Ontario Court of Appeal: Restricted Share Units Are Part of Termination Pay
In our practice, mediating employment termination disputes is common. While in most cases both parties accept that the working relationship itself is over, there is often still work to be done in finalizing a mutually agreeable separation package. Specifically, we are referring to terminations ‘without cause’, such as restructuring or layoffs, in which an employer has opted to provide pay in lieu of working notice, typically referred to as a package. The value and composition of the package can either lead to quick settlement or give rise to a dispute, especially if certain types of non-salary compensation are omitted. This article’s focus is on equity-related compensation such as stock options and restricted share units (‘RSUs’).
Pay in Lieu of Notice
The concept of pay in lieu of notice is straightforward: the reasonable interpretation is that the now-former employee is entitled to all the compensation and benefits that they would have earned had they been permitted to work during the notice period. The courts have affirmed and upheld this principle in cases such as Davidson v. Allelix Inc. (1991) CanLII 7091 (ON CA) (‘Allelix’), Paquette v. TeraGo Networks Inc., 2016 ONCA 618 (‘TeraGo’) and many more.
So why do disputes still arise?
The first area of dispute is how long the notice period should be. Absent a specific definition in the employment contract, the notice period will be either the statutory minimum, pursuant to laws such as Ontario’s Employment Standards Act, 2000, S.O. 2000 c.41 or at common law, which can be much greater. As this article’s focus is on equity-related compensation, notice period lengths will be reserved for another day.
Stock Options & RSUs
Turning to the value of the package itself, in our experience it is the stock options and/or RSUs that give rise to most disputes, and the Ontario Court of Appeal in Milwid v. IBM Canada Ltd., 2023 ONCA 702 has again upheld the principle that a former employee is entitled to the value of any RSUs that vest during their notice period. Mr. Milwid was a long-term employee of 38 years’ tenure and had been granted RSUs pursuant to IBM’s ‘Equity Award Agreement’. The employer took the position that employment ended on the date of termination, not the end of the notice period, and as such, Mr. Milwid was not entitled to any further equity benefits. Mr. Milwid disagreed, and both the lower court judge and the Court of Appeal found that he was entitled to damages for the value of the RSUs that would have vested during his reasonable notice period. This is consistent with the courts’ approach in both Allelix and TeraGo.
Employee Compensation is More Than Just Salary
Why is this important? Employee compensation has evolved to become much broader than base salary alone. Variable pay, such as commissions or non-discretionary bonuses, extended benefit packages, retirement savings, and other perquisites such as paid parking, transit passes, club memberships and even subsidized or free food by way of catering or on-site cafeterias all have value and need to be considered in the creation of a termination package. Compensation for parking and food may be moot if the employee is no longer reporting to work, however, substantive compensation such as options and RSUs should be addressed lest they create additional legal exposure for the employer.
In practice, this does not mean that the makeup of the separation package must mirror exactly how the compensation would have occurred during the notice period, only that it is equivalent. This can be addressed in several ways including extension of the notice period or other lump-sum payments in lieu of the stock options and/or RSUs.
Summary
The upshot? If you’re an employer, ensure that you’ve addressed the entirety of the departing employee(s) compensation as part of the package, including equity-based pay such as stock options and/or RSUs. If you’re an employee receiving a package, ensure that you obtain independent legal advice before finalizing an agreement. And if you could benefit from a neutral third party to facilitate agreement, then call us for a no-obligation consultation.