In a recent judgment, the Supreme Court held that a retention bonus was not remuneration within the meaning of the Insolvency Act. The judgment is likely to have an impact on the question of whether retention bonuses are covered by section 17a of the Salaried Employees Act.

Skrevet af

If a bonus to a salaried employee is considered remuneration for work performed, section 17a of the Salaried Employees Act applies. The requirement in this provision that the salaried employee is entitled to a prorated part of the bonus on termination of employment means that it is not possible to make the bonus conditional on the employee being employed at a specific date in the future (retention bonus) if the bonus amount is considered remuneration. The question of whether it is possible to grant employees a retention bonus that is not considered remuneration and, thus, is not covered by section 17a of the Salaried Employees Act has been the subject of several cases in recent years. In 2012, the Supreme Court ruled that a retention bonus to individual employees in a company in the energy sector was not remuneration, but simply a reward for remaining in their position for a certain period of time, which, among other things, was important for the security of energy supply in Denmark, whereas in 2017 the Supreme Court held that a retention bonus, following a specific assessment, was considered remuneration, for example because it required performance at a certain level.

Now the Supreme Court has had the opportunity to revisit the issue – this time in the context of insolvency law.

Creditor order of priority
The case concerned the insolvent estate of a major Danish company. Prior to the insolvency, the company had entered into agreements with three key employees on retention bonuses for staying in their positions until a certain date. After the insolvency, the trustee assumed all rights and obligations in the employees’ employment relationships and asked them to continue working for a short period of time. This meant that the employees’ claims for salary for work performed for the estate were moved forward in the order of priority as costs and charges, which would therefore have to be paid before other creditors’ claims.

The employees later filed a claim for payment of their retention bonus as costs and charges, but this was rejected by the trustee of the estate for several reasons, including because the retention bonus did not constitute remuneration within the meaning of the Insolvency Act.

Remuneration or reward?
The dispute was first taken to the bankruptcy court and then to the high court and the Supreme Court. The employees claimed that the retention bonus constituted remuneration for work performed, since the retention bonus agreement was made because no salary increases were granted during the period due to the company’s financial situation. The estate contended that the retention bonus was granted in addition to the employees’ salary and bonus, and that the right to the bonus and the amount of the bonus were not affected by the employees’ work performance or the company’s results, for which reason the bonus constituted a reward for remaining in their position in the same way as in the Supreme Court’s judgment of 2012.

The Supreme Court assessed the retention bonus agreement and held that the bonus was not remuneration within the meaning of the Insolvency Act. In its assessment, the Supreme Court attached importance to the fact that the retention bonus was only conditional on the employees remaining in their position for a certain period of time, that no holiday pay or pension was accrued, and that the retention bonus under the agreement did not constitute remuneration for work performed. Thus, the employees’ retention bonus did not have the status of costs and charges under the Insolvency Act.

Norrbom Vinding notes

• that the judgment by the Supreme Court establishes that a retention bonus is not considered salary or remuneration within the meaning of the Insolvency Act if it is a pure reward – without any specific performance requirements – for remaining in a position during a period which is critical for the employer’s business; and

• that there is nothing indicating that the definition of “salary” or “remuneration” under the Insolvency Act should be different from the definition under employment law and, as such, the judgment is probably also of significant importance to the extent to which employers and employees can enter into agreements on retention bonus without such bonus being covered by section 17a of the Salaried Employees Act.

The content of the above is not, and should not be a substitute for legal advice.