When a portion of an employee’s incentive program is considered long-term (i.e. unvested shares) and the employment contract states this will be forfeited upon resignation, will the courts uphold this?
The answer is not always straight forward. The courts will generally enforce the terms of an employment contract if consideration is provided to the employee, the terms are not illegal, the terms are not ambiguous, and the terms are not an unreasonable restraint of trade. An employee can however claim that the terms of a particular employment contract are not enforceable. For example, it is not usual for an employee to claim that a termination clause, a non-competition clause, or a non- solicitation clause is not enforceable.
In a recent Ontario decision, an employee claimed that he should not forfeit rights to a long-term incentive payment because it was an unreasonable restraint of trade even though it was a provision of his employment contract.
Mr. Levinsky worked as an executive with TD Canada Trust. In his last year there, he earned over $2,000,000 in salary and bonus, with about 25% of this income derived under the bank’s Long Term Incentive Plan (LTIP).
Under the LTIP, Levinsky was granted a certain number of Restricted Share Units (or RSUs) which matured and became payable in cash three years after their grant. Levinsky resigned and claimed the value of his unvested RSUs.
In this scenario the plan provided:
6.5 A Participant’s entitlement to a particular award will be forfeited without notice by the Bank if the Participant resigns from service prior to the maturity date of such award.
The central issue in this case was whether Section 6.5 of the LTIP was unenforceable as an unreasonable restraint of trade.
After reviewing case law from throughout Canada and around the world Justice Brown of the Superior Court of Ontario (Commercial List) concluded:
a. If the entitlement depends upon the continuation in service and does not tie eligibility to the nature of the employee’s commercial activity after he leaves his employer, the clause is not viewed as a restraint of trade, but simply a condition for entitlement to part of the employee’s compensation package and a reasonable condition designed to secure the employee’s loyalty through continued service; but,
b. If the deferred compensation has already vested in the employee prior to his termination, a forfeiture provision might be regarded as a restraint of trade if forfeiture was tied to post-termination commercial activity, not simply to the employee’s continuation in service.
The court enforced section 6.5 of the LTIP.
Lesson to be learned: Employers need to be very careful when drafting the terms of long-term incentive plans. In particular, it is important to ensure that a condition of payment is completing a prescribed length of active service, and this payment is not tied to post-termination commercial activity after the vesting period has expired.