When can a retention bonus be exempted from section 17a of the Salaried Employees Act?

The Supreme Court has determined that a retention bonus did not constitute renumeration and was an award to an employee for remaining in the position during a critical period for the company.  

The case concerned three employees who had entered into an agreement with their employer for a retention bonus of up to three months’ salary. Payment of the bonus was conditional on the employees remaining in their positions until the end of January 2019.

The employer in this case had gone bankrupt and the bankruptcy estate effectively entered the employment relationship with the employees. The employee’s employment was terminated. However the employees were working fir the estate at the end of January 2019, thus satisfying the condition for payment of the retention bonus.

In a bankruptcy situation the Bankruptcy Act provides a ranking of the claims against the estate. Claims that arise in connection with the administration of the bankruptcy estate will be satisfied before all other claims, these are often referred to as preferential claims. Second priority is given to the pre-preferential claims which concern costs incurred for attempts to restructure the company. Third priority is given to claims from employees. After the employees’ claims have been met, certain suppliers’ excise duty claims will be met. Following this any remaining claims will be met on equal terms and covered by the remaining dividend (if any).

The employees had claims for remuneration for their ongoing work for the bankruptcy estate for the time after the bankruptcy decree was passed, and these claims had the status of preferential claims.

The Supreme Court ruled that the employees’ claims for the retention bonus should only be considered as a preferential or third priority claims, if the claims were to be considered remuneration for ongoing work performed for the estate.

The Supreme Court assessed that the retention bonus did not constitute renumeration paid on a deferred basis. The court took the view, from an analysis of the retention bonus agreements, that the payment constituted an award for remaining in the position during a critical period for the company.

In these circumstances, the employees’ claim for a retention bonus should not be considered in whole or in part as remuneration for their work. The retention bonus requirement therefore did not have the status of a third priority claim and would fall within the remaining claims.

Whilst the case involved the question of the ranking of the payment for purposes of payment under the Bankruptcy Act, the Supreme Court’s judgment will also have implications for payment of retention bonuses in the context of the employment relationship. The case will be relevant to the question of whether a bonus scheme is covered by section 17a of the Salaried Employees Act, which states that an employee is entitled to a prorated bonus amount upon termination of employment way through a bonus year.

Is the previous  case of Energinet and Kontrolrum El Øst, published in UfR 2012.1315H, the Supreme Court established the narrow possibility that a retention bonus could fall outside the scope of Section 17a. This would be the case if a retention bonus was awarded only for a specific purpose in a situation where the company has compelling interests in retaining the employee for a certain period for the performance of certain tasks, and where the bonus does not therefore resemble salary. In this particular case the Supreme Court determined that the retention bonus was comprised by Section 17a of the Salaried Employees Act as the bonus involved a performance bases agreement and was dependent upon the size of the bonus pool and the employee’s length of service.

Therefore, the general principle continues to be that bonus payments will generally be considered as part of the overall renumeration package and therefore covered by Section 17a of the Salaried Employees Act. Bonus payments will generally be a fixed predictable element of the overall renumeration package, regardless of whether the bonus amount varies from one bonus period to another. Pursuant to Section 17a of the Salaried Employees Act any condition within a bonus scheme that requires an employee to be employed on a certain date to receive a bonus payment will be invalid.

However, the Supreme Court’s judgment of 23 May 2023 is an exception to the general principle and in this specific decision the Supreme Court also emphasized that there were particularly business-critical reasons for the employer to offer the employees a retention bonus, which meant it fell outside the scope of section 17a of the Salaried Employees Act. This follows the principles in the Energinet case for the possibility of a retention bonus falling outside the scope of Section 17a.