Canada: Forfeiture Provisions In Compensation Plans Not Restraints Of Trade: Employers Can Refuse Payment To Departed Employees

Executive compensation plans are often designed to both reward past performance and offer a meaningful retention incentive. In the recent decision in Levinsky v. Toronto Dominion Bank et al., (2013) 117 OR 3d 106, the Ontario Superior Court reinforced the accepted rule that forfeiture provisions in compensation plans are not likely to be an unenforceable restraint of trade.

Levinsky: Background

In Levinsky, a dispute arose after a senior executive left TD Bank to start up a hedge fund. Under the provisions of the bank's Restricted Share Unit ("RSU") Plan, participants were awarded RSUs which did not vest until three years following the initial allocation. The RSU Plan rules provided that should a participant resign from the Bank before the RSUs vested, all unvested RSUs would be forfeited. The TD Plan rule relied-upon provided as follows:

Legal Framework: What Triggers Forfeiture?

TD Bank successfully claimed that the forfeiture rule was enforceable. The Court held that when reviewing these types of clauses, the key feature will be what event or conduct triggers the forfeiture provision. Clauses that tie eligibility for compensation to continuation of service are acceptable, whereas clauses which tie forfeiture to post-termination activity are subject to challenge as restraints on trade. The key for employers is to ensure that the contract clause does not fetter the employee's ability to choose where the employee wants to work next.

In Levinsky, the Court held that the specific Plan rule triggered forfeiture based solely on the end to employment. The Court therefore dismissed the employee's argument that the rule constituted a restraint on trade. Instead, the Court found that the forfeiture of RSUs upon resignation was an appropriate form of loyalty incentive.

In holding that the Plan rule was "agnostic as to the participant-employee's post-resignation conduct", the Court also stressed that the employee was fully advised of the RSU Plan when he accepted his latest position, noting that Levinsky was a sophisticated individual who understood the terms of his employment. Finally, the Court added that the evidence that Levinsky set up his own business after leaving the bank could hardly indicate that the contractual provision restricted his post-resignation commercial activities.

Key Points for Employers

Levinsky reinforces the fact that employers can, with appropriately drafted documents, make incentives contingent upon conditions such as continued employment. This will be the case so long as the compensation plan does not improperly restrict the employee's subsequent activity. This case is helpful for employers since it confirms that a resignation does not necessarily trigger an immediate, or perhaps any, entitlement to unvested compensation.

The foregoing provides only an overview. Readers are cautioned against making any decisions based on this material alone. Rather, a qualified lawyer should be consulted.

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