Ontario Court Finds RSU Rights Forfeited Even During Statutory Notice Period
There's a recent decision gathering some attention, Wigdor v. Facebook.
A couple of interesting issues in that decision, including enforceability of termination language in a written employment agreement, but one major issue dealt with his restricted stock units (RSUs) which would have vested during his statutory and/or common law notice period.
Weirdly, the decision doesn't refer to Matthews v. Ocean Nutrition at all, which is a curious choice, because it's clearly trying to operate in the framework crafted by Matthews.
Legal Backdrop and Principles
Most employees, upon dismissal, are entitled to some amount of notice, pursuant to various statutes and/or contractual terms. Commonly, as in this case (as the court found), employees may be entitled to 'reasonable' notice.
Where somebody is entitled to reasonable notice, and they're dismissed without notice, they are typically entitled to 'pay in lieu of notice' - that is, compensation for what they would have received over the notice period. The principle is that they're supposed to be put in the position they would have occupied had they received actual notice.
For a long time, there was a controversy about certain types of compensation that purported to be contingent on 'active employment' - bonuses, incentive payments, equity-based payments, pension entitlement accruals, etc. Alberta courts were prepared to respect these kinds of "forfeiture clauses", whereas other Provinces often took the view that they could not usually be relied upon.
I wrote about this issue extensively, including in a 2019 peer-reviewed article in the Alberta Law Review. I argued that Alberta had it wrong. In short, while forfeiture clauses could effectively remove the right to participate in a bonus plan, etc., the fundamental question on a wrongful dismissal action wasn't "does the bonus plan effectively limit itself", but rather, "would the bonus have been payable in the event that actual working notice had been provided".
By coincidence, an appeal went to the Supreme Court of Canada in the same time frame as my paper. (The initial draft I submitted to the ALR predicted, in a footnote, that it was just a matter of time before the question was heard by the SCC. About two weeks later, the SCC granted leave in just such a case.) In Matthews v. Ocean Nutrition, the SCC, citing my paper, took a view that was more-or-less aligned with the argument I had advanced, concluding that you would need language that was particularly explicit, unambiguously limiting the employee's "common law right to damages".
As well, there are statutory considerations in these cases: Parties can contract to various terms, but they cannot contract out of requirements established by employment standards legislation (in this case, the Ontario ESA), which sets minimum entitlements to notice and/or termination pay, payment of wages, etc.
So there's an underdeveloped question about statutory non-compliance of forfeiture clauses, because if you're trying to remove entitlements in respect of amounts that may become payable during the statutory minimum notice period, that would seem to be an attempt to contract out of the statutory minimums.
These types of cases are often the ones with the highest monetary amounts at issue in employment law. Incentive structures can use calculation methods that achieve astronomical amounts under the right circumstances. Equity-based compensation, like stock options or restricted stock units (RSUs) can be particularly dramatic if the company's value has grown.
A stock option typically means that you're told, under x conditions - such as "You're still employed here when these options vest in x years" - you'll have the right to purchase these stock units at today's value. So the company might grant 10,000 units of stock options, to vest in five years, and it has no value today. But if the stock price goes up by $50/share, then that option to purchase means you're buying the stock at the vesting date at a price point a half million dollars lower than what they're actually worth.
RSUs are more like a bonus: If you meet these conditions, you'll get 1000 shares on the vesting date, and not have to pay anything for them. But again, if the shares are worth $20/share today, then it looks like a $20,000 bonus at face value, but if they reach $100/share by the vesting date, they turn into a $100k bonus.
These types of benefits are often granted in 'tranches' - so you might be working for a place for several years, and earn several tranches of shares with different vesting dates.
The Case
The relevant facts of the case are relatively simple. It mainly turns on two RSU agreements - the 2020 RSU Agreement, and the 2021-2023 RSU Agreements, and the question is whether they are effective to remove any right to compensation for his stock units that would vest in the notice period.
By default, if he expected an RSU to vest in the notice period, he would expect to be entitled to the lost value of those RSUs.
I'll reproduce the termination clauses of the RSUs in their entirety, because they're important.
The 2020 RSU
If Participant’s service Terminates for any reason, all unvested RSUs shall be forfeited to the Company forthwith, and all rights of Participant to such RSUs shall immediately terminate. For the avoidance of doubt, it is noted that, except as may be agreed to in the sole discretion of the Company, if Participant is Terminated by his/her employer for any reason or if Participant’s Termination is due to his/her voluntary resignation, all unvested RSUs shall be forfeited as of the date that is the earlier of: (i) the date Participant’s employment is terminated, and (ii) the date Participant is no longer actively providing services to the Company or any of its Subsidiaries (regardless of the reason for such Termination and whether or not later found to be invalid or in breach of employment laws in the jurisdiction where Participant is employed or the terms of Participant’s employment agreement, if any), and no vesting shall continue during any notice period in relation to his/her Termination, whether specified under contract or statutory, regulatory or common law, including any “garden leave” or similar period. In case of any dispute as to whether Termination has occurred, the Company shall have sole discretion to determine whether such Termination has occurred and the effective date of such Termination for purposes of the Plan.
The 2021-2023 RSUs
If Participant’s service Terminates for any reason, all unvested RSUs shall be forfeited to the Company forthwith, and all rights of Participant to such RSUs shall immediately terminate. Despite any other definition of "Termination", "Terminated" or "Termination Date" in the Plan, the Notice or the Agreement, if Participant is an Employee of the Company or a Parent, Subsidiary or Affiliate, then Participant's service Terminates when Participant has ceased to provide services to his/her Employer, whether such cessation is initiated by Participant; by his/her Employer, with or without cause, and whether or not later found to be invalid or unlawful; by mutual agreement or by operation of law ("Termination of Employment"). For the avoidance of doubt, unless explicitly required by applicable legislation, the date on which a Termination of Employment occurs and all unvested RSUs are forfeited will not be extended by any period during which notice, pay in lieu of notice or related payments or damages are provided or required to be provided under local law (including, without limitation, statute, contract, regulatory law, and/or common or civil law). Participant will not earn or be entitled to any pro-rated vesting for that portion of time before the date on which a Termination of Employment occurs, nor will Participant be entitled to any compensation for lost vesting.
Notwithstanding the foregoing, if applicable employment standards legislation explicitly requires continued entitlement to vesting during a statutory notice period, Participant’s right to vest in the RSUs under the Plan, if any, will terminate effective as of the last day of Participant’s minimum statutory notice period. Participant will not earn or be entitled to pro-rated vesting if the vesting date falls after the end of Participant’s statutory notice period, nor will Participant be entitled to any compensation for lost vesting.
The Plaintiff's Position
The Plaintiff argued that these provisions did not unambiguously displace his entitlements, and therefore he should be entitled to their value. He also argued that they were inconsistent with the ESA, by terminating an entitlement that may vest during the statutory notice period.
The Court disagreed.
On the statutory argument, the Court examined the language of Ontario's ESA which provides that an employer must provide a notice period (and continue all terms of employment) under s.60 or provide statutory termination pay under s.61, including paying all wages (which are defined as monetary remuneration, subject to certain exceptions) and continue payments to "benefit plans", which the court interpreted as not including RSUs.
In short, the Court concluded that RSUs do not constitute a protected form of remuneration under Ontario's ESA.
The Court further found that the RSU agreements were sufficiently explicit in displacing his entitlements to vesting that the employer could rely upon them.
Analysis
I expect this case to be appealed. It probably has a high enough dollar value to be worthwhile, and there are some evolving questions of law that would benefit from the Court of Appeal weighing in. I also think the plaintiff has some compelling arguments here.
The Statutory Question
At the outset, I'd highlight that the specific statutory language relied upon by the Court, defining termination entitlements, is not particularly comparable to that used in other Provinces, including Alberta.
Here in Alberta, the definition of "wages" is broader and inclusive: "includes salary, pay, money paid for time off instead of overtime pay, commission or remuneration for work, however calculated". It would be much more difficult to exclude non-monetary entitlements, and in fact - while Alberta doesn't have the explicit framework for dealing with 'benefits' that Ontario has - I've successfully convinced specialist adjudicators in Alberta that this definition of 'wages' is broad enough to include non-monetary benefits such as health and dental coverage.
So there's an important takeaway here for non-Ontario employers, that this outcome would likely not hold in all Provinces.
However, even in Ontario, I'd respectfully suggest that the Court got this one wrong. For a couple reasons:
- The language terminates RSU entitlements as of the end of the employee's service, and yet has language that suggests that providing actual notice nonetheless terminates entitlements. Under s.60 of the ESA, providing actual statutory notice prohibits changes in the terms of employment, and removing a portion of his compensation would absolutely qualify as a prohibited change, whether or not RSUs are technically 'wages'. In the same way, tips also aren't 'wages', but pulling a server off the tables during a notice period would be a problem.
So is there a scenario where this language is triggered and s.60 is still engaged? Probably. There's a real grey area between 'pay in lieu of notice' versus 'a notice period that we're just not requiring you to work within'. This difference is particularly manifest, for present purposes, in the 2020 agreement's reference to "garden leave". (I've heard this term before, mainly in the UK context, but very seldom in Canada.) This is when the employer walks you out after you give notice of resignation, and continues to pay you through your resignation. It's not typically litigated unless (as happened in one Quebec case that went to the SCC) the employer decides not to pay you. However, the authority to be able to send the employee home is actually very vague in the first place. If it's a termination of employment, then the employer's liabilities could easily be higher than the notice period given by the employee. But 'stopping working' certainly isn't voluntary on the employee's part, and there isn't typically a contractual right to impose such a leave. So unless there's something unusual in the employment contract, in a case where the garden leave actually reduced the employee's remuneration substantially, we would probably expect it to be properly characterized as an employer termination on notice, captured within s.60.
But there are other scenarios, as well, where an employee might be literally out of the workplace, but on some type of pay continuance that would discharge the employer's obligations pursuant to s.60, instead of complying with s.61 'pay in lieu' provisions. By providing that, in these scenarios, the RSUs are not payable, this language explicitly contracts out of s.60 of the ESA. - The listed exceptions to wages in the statute have one of three fundamental characteristics: They're money that would not have been provided by the employer (e.g. tips), or they're money the employer had no obligation to provide (e.g. purely discretionary bonuses, or reimbursement for work-related expenses that are contingent on those expenses being incurred), or else they're earnings captured elsewhere in the statute (like vacation pay).
Finding that RSUs - a form of remuneration provided by the employer to the employee in accordance with contractually-agreed-upon terms - are neither wages nor benefits, within the meaning of the ESA, and therefore do not engage statutory protections, is fairly bold. I'm not aware of any other cases reaching that conclusion. (In fact, the Court here, on a fairly thin basis, chose not to follow a previous case, Sandhu, that found that a profit-sharing plan did fall within the definition of "wages". The justification for not being bound by horizontal stare decisis was simply that the Ontario Court of Appeal had more recently articulated the statutory definition of wages - without commenting on how that definition applied in a scenario like Sandhu or Wigdor.)
I would argue that it's not a purposive reading of the statute - that allowing an employer to structure a remuneration package in a way that, in whole or in part, undermines the applicability of the ESA and reduces statutory notice entitlements, is not an appropriate reading of the ESA. One could get around this problem either by giving a broader purposive reading of the definition of wages, or by giving a broader purposive reading to the definition of 'benefits', and neither approach results in a particularly strained interpretation.
It's a very well-established point of employment law that employment standards legislation must be given a "broad and generous interpretation", and I'd argue that the Court failed to do so in this case.
This is a separate critical problem with the Court's analysis. While the Court considers whether the RSUs will vest, it fails to consider the further question of whether their failure to vest creates compensable damages flowing from the employer's breach of the implied obligation to give reasonable notice.
This is the same problem that plagues a lot of the pre-Matthews jurisprudence: Courts are asking whether there's a contractual entitlement to payment after the end of employment, instead of asking whether there's a damages entitlement, based on the compensation principle from Hadley v. Baxendale, to a cash equivalency.
The language of these RSUs says about a dozen different ways that, once you're out of the workplace, they won't vest. It's virtually Seuss-ian in its repetitiveness - They will not vest in a house, they will not vest with a mouse, they will not vest here or there, they will not vest anywhere.
But this fundamentally misses the point of Matthews:
"The issue is not whether Mr. Matthews is entitled to the LTIP in itself, but rather what damages he is entitled to and whether he was entitled to compensation for bonuses he would have earned had Ocean not breached the employment contract. By focusing narrowly on the former question, the Court of Appeal applied an incorrect principle, resulting in what I see as an overriding error."
This distinction is critical - it lies at the core of my 2019 paper, at the core of the Matthews decision, and at the core of the error I would argue the Court made here: There is a difference between asking whether the plaintiff is contractually entitled to have his RSUs vest, versus asking whether he is entitled to damages calculated on the basis of the position he would be in if they had vested.
Matthews leaves a narrow 'out': Where there's contract language that unambiguously limits the plaintiff's "common law right to damages", that may result in a forfeiture clause being upheld. There isn't much case law, so far, asking what language would satisfy that requirement. Which is why these types of cases are so interesting.
It's worth noting the operation of the language in this case - though it differs a bit between the two agreement forms - in that the entitlement terminates when the employee ceases to actively work. While there are references to notice periods, that RSUs will not vest during a period of notice, on the overall language of the provisions this can't be read as excluding periods of actual working notice. So while there can be relatively rare scenarios of actual notice (within the meaning of the statute) that don't include working notice, which runs us into the s.60 issue here, there can't be any serious doubt that, in the event the employer gave actual working notice of termination (in compliance with its contractual obligations), the employee would absolutely be entitled to RSU vesting during that period.
Which means that there's no question: We start from the position that the non-vesting of the RSUs during the notional reasonable notice period is a loss flowing from the employer's breach of contract, and is ostensibly compensable as wrongful dismissal damages.
In my view, there's no language in these RSUs that does what the SCC describes in Matthews. The closest it comes (being language not referenced or emphasized by the court) is this:
"Participant will not earn or be entitled to any pro-rated vesting for that portion of time before the date on which a Termination of Employment occurs, nor will Participant be entitled to any compensation for lost vesting."
But this falls short of a waiver of damages for breach of a separate contract. In context, it's most easily and obviously understood as saying that the RSU agreement does not contemplate any partial payment being made for unvested units in these circumstances (in other words, disclaiming any contractual entitlements arising under the RSU agreement for some payment in lieu of vesting), and you'd need something a lot more explicit to interpret it as saying "In the event of a breach of your employment contract by way of wrongful dismissal, you hereby waive any entitlement to damages calculated on the basis of the loss of RSU vesting during the notice period."
Ambiguity
There's also an issue of the impact of that language at the end of the 2021-2023 RSU Agreement, that says "if" the prior language is illegal, then here's a separate set of entitlements instead that will hopefully not be illegal.
The plaintiff argued that this language creates ambiguity. The Court found otherwise:
The provision does not purport to identify a particular piece of legislation. Legislation may be amended. The meaning is clear. As the Respondents submit, this statement is no different than a termination provision that provides employees with “only the minimum payments and entitlements, if any, owed to you under the [ESA] and its Regulations”, whether the dismissal is with or without cause: Bertsch v. Datastealth Inc., 2024 ONSC 5593 at para 7.
With respect, that analogy fails. The Bertsch language addresses the potential for divergent factual scenarios, at the point the contract is entered into. A person who is dismissed may or may not be entitled to any payments under the ESA, depending on when the termination occurs, and whether it falls within certain regulatory exclusions.
That's very different from addressing the potential for divergent legal interpretations (or legislative amendment). This is one employment agreement, governed by one employment standards statute, and it is simultaneously unreasonable to think that the language does anything other than identify the Ontario ESA, and absurd to think that the parties may have intended to contract into a different entitlement framework just in case some future indeterminate hypothetical amendments should be passed that made the initial contractual framework illegal.
The far better analogy is to waterfall restrictive covenants. This is an old tradition in employment contracts that invited the court to read down an unreasonable non-competition clause to something that is reasonable, by inserting a clause saying "You can't compete for five years within 500km, or alternatively if a court finds that unenforceable, you can't compete for four years within 400km, or alternatively..."
These clauses were made unenforceable by Shafron, in which the SCC refused to engage in that exercise anymore and required that restrictive covenants be "unambiguous". While the public policy implications of the restrictive covenant cases are slightly different, the problem of ambiguity created by creating multiple entitlement frameworks that hinge on uncertain legal interpretations...are not at all different.
Shafron sends a clear message to management lawyers and their clients: Commit to your interpretation. Draft an aggressive term, or not, but pick one approach on the understanding that you either get the clause fully enforced or completely ignored. You don't get to place the burden of your own uncertainty on the employee. (In practice, employers tend to prefer to hedge bets, and ask for an 'okay' clause with a high likelihood of enforceability, rather than an aggressive clause with a lower likelihood.)
(I'd also question the wisdom of drafting that RSU clause with language that defined the effect, one way or another, based on whether employment standards legislation "explicitly" requires x. So if legislation merely "implicitly" requires x, based on canons of construction, without "explicitly" saying so, your intention is to not comply with implicit requirements of the law?)
Conclusion
Lawyers complicate this question unnecessarily, because they largely don't appreciate the critical distinction in play between 'entitlements under a contract' versus 'damages for breach of contract'.
Many lawyers, and some judges, think it's a matter of making the contractual entitlement contingent on still being employed at the vesting date, or on actively working, but guess what: Nearly all aspects of employment remuneration are implicitly contingent on active employment. You earn wages by being at work. When you're wrongfully dismissed, you don't get pay in lieu of notice because you have some contractual entitlement to wages that you haven't worked for; it's because you were contractually entitled to notice, and would have actively worked and earned those wages if you'd gotten that notice.
What lawyers are trying to set out is that the employee not only doesn't get the payment if they aren't actively employed, but also that the calculation of their wrongful dismissal damages should be deemed not to include any compensation for the loss of that entitlement.
Under the logic of Matthews, that is what you have to communicate (and, I would argue, properly entrench in contract) in order to disentitle an individual to a plan that would ostensibly be owing during the course of an actual notice period.
Disclaimers
Given my expectation of an appeal here, it calls for a bit more than my standard disclaimer.
I have no involvement or stake in this matter, on either side, and this article is a case comment addressing the applicable principles applied (or not applied) in this case. This should absolutely not be construed as legal advice to any of the parties involved, and the parties - all of whom are represented by competent counsel - should not rely on this article in any way, but should seek the advice of their counsel in respect of any next steps.
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The author is an in-house lawyer in Alberta. Views are the author's alone. This article does not contain legal advice, but general legal information. If you have a legal issue, consult a lawyer.
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