Termination & Unvested Restricted Stock Units

Senior level employees may be awarded restricted stock units (“RSUs”) as part of their compensation package. RSUs are an incentive to retain senior management and executives. The RSUs will be granted to the employee with a percentage of the RSUs vesting on an incremental basis over a three or four year period. What happens to your unvested RSUs when you are terminated? If you lose the value of your unvested RSUs as of the date you are let go, this will constitute a significant loss and in some cases, potentially in the range of hundreds of thousands of dollars.

At common law, when an employee is dismissed without cause, the employee is entitled to all terms of their compensation package that they would have enjoyed over the common law reasonable notice period. The RSU agreement may include wording that deprives the employee of their common law entitlement to unvested RSUs on termination., or their employment contract may explicitly do so. The wording in the RSU agreement or employment contract must meet a stringent test to oust the employee’s common law entitlement ie. the unvested RSUs that would vest over the reasonable notice period. If it does not meet the test, the employee will be entitled to damages for the lost value of the unvested RSUs that would have vested over the common law reasonable notice period.

The decision of the Ontario Superior Court of Justice in Maynard v. Johnson Controls Canada dealt with the employee’s entitlement under his employment contract.  The Court concluded that the employee would not know that he would not be entitled to the unvested RSUs on a termination without cause.  In this case there was no evidence that the employee had been provided with a copy of the RSU plan or that the forfeiture provision on termination had been brought to his attention.  This decision was upheld by the Ontario Court of Appeal. What’s significant is that prior to analyzing the wording of the RSU provisions, the Court first looked at whether the company had provided the employee with a copy of the plan and whether the employee was made aware of the forfeiture provision.  The fact that this had not happened lead to the Court’s conclusion that he would not have understood that the termination provisions under his employment contract did not include RSUs. Therefore the Court concluded that he was also entitled to the value of the RSUs that would have vested over the notice period.