Does your organization provide equity compensation to employees? Stock options, restricted stock units (“RSUs”), stock purchase plans, and performance shares are just some of the possibilities. Whatever the form, equity compensation has grown increasingly popular. This fact has also spurred greater employment litigation concerning equity entitlements.
Much (virtual) ink has been spilled over the importance of having enforceable termination clauses in employment contracts. The focus is typically on statutory compliance. Less attention, however, is paid to another enforcement precondition: communication of adverse terms prior to securing employee agreement (see Matthews v. Ocean Nutrition Canada Ltd., 2020 SCC 26 at para. 76).
Termination clauses are normally contained within written employment contracts. Assuming such contracts are provided to employees in advance of their start date, and a signed copy is returned to the employer before work starts, effective communication is not a problem. The precondition is likely met.
Equity compensation, however, can complicate matters.
Most forms of equity compensation are created, and governed, by their own complex plans. These plans may address topics ranging from vesting schedules to tax treatment. They will also invariably deal with the rights of plan participants upon termination of employment. A common approach is to automatically end plan participation, and cancel future vesting rights, upon the cessation of a worker’s active employment.
Accordingly, a worker’s termination rights may not be entirely addressed within their original written contract. Equity plans can also play a key role in determining what an employee is owed. How and when such equity plans are communicated therefore takes on significant importance.
Consider this typical scenario:
A worker signs an employment agreement upon being hired. The contract states that the employee will be entitled to participate in an equity compensation program, subject to its rules and requirements. No further details are provided.
Flash forward six months, and the employee is granted RSUs worth $90,000.00. These are set to vest over the next three years in 1/3 increments. The worker is told that the RSUs have been granted, and are subject to, an RSU plan. The employee agrees and accepts the RSUs on this basis. They are not provided with the RSU plan itself.
One month before the worker’s last tranche of RSUs are set to vest, they are dismissed. The worker is then surprised to learn that the employer’s RSU plan limits post-dismissal vesting rights. A dispute quickly arises over RSU entitlements and litigation ensues.
Knowledge is a precondition to acceptance
A situation very similar to the one just described was recently heard in Ottawa. In Maynard v. Johnson Controls Canada, 2022 ONSC 3863, Justice MacLeod had to rule on a dismissed employee’s entitlement to unvested RSUs.
The employer claimed vesting rights were forfeited upon dismissal due to the terms of its “Share and Incentive Plan.” The employee objected and, among other things, pointed out that this equity plan had never been provided to him.
After reviewing the evidence, Justice MacLeod concluded:
The question is not really whether the terms of the plan permit the plan to forfeit the RSUs. The question is whether the employment agreement limits Mr. Maynard’s right to compensation to salary alone. Had the forfeiture provisions been brought to his attention as they were in Mr. Battiston’s case, then those provisions might have formed part of his contract of employment. Here they were not brought to his attention… [emphasis added]
The employer’s failure to effectively communicate its equity plan, and the adverse terms contained within, was determinative. As a result, the employee was awarded $92,348.08 in RSUs that would otherwise have been forfeited.
Takeaway
Effective communication lies at the heart of successful equity compensation programs. In this regard, employers should directly provide equity plans (in their entirety) to affected workers. Do not rely upon posting plans on an intranet or making them available upon request. Be sure they get into employee hands. Draw attention to key terms and record such efforts. Finally, confirm workers have reviewed and agreed to abide by the terms of your equity plan prior to issuing compensation.
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