It is common today for employers to grant to employees performance incentives including share-based awards that make up an important part of an employee’s compensation package. Share-based compensation awards provide an employee with a certain number of shares of their employer, upon “vesting”. Vesting occurs when an employee has met the conditions to receive the shares, which are customarily tied to the duration of employment and performance evaluations.
Employment contracts often stipulate that share-based awards are void on termination of employment and that unvested share awards are cancelled rather than vested at that time. The features of share-based awards are often based upon considerations for employer and employee including providing competitive financial incentives to employees, with significant upside value, while the employer maintains cash and working capital. Additionally, the risk of forfeiture on termination plays a role in fostering employee performance and loyalty, while the continuing award of such compensation to the employee is normally tax deferred.
In the Ontario Superior Court of Justice in Battiston v. Microsoft Canada Inc. (July 2020), the court considered what damages to award to a 22-year Microsoft employee fired without cause who forfeited his share-based compensation in accordance with his employment contract. The court determined that, despite very clear wording in Battiston's employment agreement that all of his unvested share-based compensation lapsed on termination of employment, the employee was still entitled to its underlying value. The court held that because voiding unvested share-based compensation is "harsh and oppressive", the employer had a special duty to highlight its potential significance to the employee, in order for this contract term to be held valid. The contract itself was insufficent.
In so finding, the court considered case law that deals with unequal bargaining power between contracting parties involving employment contracts. The upshot of the decision is that an employer should give a prospective employee a fulsome explanation of termination provisions that may result in the loss of anticipated financial rewards and ask the prospective employee to specifically acknowledge the provision in writing.
The judgment also seems to suggest that an employee may bear no responsibility for reading or signing their employment agreement, despite the employer's expectation that a signed employment contract would be binding. Although there is little doubt that employers may find it awkward to discuss potentially onerous termination provisions at the time of the positive hiring event and have such terms expressly acknowledged in writing by the employee, this judgment underscores the importance of taking this extra measure.
Recommendation: it is advisable for employers to draw attention to an employee upon hiring of the potential loss of the value of unvested share-based awards. The employee should be asked to sign an express acknowledgement that on termination the right to unvested share-based compensation will end and the employee will not be entitled to its underlying value. The employer can provide context to this by stating that the courts have found that it is a duty of the employer to explain significant termination provisions and to have the prospective employee explicitly acknowledge their understanding of this possible forfeiture.
**this post does not constitute legal advice and represents to views of the author only.
For further information, please contact me at robert@spiegellaw.ca or find me on linkedin.
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