The Ontario Court of Appeal recently released its decision in Wigdor v. Facebook Canada Ltd., addressing two significant issues for Ontario employers: the enforceability of termination clauses that purport to limit an employee's entitlements, and the application of the Employment Standards Act, 2000 (ESA) to equity-based compensation documents such as Restricted Stock Unit (RSU) agreements. The Court of Appeal's decision addressed the earlier ruling of the Ontario Superior Court of Justice and provides important guidance on both issues.
What happened?
The employee began employment with the employer on September 12, 2020. His compensation included eligibility for semi-annual discretionary bonuses and participation in the employer’s RSU program. His employment was terminated without cause on December 4, 2023.
The employment agreement had a termination clause which stipulated the employee’s entitlements upon termination. The clause stated that the employer could terminate by providing only two weeks of advance notice or pay in lieu during the first three months of employment, including the employee’s prior service with his former consulting firm (which dated back to 2011). The agreement also contained a general "saving" provision stating that the employee's entitlements on termination would be no less than those required under applicable employment standards legislation.
The relevant portions of the termination clause read as follows:
"During the first three (3) months of your employment, including any prior service with [prior employer] or its predecessors, the Company may terminate your employment at any time by providing you with two (2) weeks of advance notice or base pay in lieu of notice."
"After the first three (3) months of your employment, the Company may terminate your employment without cause by providing you with all of your minimum entitlements under Employment Standards Legislation, including notice of termination, or payment in lieu of notice, benefits continuation (if required), and severance pay (if applicable). In addition to your minimum statutory entitlements and in exchange for a full and final release in favour of the Company, the Company will also provide you with an additional 4 weeks of base pay for every year of completed service, up to a maximum of 12 months' base pay (inclusive of any Employment Standards Legislation notice and, if applicable, severance amount)."
The saving provision in the general termination clause also stated:
"Although you will not be entitled to any reasonable notice or entitlements except as set out below, whether at common law or otherwise, in no event will your entitlements upon termination be less than those minimum entitlements set out in Employment Standards Legislation."
In addition to his employment agreement, the employee's RSU entitlements were governed by separate RSU Award Agreements. The 2021-2023 RSU Agreements contained the following termination language and saving provision:
“If Participant’s service Terminates for any reason, all unvested RSUs shall be forfeited to the Company forthwith, and all rights of Participant to such RSUs shall immediately terminate… For the avoidance of doubt, 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).”
“Notwithstanding the foregoing, if applicable employment standards legislation explicitly requires continued entitlement to vesting during a statutory notice period, Participant’s right to vest in the RSUs under the Plan, if any, will terminate effective as of the last day of Participant’s minimum statutory notice period.”
Upon termination, the employer calculated the employee's statutory entitlements based on his combined service dating back to 2011 and offered additional payments under the employment agreement in exchange for a full and final release. The employee declined to sign the release because it included a term requiring him to waive any claim to his unvested RSUs, which he valued in the millions of dollars.
The employee applied to the court for a declaration that the termination clause in his employment agreement was unenforceable as contrary to the ESA, and for an order entitling him to common law reasonable notice. He further argued that provisions in the RSU agreements were void and unenforceable because they purported to forfeit his unvested RSUs upon termination in circumstances that could include unlawful dismissal, and because they deprived him of RSUs that he argued should have vested during his statutory notice period.
What did the Superior Court decide?
The court found in favour of the employee on the enforceability of the termination clause, and in favour of the employer regarding the enforceability of the RSU agreements.
Regarding the termination clause that limited notice to two weeks, the court held that the provision violated the ESA. Because the employee's prior service with his previous employer was recognized under the agreement for ESA purposes, he was entitled to significantly more than two weeks of notice upon termination under the ESA. The court rejected the employer's argument that the general "saving" provision in the preamble of the termination clause could cure this deficiency, relying on established Court of Appeal authority confirming that a general saving provision cannot rescue a specific term that is contrary to the ESA.
On the RSU agreements, the court held that both the 2020 RSU Agreement and the 2021-2023 RSU Agreements were valid and enforceable. The court found that RSUs are not "wages" under the ESA and that section 61 of the ESA, which governs an employer's obligations where pay in lieu of statutory notice is provided, does not require RSUs to continue vesting during that period.
The court read sections 60 and 61 of the ESA disjunctively, finding that section 60 governed working notice and section 61 alone governed pay in lieu of notice. On this basis, the court concluded that the obligation in section 60(1)(a) not to alter any "term or condition of employment" during the notice period had no application to the calculation of pay in lieu of notice under section 61. The court further found that the RSU entitlements were not "benefits" within the meaning of section 61(1)(b) and were not "wages" under section 61(1.1).
What did the Court of Appeal decide?
The Court of Appeal allowed the employee's appeal in part and dismissed the employer's cross-appeal. The Court upheld the application judge's finding that the termination clause in the employment agreement contravened the ESA and was therefore unenforceable, entitling the employee to common law reasonable notice of 10 months. However, the Court reversed the application judge's finding on the RSU agreements, holding that the RSU agreements contravened the ESA and were void. As a result, the employee was entitled to damages for the value of the RSUs that would have vested during the common law reasonable notice period. The Court declined to disturb the application judge's denial of punitive damages.
On the RSU agreements, the Court of Appeal found that the application judge incorrectly interpreted sections 60 and 61 of the ESA. The Court held that sections 60 and 61 must be read together, not disjunctively. Section 61(1)(a) requires an employer to pay a lump sum "equal to the amount the employee would have been entitled to receive under section 60 had notice been given in accordance with that section." The Court found that this language expressly incorporates the protections in section 60(1)(a), including the prohibition on altering any "term or condition of employment" during the statutory notice period.
The Court concluded that sections 60 and 61 are intended to create a harmonious scheme ensuring that employees are in the same financial position whether they receive working notice or pay in lieu of notice.
Applying this interpretation, the Court found that the employee's entitlement to RSUs was a "term or condition of employment" within the meaning of section 60(1)(a) of the ESA. The attempt to forfeit all unvested RSUs immediately upon termination, including during any statutory notice period, thus constituted an alteration of a term or condition of employment during the notice period contrary to section 60(1)(a) of the ESA.
The Court of Appeal also found that the saving language in the 2021-2023 RSU Agreements, which preserved vesting only where "explicitly required by applicable legislation", was not engaged – the Court explained that there is nothing "explicit" in the ESA about continued vesting of RSUs. To the extent this language was ambiguous, the ambiguity had to be resolved in favour of the employee.
Takeaways
This decision adds to the growing Ontario caselaw which shows that termination clauses must be carefully drafted to comply with the ESA in all circumstances in which they may operate.
The decision also provides much needed guidance to employers on the application of the ESA to equity-based compensation agreements. The Court of Appeal held that the employee’s entitlement to RSUs constituted a "term or condition of employment" under the ESA, and that provisions in RSU agreements that purported to forfeit unvested equity upon termination (including during the statutory notice period) contravene the ESA and are void. Importantly, the Court found that saving language in the 2021-2023 RSU Agreements, which preserved vesting only where "explicitly required by applicable legislation," was insufficient to bring the agreements into compliance with the ESA.
Employers who provide equity-based compensation should be aware that this decision strongly impacts the ability to rely on plan language that causes equity to stop vesting immediately upon termination. This applies not only to RSU agreements but also to analogous equity compensation arrangements (such as stock option plans). Employers with equity plans that contemplate automatic forfeiture upon termination should revisit those provisions in light of this decision.
If you need assistance reviewing your current agreements or have questions about this decision, please contact one of the authors or your usual Fasken lawyer.
