

  • There is a legal ban on employment during pregnancy and after birth.
  • During this time, mothers receive maternity benefit as financial compensation.
  • Special protection against dismissal protects pregnant women and mothers from job loss.
  • Night, Sunday and holiday work is prohibited for expectant mothers.
  • Dangerous or physically demanding activities must not be performed during pregnancy.
  • Maternity protection usually begins six weeks before the expected date of birth.
  • After the birth, there is a work ban of eight weeks – in the case of premature or multiple births, this period is extended to twelve weeks.

The Parental leave differs significantly from maternity protection:

  • It begins after birth and is not only available to the mother – fathers, foster parents or, in exceptional cases, grandparents can also apply for it.
  • The aim of parental leave is to care for and raise the child in the first years of life.
  • The maximum duration is three years per child and can be flexibly divided up until the child's eighth birthday.

Maternity protection and parental leave: Is an overlap possible?

Whether parental leave and maternity protection overlap depends on who is taking the parental leave:

  • For mothers An overlap is excluded – you are either on maternity leave or on parental leave, but not both at the same time. Parental leave can begin immediately after maternity leave. Important: The maternity leave period (eight or twelve weeks after birth) is credited towards parental leave (Section 15 (2) Sentence 3 of the Parental Leave Act (BEEG)), so parental leave is reduced accordingly.
  • For fathers An overlap is possible. If the father applies for parental leave before the birth, it can coincide with the mother's maternity leave. His parental leave remains valid for the full duration – up to three years.

Do you have questions about maternity protection or parental leave? I'm happy to assist you in clarifying your rights and enforcing your claims through my employment law consulting services.

Re-pregnancy during parental leave – what should be considered?

If a mother becomes pregnant again while on parental leave, the question often arises whether the leave can be interrupted and continued at a later date. The answer: Yes, it is possible.

It is important to inform your employer as soon as possible about your new pregnancy and the planned termination of your parental leave. The remaining parental leave can be reapplied for and used after maternity leave and, if necessary, following another period of parental leave.

Tip: Timely and open communication with the employer helps to avoid misunderstandings and ensure smooth planning.
The legal basis for this can be found in Section 16 Paragraph 3 BEEG.

Do you have questions about parental leave or maternity protection? I would be happy to advise you personally in my employment law firm—competently, passionately, and with an eye for your individual needs.

Bonuses in employment law – information from an employment law attorney

Raphael Lugowski,

What exactly is a bonus, who is entitled to it, and what conditions must be met? As experienced employment law attorneys, we explain on this page what a bonus means in the context of employment law and how this variable compensation component is legally classified.

Do you have any questions about the topic? Please contact me by phone at 040 524 717 830 or by email to lugowski@smart-arbeitsrecht.de

You will learn:

  • When a claim to royalties exists,
  • What requirements must be met for this,
  • How the bonus differs from other variable compensation models
  • Which employment law regulations must be observed in the case of a voluntary reservation or revocation reservation.

We advise both employers and employees on the legally compliant drafting of employment contracts, including the agreement on bonuses. Contact our firm today for a personalized consultation.

What awaits you:

  1. What is a bonus? – Definition and classification under labor law
  2. Right to royalties – Where does the legal claim arise?
  3. Bonus: Requirements for entitlement to payment
  4. Royalties vs. bonus, commission & premium – what’s the difference?
  5. Bonuses with voluntary reservation – is this permissible?
  6. Royalties with revocation right – is this legally permissible?
  7. What we can do for you with royalty questions

What is a bonus? – Definition and classification under labor law

In labor law, a bonus refers to a variable compensation component based on the company's financial performance. This performance-related bonus is typically paid to executives such as managing directors of a limited liability company (GmbH), board members of a stock corporation (AG), or senior managers. The exact details of the bonus are usually contractually agreed upon and can be adjusted on an individual basis.

Would you like to have your bonus entitlement assessed or how to ensure a legally compliant bonus arrangement? Schedule an appointment with our employment law firm now – we will provide you with expert, personalized advice.

Right to royalties – Where does the legal claim arise?

The right to payment of a bonus usually arises from the employment contract or, in the case of managing directors, from the managing director's service agreement. This contractual agreement forms the legal basis for the variable compensation component, which is often tied to the company's performance.
In exceptional cases, a claim may also be derived from the principle of equal treatment under labor law. If a company grants a bonus to comparable executives under the same conditions, it may not exclude individual members of the management level without objective reason. Such unequal treatment without a comprehensible justification may be legally challengeable.

Would you like to have your contractual rights to a bonus reviewed, or are you experiencing unequal treatment? Contact our employment law firm now – we will vigorously represent your interests.

Bonus: Requirements for entitlement to payment

Whether there is an entitlement to a bonus and the amount depends fundamentally on the contractual agreements—be it the employment contract or the managing director's service contract. These regulations stipulate the conditions under which variable compensation is granted.
Typically, the payment of a bonus is tied to the company's financial success. The basis for calculation can be based on performance indicators such as sales, profit, or other measurable corporate goals.

Do you require legal clarity regarding your bonus agreement or would you like to create a legally sound arrangement? Secure in-depth advice from our employment law firm now – we will provide you with competent, personalized support.

Royalties vs. bonus, commission & premium – what’s the difference?

The bonus is a performance-related compensation component that differs significantly from other variable payments in an employment relationship. Unlike commission, which is based on an employee's individual sales performance, the bonus is based on the overall economic success of the company or a division.
There are also differences compared to target-based bonuses: Target bonuses are mainly tied to personal performance, while bonuses are primarily based on collective company results – for example, profit or sales at the end of a financial year.
Unlike bonuses such as Christmas bonuses or vacation pay, the bonus is not automatically payable, but usually requires the achievement of certain financial goals.
Although the term bonus is often used synonymously, the term royalty must be legally differentiated: a bonus can be set individually and tied to departmental results or individual performance, while a royalty usually reflects the success of the company as a whole.

Would you like to know whether your case involves a genuine royalty or bonus – and what rights you may have as a result? Our employment law firm can assist you with the legal assessment and provide advice.

Bonuses with voluntary reservation – is this permissible?

A discretionary bonus payment requirement is legally problematic and in many cases ineffective. If a bonus is paid based on general, company-wide regulations, for example, within the framework of a company compensation system for executives, the employer cannot effectively make the entitlement subject to a discretionary bonus requirement.
If a senior employee or managing director is given a binding commitment to participate in an existing bonus system, it is contradictory for the company to simultaneously declare that the payment is voluntary and non-binding. This contradiction can lead to the clause being classified as non-transparent and invalid under Section 307, Paragraph 1, Sentence 2 of the German Civil Code (BGB).
The Federal Labor Court confirmed this in its judgment of October 24, 2007 (case no. 10 AZR 825/06): A bonus clause that, on the one hand, guarantees participation in a bonus system and, on the other hand, excludes the right to payment, violates the transparency requirements of the German Civil Code (BGB) and is therefore not legally tenable.

Would you like to have a review carried out to determine whether a discretionary clause in your contract is valid? Our employment law firm will support you in the legal assessment and enforcement of your claims – request a free, no-obligation consultation now!

Royalties with revocation right – is this legally permissible?

A contractual right of revocation regarding the payment of a royalty is only effective under strict legal conditions. According to case law, revocation rights may only be applied if they at least briefly state specific reasons for a possible later revocation—such as economic reasons or performance criteria.
There is a clear limit: The revocable compensation component—the bonus—may not exceed 25 to 30 percent of total compensation. Since bonuses often represent a large portion of total compensation, especially in management positions, a standardized reservation of revocability is usually inadmissible and therefore legally ineffective.

Do you have an employment or management contract with a right of revocation and would like to have its validity reviewed? Our employment law firm will clarify your rights – competently, individually, and effectively. Schedule an appointment now!

What we can do for you with royalty questions

Do you have questions about your bonus entitlement, or would you like to know whether a previously paid bonus has been legally revoked or changed? As an experienced employment law firm, we are at your side with comprehensive advice on all legal issues relating to variable compensation and bonus regulations.

Our services for you:

  • Review of bonus claims in the employment contract or managing director service contract
  • Assessment of revocation or voluntary reservations
  • Advice on changes to the calculation basis or non-payment
  • Representation in the out-of-court and judicial enforcement of your claims
  • Tactical advice on procedures taking into account possible deadlines

Whether it's discreet advice in the background or negotiations with the employer – we tailor our services to your individual situation and goals.

Act quickly – there are often short deadlines for claiming royalties! Request a free consultation now – we'll fight for your right to royalties.

Image source: Butch | stock.adobe.com

Equal Opportunities Officer: Why only women are allowed to do this job

Raphael Lugowski,
Do you have any questions about the topic? Please contact me by phone at 040 524 717 830 or by email to lugowski@smart-arbeitsrecht.de

In Schleswig-Holstein, the position of equal opportunity officer in the public service is reserved exclusively for women. Individuals who do not clearly identify as female cannot be considered for this position. The Federal Labor Court (BAG) does not consider this a violation of the Basic Law—on the contrary: the regulation is constitutional, as it fulfills the special mandate to promote women.

What awaits you:

  1. Equal Opportunities Commissioner: Federal Labor Court confirms restriction to women
  2. Being a woman as a professional requirement: Federal Labor Court confirms restriction to female equal opportunity officers
  3. Your partner in employment law – For equal opportunities and fair application procedures

Equal Opportunities Commissioner: Federal Labor Court confirms restriction to women

In a district in Schleswig-Holstein, a position for equal opportunities officer was specifically advertised for women only. An intersex person with a Master of Laws degree and extensive senior civil service experience at two universities nevertheless applied and was invited to an interview – but was not offered the position.

The applicant subsequently filed a lawsuit for €7,000 in compensation for gender discrimination, alleging discrimination by the job advertisement, which was restricted to women.

The labor court initially awarded her €3,500—half of the amount claimed—and the state labor court also upheld this ruling. It found that the district had not convincingly demonstrated that the rejection was not gender-based. Furthermore, the court found no sufficient objective reason why intersex people should be fundamentally excluded from the position.

The Federal Labor Court (BAG), however, reached a different conclusion in October 2024 (judgment of October 17, 2024 – 8 AZR 214/23) and dismissed the lawsuit in its entirety. While gender discrimination did exist, it was permissible under Section 8 (1) of the General Equal Treatment Act (AGG). The restriction of the position to women was justified by the constitutional mandate to specifically promote women in the public service. Therefore, there was no claim for compensation under Section 15 (2) of the AGG.

Being a woman as a professional requirement: Federal Labor Court confirms restriction to female equal opportunity officers

The Federal Labor Court (BAG) has ruled that the legal requirement in Schleswig-Holstein to fill the position of equal opportunity officer exclusively with women is lawful.

The court clarified that female gender represents an essential and appropriate professional requirement—particularly with regard to advising women in stressful situations such as sexual harassment. Experience has shown that those affected are more likely to open up to a female contact person.

This restriction is permissible not only for men, but also for intersex people. While binary-sex people can also experience discrimination, this does not explicitly affect their role as women. What is decisive is not individual perception, but the legal framework.

The Federal Labor Court also referred to Article 3, Paragraph 2, Sentence 2 of the Basic Law, which states that the state must promote the effective equality of women and men. This constitutional mandate justifies gender-based restrictions – even if they restrict the occupational freedom of individuals.

Your partner in employment law – For equal opportunities and fair application procedures

We stand for equal career opportunities – regardless of gender, origin, or identity. As experienced employment lawyers, we are committed to combating discrimination in job advertisements and application processes.

Whether it is obvious discrimination or subtle unequal treatment, we examine your prospects of success and represent your interests – competently, committedly, and on an equal footing.

Image source: Marco2811 | stock.adobe.com