It is not uncommon for an equity plan or a leave of absence policy to provide that vesting of awards will be suspended during any unpaid leave of absence. The intent is clear: companies do not want their employees to continue to vest in and earn awards if they are not rendering services (e.g., because they are on a sabbatical). However, these types of provisions can be problematic.

Is Suspension Legal and Administratively Feasible?

First, by suspending vesting during an unpaid leave of absence, companies are assuming that such leaves are not protected by law. (Often, the provision goes on to provide that vesting during paid leaves will also be suspended, but only to the extent such leaves are not protected by law or by contract.) However, there may also be unpaid leaves outside the U.S. during which suspension will not be permissible. The provision also raises the question of what is considered an unpaid leave. Is it a leave during which the company does not pay the employee, even if the employee is paid by a government agency (for at least a portion of his/her regular salary)? If the employee is paid by the government (as may be the case in some countries for employees on maternity or parental leaves), it will be quite common for the leave to be protected under local law.

In any event, because the plan or policy has to be administered in accordance with local law, the company would have to determine for each leave (regardless how short) whether or not it is protected. Relying on the local HR team to make this determination is not advisable because the treatment of equity awards is often different from other employment-related benefits, and local HR teams are often not savvy enough to appreciate the differences. Therefore, companies would either need to work with counsel each time a leave occurs to determine whether vesting can be suspended during a particular leave or prepare a database for all of their countries with information on the various protected leaves (which will have to be reviewed and updated on a regular basis). Either way, the effort required to determine the protected status of a leave will be substantial.

(As a side note, I want to mention that the effort can be similarly significant for leave of absence provisions which provide for suspension of vesting during paid leaves after a certain period of time. Unless the grace period is very long (e.g., two years), companies will find that even long-term leaves are protected in many countries outside the U.S., resulting in a greatly differing application of the suspension provision, depending on the country and leave.)

Second, even if a suspension is permissible under applicable laws, companies may find it challenging to administer a suspension in the case of short-term leaves, especially for employees outside the U.S. This would require that the local HR team notify the global stock plan team diligently every time an employee goes on leave. In my experience, that often does not happen which means that, in practice, companies fail to suspend employees on short-term leaves. This, in turn, could raise accounting issues on the basis that the terms of the award were amended to allow for continued vesting. In addition, allowing continued vesting in some cases (because of a failed notification) could set a bad precedent for leaves for which the company is able to suspend vesting, because the employees whose leaves are suspended could argue that the provision is not enforced consistently or that it is enforced in an arbitrary manner.

How To Deal with Leaves

As a preliminary comment, it is advisable not to hardwire the treatment of awards during a leave into the plan, mainly because companies should have the flexibility to change the treatment of awards during leaves over time. Instead, the plan should refer to a leave of absence policy that can be adopted (and modified) by the Board or a delegatee of the Board.

The policy should exclusively deal with the treatment of equity awards during leaves. In other words, it is not recommended to cover the treatment of equity awards in a broader leave of absence policy, which also covers the treatment of other employment benefits during the leave. (As most of you know, we always advise against commingling the equity awards (granted by the foreign parent) with employment benefits (paid by the local employer) to avoid that the equity awards could be considered part of these benefits.)

In the policy, at least for employees outside the U.S., companies should consider establishing a grace period during which vesting will not be suspended, even in the case of an unpaid leave. If, for example, vesting is suspended only after six months, this will dramatically reduce the number of leaves during which any action is required. At the same time, it will be more likely for the local HR team to notify the global stock team of a long-term leave which will enable the company to properly administer the suspension.

Finally, the longer the grace period, the less likely it is that the leave will still be protected under local law (especially for unpaid leaves). This means that companies will be able to apply the suspension more consistently and fairly across countries (with some exceptions notwithstanding).

Of course, companies will need to weigh the length of the grace period against their desire not to compensate employees who are not actually working and strike a balance between the greater administrative effort (and legal costs) required to administer suspension during shorter leaves and the ability to suspend inactive employees from vesting.