Ontario Court of Appeal Rules Employee Equity Vesting May Continue During Statutory Notice Period

In a much-anticipated decision, the Ontario Court of Appeal in Wigdor v. Facebook Canada Ltd. and Meta Platforms, Inc. found that the Employment Standards Act, 2000 (the “ESA”) requires that Restricted Stock Units (“RSUs”) continue to vest during the termination notice period prescribed by the ESA. Further, if the termination provisions of the employment agreement or equity incentive agreement are unenforceable and common law notice periods are awarded, such equity entitlements, including RSUs, continue to vest through the common law notice period.

This decision has implications for equity incentive plans as well as employment agreements that purport to limit entitlement to equity or other equity-based compensation upon termination of employment, or limit entitlement to those “actively employed.”

Background

Wigdor v. Facebook concerned the employment relationship of Dr. Wigdor, a former owner of a business that was sold to Meta Platforms (“Meta”), previously Facebook Inc. Following the sale, Dr. Wigdor became an employee of Facebook Canada Ltd. (“Facebook”), a Canadian subsidiary of Meta. Dr. Wigdor’s compensation package included RSU entitlements which were governed by a series of RSU agreements granted from 2020-2023.

Each RSU agreement contained provisions that restricted the vesting of RSUs after the employee’s termination of employment:

• The 2020 RSU agreement stated that “no vesting shall continue during any notice period in relation to his/her Termination, whether specified under contract or statutorily, regulatory or common law.”
• The 2021–2023 RSU agreements indicated that “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).”

Separately, Dr. Wigdor’s employment agreement provided, among other things, that his past service to the predecessor employer would be recognized under his employment agreement with Facebook. However, Dr. Wigdor’s employment agreement permitted Facebook to terminate his employment during the first three months of employment on only two weeks’ written notice, which was inconsistent with his nine years of recognized service (which would necessitate at least eight weeks’ notice of termination under the ESA).

Following his termination without cause, Meta offered Dr. Wigdor a separation package consisting of minimum ESA and supplemental entitlements, conditional upon Dr. Wigdor signing a release which prevented him from challenging the forfeiture provisions in the RSU Agreements. Dr. Wigdor refused to sign and brought an application seeking damages in lieu of reasonable notice at common law, including approximately $4.7 million USD for the loss of RSUs that would have vested during the reasonable notice period.

Court of Appeal Decision

Enforceability of the Termination Provisions

On the issue of Dr. Wigdor’s entitlement to reasonable notice, the Court of Appeal affirmed the lower court’s ruling that the employment agreement provision allowing the employer to terminate Dr. Wigdor upon two weeks’ notice during the first three months of his employment was contrary to the ESA. Section 9 of the ESA required Dr. Wigdor’s nine years of service to the predecessor employer to be credited as service to Facebook, the successor employer. Those nine years of service meant that he could not have been terminated by Facebook upon two weeks’ notice at any point during his employment, as the ESA would require at least eight weeks’ notice and give him various other rights. As a consequence, the termination clause was void and common law reasonable notice applied, which the judge fixed at 10 months.

RSU Entitlements

On the issue of the RSU entitlements, Dr. Wigdor argued that the vesting restrictions in the RSU agreements violated Section 60 of the ESA and he was entitled to continued vesting of RSUs during the reasonable notice period.

Section 60(1)(a) of the ESA provides that, during a termination notice period required under the ESA (eight weeks, in the case of Dr. Wigdor), the employer “shall not reduce the employee’s wage rate or alter any other term or condition of employment.”

Additionally, Section 61(1)(a) of the ESA requires a payment equal to what the employee would have received under section 60 had notice been provided, which, by inference, means what would have been provided assuming there were no changes to wage rates or other terms of employment.

When interpreted harmoniously, sections 60 and 61 of the ESA operate to ensure that the employee is put in the same financial position regardless of whether the employer gives working notice or pay in lieu of notice. Applying this interpretation, the Court of Appeal found that the RSU agreements contravened the ESA by restricting vesting during the statutory notice period.

The Court of Appeal rejected the employer’s attempt to rely on the “saving” language in the 2021–2023 RSU agreements set out above, which provided that “unless explicitly required by applicable legislation” vesting would not be extended. The employer argued that these agreements contemplated extended vesting during the statutory notice period if required by law. The Court found that this language was not engaged because the ESA did not “explicitly” require continued vesting of RSUs during the statutory notice period. At best, the clause was ambiguous, and that ambiguity would be resolved in favour of the employee.

The vesting restrictions were, therefore, void, and the common law presumption concerning the treatment of the RSUs applied. Following Matthews v. Ocean Nutrition, damages were to be awarded for the RSUs that would have vested during the notice period. Ultimately, the court awarded Dr. Wigdor approximately $4.7 million USD in damages for the loss of these RSUs during the common law notice period of 10 months.

Implications for Employers

Wigdor v. Facebook clarifies several important points for employers:

• Equity incentive agreements that restrict vesting during the statutory notice period are contrary to the ESA, and, therefore, such restrictions are void.
• Employers cannot alter any term or condition of employment during the statutory notice period. Where an RSU forfeiture clauses contravenes this rule, the employee’s common law entitlement to continued vesting will apply.
• Saving language in RSU agreements or equity incentive plans may not be sufficient to comply with the ESA, particularly where it is unclear whether RSUs continue to vest during the statutory notice period or are eliminated immediately upon termination.
• On termination of employment, the ESA generally provides that an employee should be in the same financial position whether the employer gives working notice or ends employment immediately and provides pay in lieu of notice.

For information on how this decision may affect your equity compensation plans or employment agreements, please contact any member of our Employment, Pensions and Executive Compensation Group.