The truth behind the oft-misunderstood equity compensation plan

Skip to Content News Archives Economy Energy Oil & Gas Renewables Electric Vehicles Mining Commodities Agriculture Real Estate Mortgages Mortgage Rates Finance Banking Insurance Fintech Cryptocurrency Work Wealth Smart Money Wealth Management Investor Personal Finance Family Finance Retirement Taxes High Net Worth FP Comment Executive Women Puzzmo Newsletters Financial Times Business Essentials More Innovation Information Technology FP500 Podcasts Small Business Lives Told Tails Told Shopping Financial Post Store Obituaries Place a Notice Advertising Advertising With Us Advertising Solutions Postmedia Ad Manager Sponsorship Requests Classifieds Place a Classifieds ad Working Profile Settings My Subscriptions Saved Articles My Offers Newsletters Customer Service FAQ News Economy Energy Mining Real Estate Finance Work Wealth Investor FP Comment Executive Women Puzzmo Newsletters Financial Times Business Essentials This advertisement has not loaded yet, but your article continues below.HomeWorkThe truth behind the oft-misunderstood equity compensation planHoward Levitt and Peter Carey: If your compensation includes equity and your employment has been terminated, do not assume the employer’s interpretation is correctLast updated 1 hour ago You can save this article by registering for free here. Or sign-in if you have an account.Increasingly, executives and professionals are paid not only through salary and bonuses, but through an ownership stake in their employer as well. Photo by UNSPLASHGeorge Gershwin’s It Ain’t Necessarily So, with lyrics by Ira Gershwin, debuted in Porgy and Bess in 1935. The song playfully questioned whether accepted truths were, in fact, true at all.THIS CONTENT IS RESERVED FOR SUBSCRIBERS ONLYSubscribe now to read the latest news in your city and across Canada.Exclusive articles from Barbara Shecter, Joe O'Connor, Gabriel Friedman, and others.Daily content from Financial Times, the world's leading global business publication.Unlimited online access to read articles from Financial Post, National Post and 15 news sites across Canada with one account.National Post ePaper, an electronic replica of the print edition to view on any device, share and comment on.Daily puzzles, including the New York Times Crossword.SUBSCRIBE TO UNLOCK MORE ARTICLESSubscribe now to read the latest news in your city and across Canada.Exclusive articles from Barbara Shecter, Joe O'Connor, Gabriel Friedman and others.Daily content from Financial Times, the world's leading global business publication.Unlimited online access to read articles from Financial Post, National Post and 15 news sites across Canada with one account.National Post ePaper, an electronic replica of the print edition to view on any device, share and comment on.Daily puzzles, including the New York Times Crossword.REGISTER / SIGN IN TO UNLOCK MORE ARTICLESCreate an account or sign in to continue with your reading experience.Access articles from across Canada with one account.Share your thoughts and join the conversation in the comments.Enjoy additional articles per month.Get email updates from your favourite authors.THIS ARTICLE IS FREE TO READ REGISTER TO UNLOCK.Create an account or sign in to continue with your reading experience.Access articles from across Canada with one accountShare your thoughts and join the conversation in the commentsEnjoy additional articles per monthGet email updates from your favourite authorsSign In or Create an AccountRegular column readers know that we often say the same thing about employment contracts. What appears to be clear on paper frequently turns out to be legally unenforceable.The same is also true of another document employees often overlook entirely: the equity compensation plan.FP Work touches on HR strategy, labour economics, office culture, technology and more.By signing up you consent to receive the above newsletter from Postmedia Network Inc.A welcome email is on its way. If you don't see it, please check your junk folder.The next issue of Work will soon be in your inbox.We encountered an issue signing you up. Please try againIncreasingly, executives and professionals are paid not only through salary and bonuses, but through an ownership stake in their employer as well. That equity may take the form of restricted share units (RSUs), stock options, deferred share units, performance share units or outright shares. In many cases, it represents the most valuable part of the employee’s compensation package.Yet remarkably, some employees have never even seen the document that governs it. And of those that have, few have thoroughly read it.The details are usually buried in a separate “plan” rather than in the employment agreement itself. That plan determines when awards vest, when they may be exercised and, most importantly, what happens if employment ends.Almost invariably, the employer points to a clause stating that all unvested awards are forfeited immediately upon termination.The starting point in every wrongful dismissal case is simple: An employee wrongfully dismissed is entitled to the financial position they would have occupied had they continued working throughout their reasonable notice period. That includes every component of compensation they would have received — salary, bonuses, benefits and, unless validly excluded, equity compensation.This is where many employers — and surprisingly, many employees — misunderstand the law.When an employee sues after a wrongful dismissal, they are generally not claiming the equity itself. They are claiming damages equal to the value of the equity they would have earned had they remained employed during the notice period.That distinction has profound legal consequences.Canadian courts have repeatedly held that an employer cannot simply rely on forfeiture language in an equity plan. If the employer intends to deprive an employee of compensation that would otherwise accrue during the notice period, the plan must do so with unmistakable clarity.The language must clearly inform the employee that they are surrendering their common law right to damages for lost equity during the notice period. The Supreme Court of Canada made this very clear in the Matthews v. Ocean Nutrition case in which we acted.And yet, very few plans do so sufficiently to be legally effective.This is especially true of plans drafted in the United States, where employment law differs dramatically from Canada’s. In the U.S., the law often permits employment to be terminated at will without compensation and therefore plans contain language that is wholly inadequate to displace Canadian common law rights.This advertisement has not loaded yet.This advertisement has not loaded yet, but your article continues below.The result can be staggering.An employee told they have forfeited hundreds of thousands — or even millions — of dollars in equity may in fact remain legally entitled to receive its value as damages.The employer’s human resources department may genuinely believe the plan governs. So may senior management. They may confidently advise that the matter is beyond their control because “the plan says so.”But the courts have repeatedly demonstrated that what the plan says is only the beginning of the analysis.If the language does not clearly and lawfully remove an employee’s common law entitlement to damages, the forfeiture provision may simply not be enforceable.The lesson is straightforward.If your compensation includes equity and your employment has been terminated, do not assume the employer’s interpretation is correct. Have both your employment agreement and the equity plan reviewed by an experienced lawyer. What appears to be a complete forfeiture on paper may be worth a substantial financial recovery in court.As George and Ira Gershwin reminded us more than 90 years ago, don’t believe everything you read, because it ain’t necessarily so.Howard Levitt is senior partner of Levitt LLP, employment and labour lawyers with offices in Ontario, Alberta and British Columbia. He practises employment law in all provinces and is the author of six books, including the Law of Dismissal in Canada. Peter Carey is a partner at Levitt LLP.Notice for the Postmedia NetworkThis website uses cookies to personalize your content (including ads), and allows us to analyze our traffic. Read more about cookies here. By continuing to use our site, you agree to our Terms of Use and Privacy Policy.