It has become more common for restricted stock units (RSUs) to be an employee benefit in employment contracts. In particular, this has become more common for workers in the technology industry. RSUs can form a significant part of the employee’s total compensation package, and more employers are considering incorporating RSUs in employment offers beyond base salary and other benefits.
This blog will discuss RSUs and how they may be structured in employment contracts. A recent case, Maynard v Johnson Controls Canada LP, 2023 ONCA 392, involved a terminated employee who claimed that he should receive the RSUs in his employment contract. Those offered RSUs as part of their compensation packages, and employers who want to know how to structure RSU terms so that they will be upheld in court will benefit from this post.
What are restricted stock units?
Since RSUs have become a significant component in an employee’s compensation package, especially for many tech workers, it is important to understand how they operate.
RSUs are a form of compensation offered to employees. Employees are given company stocks that will vest sometime in the future if they meet certain conditions. If you meet the conditions, then the stocks will be vested, and the employee can sell or keep the stocks. Depending on the terms of the contract, the RSUs may not vest upon termination.
With other stock options, the employee can buy the company’s stock at a set price. This is different from RSUs, where an employee would be given the stocks, which are vested at a later time. Even if a stock price decreases, RSUs also have an underlying value.
There may also be some taxes that apply once the RSUs vest.
What conditions may apply?
Common conditions for the vesting of RSUs include working for the company for a set period (typically a long-term commitment) or if a particular goal is reached, such as completing a specific project, or if the company goes public.
For time-based vesting conditions, there may be a schedule that vests a portion of the RSUs after a set period. Then the remaining portions will be vested in later years.
Why offer restricted stock units?
Employers may use RSUs to incentivize employees to stay with the company and retain talent. RSUs also incentivize employees to build up the company’s value through their work, as their stocks would be more valuable.
Court finds tech employee entitled to RSUs as forfeiture terms not provided by employer
In the Maynard case, the employee began working for the employer in 2004. He was terminated without cause in 2018.
The employee’s compensation package was changed in 2014 to include a base salary, benefits, and a bonus and incentive plan through RSUs.
The employer had a “Share and Incentive Plan” policy, which dictated how the RSUs would be regulated. The Plan included a forfeiture provision that specified that if the employee were terminated without cause, the unvested RSUs would be forfeited and returned to the company automatically at the termination date. The employer also had the discretion to waive this automatic forfeiture of the RSUs if they chose to do so. However, there was evidence that the employee never received a copy of the Plan, which was never brought to his attention. He only learned of the Plan during litigation.
At termination, the employee received compensation for pay in lieu of notice for 8 weeks, as set out in the Ontario Employment Standards Act. Also, the employer provided that his health benefits would continue for 8 weeks. In addition, he received $225,135.12 for 56 weeks of pay, plus an extension to his health benefits for 56 weeks. To receive this, the employee was asked to sign a release.
In 2016 and 2017, the employee received RSUs valued at $118,335.95. These were not yet vested. According to the termination letter, the employer advised the employee that he would not receive the value of the RSUs, and his termination package was only based on his base salary, even though the RSUs made up approximately 37% of his total compensation. The release stipulated that the employee would waive rights to compensation for any bonuses, profit-sharing, or other entitlements, which included the RSUs.
The employee did not sign the release.
The court found that the facts differed from the case, Battiston v. Microsoft Canada Inc., 2021 ONCA 727, in which the Court of Appeal reversed the lower court finding that the employee was entitled to stock awards in his contract after termination. The Court of Appeal in Battiston ruled that the employee did receive notice of the terms, as each year for 16 years, when he accepted his stock award, he was provided with a drop-down window with the terms of the plan, and he was required to certify that he had read the terms. Even though the employee claimed he did not read the terms, the Court of Appeal found that he deliberately made the decision not to read the terms, and he was making a misrepresentation when he checked off the box that confirmed he had read the terms.
In the Maynard case, there was evidence that the employee never even received a copy of the Plan that regulated the RSUs. Therefore, the court did not follow the Battiston case and decided that the employee was to receive the value of the RSUs even though he was terminated.
The employer appealed the decision in Maynard, which was upheld in the Court of Appeal.
As the case law shows, any terms concerning the RSUs must be brought to the employee’s attention. If the terms are set out in a plan outside the main employment contract, the employer must provide a copy to the employee. If the terms are provided to the employee, more is needed for them to say that they did not read the terms if they affirmed that they had read them.
Contact Haynes Law Firm in Toronto for Advice on RSUs in Employment Contracts
As RSUs become more popular in employment contracts, especially for tech workers, it is important to understand how they work. There may be terms in the employment contracts or related policies that set out the terms for RSUs. Our experienced employment law legal team at Haynes Law Firm in Toronto can assist you with issues that arise from employment contracts or termination. For employees, our goal is to ensure that they understand their rights and receive maximum compensation upon termination. Haynes Law Firm also assists employers in avoiding liabilities that may arise from termination packages that are not in line with legislation or case law. We are dedicated to finding the best resolution for you.
To book a consultation, please contact us online or by phone at 416-593-2731.