Restricted stock units (“RSUs”) form a substantial part of modern compensation packages, especially for senior and highly compensated employees. Although their value is not always immediately quantifiable, RSUs frequently become a source of dispute when the employment relationship ends.

Two recent Ontario Superior Court of Justice (“ONSC”) decisions this year reached different conclusions on whether employees are entitled to RSUs during the notice period following termination. While it remains to be seen how these decisions will ultimately be reconciled by the Court of Appeal, both cases underscore that entitlement to RSUs on termination turns squarely on the precise language of the governing RSU agreement.

Introduction

RSUs are a common form of equity-based compensation used to attract and retain employees. They provide an employee with a conditional interest in company shares, which only acquire value once certain conditions are met.

Most commonly, these conditions include the passage of time or the achievement of performance milestones before the RSUs vest. Until vesting occurs, the employee has no ownership interest in the shares.

A recurring legal issue is whether unvested RSUs continue to vest after termination of employment, particularly during any applicable notice period. The two decisions illustrate how different contractual language can lead to very different outcomes.

Wigdor v Facebook Canada Ltd. [Wigdor]

In Wigdor, the employee was granted RSUs as part of his compensation package. Upon termination, the employee’s RSU agreements contained express forfeiture provisions stating that:

• All unvested RSUs would be forfeited upon termination of employment; and
• RSUs would not continue to vest during any notice period.

After the employee was terminated, the employer offered the employee a termination package that exceeded ESA minimum entitlements, but made the offer conditional on the employee signing a release that would prevent him from challenging the forfeiture of his unvested RSUs. The employee declined and brought an application seeking compensation for the RSUs that would have vested during his statutory notice period, claiming that the RSU agreements that applied to him were contravening the ESA and should not be given effect.

The Court rejected the employee’s argument that RSUs should be treated as wages or benefits under the ESA. It held that RSUs, like stock options, are not monetary remuneration or benefit plan contributions. As a result, they fall outside the ESA’s requirement that benefits be continued during the statutory notice period when an employer provides pay in lieu of notice.

The Court emphasized that the ESA requires continuation of benefit plan contributions, which differ from entitlements under equity compensation arrangements, and that the statutory definition of wages is limited to monetary compensation and certain prescribed allowances.

The employee also argued that the wording that permitted unvested RSUs to be forfeit upon termination was ambiguous, as it included a term that stated an employee could be entitled to RSUs if applicable employment standards legislation explicitly required continued entitlement to vesting during a statutory notice period. The employee argued that because the ESA did not expressly require RSUs to vest during the statutory notice period, including wording suggesting that the legislation could require vesting imported an ambiguous term in the RSU agreement and voided the provision.

The Court denied the application, finding that the meaning of the provision was clear.  The provision did not purport to identify a particular piece of legislation and the agreement was valid and enforceable.

Because the RSU agreements clearly and unambiguously provided for forfeiture upon termination and excluded vesting during any notice period, the provisions were enforceable. The employee was therefore not entitled to RSUs that would have vested during the statutory notice period.

Liggett v Veeva Software Systems, Inc. and Veeva Systems Inc. [Liggett]

In contrast, the ONSC in Liggett reached the opposite conclusion on whether an employee was entitled to RSUs during his notice period after they were terminated from their employment, based on the language of the employee’s RSU agreements.

The Court found that the language in the forfeiture provision was ambiguous and therefore unenforceable for several reasons:

• There was language which defined the date that the employee’s right to vest in the RSU’s as the earlier of several options, which violated the ESA’s minimum notice period of one week per year of service, as the date of notice was not the date of termination of the employment contract.
• The provision denying vesting when the employee was “no longer actively providing services” mirrored language considered by the Supreme Court of Canada in Matthews v Ocean Nutrition Canada Ltd., where similar wording requiring an employee to be “full-time or active” was found insufficient to extinguish entitlements arising during the notice period.
• A discretionary clause granted a committee “exclusive discretion” to determine whether the employee was actively providing services, including during periods of leave. The Court found this unfettered discretion further contributed to ambiguity.
• The contract was found to be overly complex and potentially misleading, as employees were required to piece together multiple provisions and substitute country-specific sections to understand how the agreement applied to them.

Because the agreements did not clearly and unambiguously extinguish the employee’s right to equity compensation during the notice period, the Court held that the employee was entitled to the RSUs and stock options that would have vested during that period.

Takeaways for Employers

While the ONSC reached different conclusions in Wigdor and Liggett, both cases are clear that the specific language in the provision governing RSU entitlement is key to determining whether an employee will be entitled to RSUs that would have vested during the notice period. Employers should consider the following practices if they plan to offer RSU compensation to employees:

• Assess Whether RSUs Are Intended to Form Part of Termination Compensation: Employers should make a deliberate decision about whether RSUs are intended to be provided to employees post-termination and factor that decision into the overall cost of termination.
• Conduct a Review of RSU and Equity Plan Language: Employers should review RSU and equity compensation plans to ensure forfeiture and vesting provisions are drafted in clear, unambiguous language and do not breach the ESA.
• Tailor RSU Language to the Applicable Jurisdiction: Employers should avoid reliance on broadly worded provisions and ensure that RSU agreement language is tailored to the jurisdiction governing the employee’s employment.

This blog is provided as an information service and summary of workplace legal issues.

This information is not intended as legal advice.