Employee Entitled to Restricted Stock Units After Termination

Written on behalf of Peter McSherry
A computer screen showing stock price influctions, representing employee entitlements to Restricted Stock Units
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It is a common arrangement for companies to plump up compensation with various extras. For instance, employees may receive a bonus for hitting specific performance benchmarks or if the company does well in a fiscal year. Other companies offer stock options and Restricted Stock Units. 

In the recent case of Maynard v. Johnson Controls Canada, the question before the Ontario Superior Court of Justice was whether Restricted Stock Units formed part of an employee’s termination pay despite the employment contract indicating otherwise.

Employee’s compensation package included Restricted Stock Units above base salary

The employee worked for the defendant employer for about 14 years, from 2004 to 2018. He was promoted in 2014. He was aware that amid this promotion, his remuneration plan was amended. It provided that his “compensation thereafter and up until the date of termination consisted of base salary, benefits, and a bonus and incentive plan distributed in the form of Restricted Stock Units.”

The Restricted Stock Units would later become free-trading shares in the corporation as a delayed bonus. In 2017, the value of these Restricted Stock Units totalled approximately $76,000.

Employee’s severance excluded Restricted Stock Units

The employee was the most senior employee in Canada at the time of his termination in June 2018. The termination letter provided that he would be paid $89,652.02 in lieu of notice. This amount was the equivalent of eight weeks’ pay plus 14.3 weeks’ statutory severance under the Employment Standards Act. The employer also undertook to continue his medical, retirement, and dental benefits for eight weeks afterward. If the employee agreed to sign a release, the employer agreed to pay an additional $225,135.12, equivalent to 56 weeks of pay. The employer would also extend health and dental benefits for that same period.

The employee interpreted the letter as excluding the value of the Restricted Stock Units. Although not yet vested in 2016 and 2017, the Restricted Stock Units were valued at $118,335.95. The sums mentioned above were only in relation to his base salary, while the Restricted Stock Units made up roughly 37% of his entire compensation package. As a result, the employee refused to sign the release and sued the employer.

Court had to decide if termination pay should include Restricted Stock Units

The first question the Court considered was if the employee was entitled to compensation for the Restricted Stock Units, both earned and in the future. If not, the Court had to decide if the employee had forfeited his right to additional payment as he had not signed the release.

The employee argued that the termination provisions of the employment contract were ambiguous. Although there was a provision pertaining to the revocation of the Restricted Stock Units when the employment ended, it had not been brought to the employee’s attention. He submitted that the employment contract should be interpreted to compensate the employee for his total loss during the notice period, including the Restricted Stock Units.

Previous cases indicate that Restricted Stock Units should be available with termination pay

The Superior Court of Ontario began by analyzing cases submitted by the employee in support of his claim. The first case came from the Ontario Court of Appeal, which held:

“… loss of the right to exercise [Restricted Stock Units] and stock options that would have accrued during the notice period forms part of the damages available to a terminated employee at common law.”

The second case was a decision from the Ontario Superior Court of Justice where a company nullified unvested stock awards after terminating the employee without cause. In Battiston v. Microsoft, the court ruled this was improper because the contractual provision governing the nullification had not been brought to the employee’s attention.

Employee was not advised of provisions governing forfeiture of Restricted Stock Units

The Court in this case noted that Battiston v. Microsoft had been reversed in 2021. Because the employee in Battiston had been given yearly copies of the stock option plan, he had certified reading the terms by selecting a checkbox on numerous occasions. The court did not accept his arguments as he had made a conscious decision and misrepresentation about agreeing to the terms when he clicked the checkbox.

Unlike in Battiston, the Court in Maynard found no evidence that the employee had been provided with the employer’s “Share and Incentive Plan” or the provisions about the forfeiture of the Restricted Stock Units. All the employee knew was that while other terminated executives had been able to retain their Restricted Stock Units, he had not been offered the same opportunity.

Employment contract was unclear on what the employee would be entitled to upon termination

The Court noted that the wording of the termination provisions in the employment contract was so complex they could only be read with the assistance of a lawyer. The Court did not think it could have been clear to the employee that he would be forfeiting the Restricted Stock Units that had already been awarded to him. It also would not have been clear that the calculation of what was owed to him would not include his regular bonus and equity share.

The Court concluded that the compensation for the employee’s termination without cause “should have included the salary, benefits and the value of the [Restricted Stock Units] during the notice period established by the contract.” The employee could not have signed the release unless he wanted to give up the full amount to which he believed he was entitled.

Further, as the release was not attached to the termination letter, he had not had the opportunity to review it. The Court found it “unreasonable to make a payment conditional upon signing a release which the employee has never seen in circumstances which the employee cannot foresee.”

Contact Peter A. McSherry Employment Lawyer in Guelph for Help After Termination

Peter A. McSherry Employment Lawyer provides employees and employers knowledgeable advice and robust legal solutions for terminationwrongful dismissal and severance issues. Our skilled team regularly assists employees and provides guidance during difficult times. For employers, we can help you understand your legal obligations and advise on managing the legal and reputational risk of making these difficult decisions that impact employment. Contact us online or by phone at 519-821-5465 to schedule a consultation.