As companies increasingly turn to virtual stock options (VSOs) to attract and retain talent, questions are emerging about how these incentives are treated when employees choose to leave. In particular, legal and HR professionals are paying close attention to the distinction between “good leavers” and “bad leavers” — classifications that can dramatically impact whether departing employees retain any of their equity-based rewards.
At the heart of the issue is how companies define the terms of exit. A “good leaver” is usually someone who departs under amicable circumstances, such as redundancy, retirement, or long-term ill health. These individuals may retain vested options and, in some cases, even partial access to unvested awards. Conversely, “bad leavers” — often those who resign to join a competitor or are dismissed for misconduct — frequently lose all rights to their stock options, including those that have already vested.
The implications for employees who resign voluntarily can be significant. While many organisations automatically classify voluntary resignation as a bad leaver event, others take a more flexible approach. “Some companies factor in elements like length of service, completion of notice period, and the nature of the departure,” explains one employment law expert. “This discretion can work in an employee’s favour — or open the door to legal disputes if applied inconsistently.”
Unvested vs. Vested: a key distinction
In most cases, unvested options are forfeited upon resignation, regardless of leaver status. These are typically viewed as a reward for future service — something the departing employee will no longer be providing. However, vested options are where things become more complicated.
Employees classified as good leavers may be allowed to retain and exercise their vested options within a defined post-departure window. Bad leavers, on the other hand, may be forced to exercise vested options immediately or risk losing them altogether. The specific provisions vary widely depending on the company’s stock option agreement.
Clarity Is Crucial to Avoid Disputes
Ambiguity in policy wording around leaver classifications can often result in costly disputes. To mitigate this risk, companies are encouraged to clearly define the terms "good leaver" and "bad leaver" within both employment contracts and stock option agreements. Establishing consistent criteria and maintaining thorough documentation helps ensure decisions are defensible if ever challenged.
Misclassification doesn’t just carry legal risk — it can also damage a company’s reputation, especially in competitive industries where equity incentives are a major draw. Former employees who feel they’ve been treated unfairly may pursue claims of breach of contract or unfair dismissal, particularly if they believe the classification was made arbitrarily or in bad faith.
International nuances in leaver treatment
Treatment of virtual stock options upon resignation can also vary by jurisdiction. In the UK, companies generally enjoy broad discretion to set their own leaver definitions, provided they comply with employment law and anti-discrimination rules.
In Germany, however, recent case law has put limits on this freedom. A landmark ruling by the Federal Labour Court found that forfeiture of vested options upon resignation could be unlawful if it disproportionately penalises the employee. This has prompted many German companies to revisit their stock option plans to ensure fairness and legal compliance.
Meanwhile, in the United States, tax law plays a major role. Companies must carefully structure stock option arrangements to avoid triggering adverse tax treatment, especially in cases where employees retain the right to exercise options after leaving.
Looking ahead
As resignation rates remain high in many sectors, particularly tech and finance, employers are being urged to revisit their equity policies. Transparent, fair, and legally compliant stock option plans not only reduce the risk of litigation but also enhance trust — a key factor in attracting and retaining top talent.
The core message for employers is clear: policies should be well-documented, applied consistently, and supported by clear reasoning—particularly in cases where the distinction between a good and bad leaver may be open to interpretation.
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