An employee passes away: what to do with their virtual shares?
Legal basis, market practice and best practice on death,
by Eissens HR & Legal.
Auteur
Geert Jan Eissens
Associated Sharesquare Consultant
When designing a virtual share plan, employers can consider situations such as the death of an employee, even though these fortunately do not occur often. Think about questions like: what happens to accrued rights, and which rules apply? What is set out in law, and what is left to the employer to decide?
In this article expert Geert Jan Eissens shares how this is usually handled in practice and from a Dutch employment law perspective, and what he recommends.
In short:
Death does not automatically mean that all rights lapse. In practice many employers opt for a ‘good leaver’ approach, where next of kin retain (partial) entitlement to future payout.
When an employee passes away, what happens to the value of the virtual shares accrued during their employment? Employment law covers the basics (salary, death benefit, holiday days), but with variable pay and long term incentive plans (LTIPs) such as virtual shares, much of the room is left to the employer.
That room is, however, bounded by reasonableness, fairness and good employer practice. In practice we see that employers choose (on a discretionary basis) to treat ‘the death of the employee’ as a “good leaver”, with (part of) the accrued value being preserved.
Legal framework
Considerations
The death of an employee is first and foremost a profound human event. But for employers it also raises a number of legal and employment-related questions. Such as: what happens to bonuses that have not yet been paid out? And how do you handle the value of virtual shares or a SAR arrangement?
This article outlines the legal basis in the Netherlands, with a focus on employment terms that gradually build up value over a career. As an example we look at what is common at employers that work with LTIPs, and we take a brief look across borders at how this is handled in other countries.
Overview
What an employer has to settle
Set out in law and always applicable.
Employment contract ends
By operation of law under art. 7:674 Dutch Civil Code
Final salary settlement
Including accrued holiday days and holiday allowance
Death benefit
One month's salary, when employment exceeds 3 months
Statutory framework
The basics: what is set out in law?
On death the employment contract ends by operation of law (art. 7:674 Dutch Civil Code). The employer then has to settle a number of employment terms, including the final salary, the statutory death benefit, and any accrued holiday days and holiday allowance. This part is relatively clear and statutorily regulated.
Variable pay
Bonus: when does the right arise?
Variable pay is more nuanced. If a bonus has been unconditionally awarded, it generally has to be paid out. For discretionary bonuses, where the award depends on conditions or assessment, there is room for interpretation.
In such cases practice looks at the legitimate expectations created, established practice within the organisation, and of course reasonableness and fairness.
Things differ for a discretionary bonus where payout depends on agreed conditions. That raises questions immediately and can be assessed case by case, unless of course it has been laid down in the conditions upfront. A common way to settle this discussion is to look at the legitimate expectations between the parties, established practice within the organisation, and again reasonableness and fairness.
In practice we see that parties usually reach agreement, because the conditions under which bonuses are granted within a company can usually be identified and valued.
LTIP & SAR
Virtual shares: freedom of contract with limits
For long-term bonuses, such as virtual share plans and SAR arrangements, the law contains few specific rules. Employers therefore have a large degree of freedom of contract when designing these arrangements. That freedom is, however, bounded by good employer practice (art. 7:611 Dutch Civil Code) and reasonableness and fairness.
The core question is: what happens to rights that have not yet vested on death?
Practice
Market practice
In practice two approaches are commonly used.
1. Good leaver approach
Death is treated as a “good leaver” situation, with:
- (partial) pro rata vesting, or
- in some cases, accelerated vesting
In practice this is considered a balanced and reasonable solution. It strikes a balance between protecting rights the employee retains even in these situations, and limiting the claim itself. This is reasonableness and fairness in action.
2. Full forfeiture
Some arrangements state that all rights lapse on death. While legally possible, this approach can come under pressure in specific cases, especially when the employee has been participating for a long time, the vesting date is near, or substantial value has been accrued.
In practice we also see clauses that are less employee-friendly: on death all rights lapse. This is legally possible (referring to the conditions and clauses laid down in the virtual share plan), but less common, because the death of an employee is not a choice (so a comparison with a “bad leaver” does not hold), and losing the value accrued over recent years is impactful, also for next of kin.
"Death is not a choice. A comparison with a 'bad leaver' does not hold."
Geert Jan Eissens
Legal risk
Can this be challenged?
Looking briefly at succession law, the rights (provided there is a proprietary claim and therefore enforceable) fall into the estate. Heirs (partner/children) are normally entitled, unless arranged otherwise (e.g. by will).
Where next of kin find this interpretation unfair, heirs can invoke reasonableness and fairness of the case, good employer practice, and rely on ‘unreasonably onerous conditions’ (borrowed from consumer law), meaning that clauses in the agreement could be void or voidable. Especially under self-evident circumstances such as long tenure, an imminent vesting date and/or substantial value already accrued over the past years.
Best practice
What is the best practice?
In practice the "best practice" is that most employers ultimately decide to treat the death of an employee as a "good leaver" situation. This is often done with pro rata vesting, and sometimes with a (partial) acceleration (accelerated vesting) of rights.
Recommendation
Settle this upfront by naming and describing the situation in the virtual share plan.
This makes the solution much more robust (legally), it prevents disputes with heirs, and it keeps the employer's reputation intact. Employers that treat death as a "good leaver" situation are not just choosing a legally safe route, but an approach that aligns with good employer practice and societal expectations.
Frequently asked questions
Answers to the most common questions about death and virtual shares.
What happens to salary when an employee dies?+
On death the employment contract ends by operation of law (art. 7:674 Dutch Civil Code). The employer settles the final salary, the statutory death benefit, and any accrued holiday days and holiday allowance with the next of kin.
Is a deceased employee entitled to a bonus?+
It depends on the conditions. An unconditionally awarded bonus generally has to be paid out. For discretionary bonuses, which depend on conditions or assessment, there is room for interpretation based on legitimate expectations, established practice within the organisation, and reasonableness and fairness.
What is a 'good leaver' approach on death?+
Under the good leaver approach death is not treated as the employee's fault. Rights accrued under the virtual share plan are kept pro rata, sometimes with accelerated vesting. This is the most common and widely accepted approach.
Can heirs challenge a full forfeiture clause?+
Yes. Heirs can invoke reasonableness and fairness, good employer practice, and the concept of 'unreasonably onerous conditions'. Especially in case of long tenure, a vesting date in sight, or substantial accrued value, a full forfeiture clause is legally vulnerable.
How do you handle death in a virtual share plan?+
The recommendation is to address the situation of death explicitly in the agreement. Describe it as a good leaver scenario with pro rata or accelerated vesting. This is legally more robust, prevents disputes with heirs, and aligns with good employer practice.
What is the difference between pro rata and accelerated vesting?+
Under pro rata vesting the employee (and next of kin) keep the share of rights accrued up to the moment of death. Under accelerated vesting all remaining rights vest immediately as if the full vesting period had been completed. Pro rata is the most common.
Can I configure this in Sharesquare?+
Yes. When setting up a virtual share plan in Sharesquare you configure leaver scenarios yourself, including death. You select and adjust clauses, vesting rules and good leaver provisions that fit your organisation. This lays a legally robust foundation that prevents later disputes with heirs.
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