The Ontario Superior Court of Justice upheld a contract that forced an employee to forfeit restricted shares upon resignation in Levinsky v The Toronto-Dominion Bank.
The Plaintiff, a Vice President and Managing Director at the bank, participated in the bank’s Long Term Compensation Plan. The Plan granted the Plaintiff Restricted Share Units each year. Under the Plan, shares that had not yet matured would be forfeited upon resignation. The Plaintiff resigned in 2010, and accordingly, lost his entitlement to shares allocated to him in 2007, 2008 and 2009. The value of the shares was over $1 Million. The Plaintiff argued that the requirement to forfeit shares on resignation was a restrictive covenant and unreasonable, and therefore unenforceable. He also argued that it was an unreasonable restraint on trade.
The Court rejected the Plaintiff’s argument that he had no choice but to accept the terms of the Plan. The Court concluded that the Plaintiff was a sophisticated business man and knew the terms of the plan. The Court reviewed the jurisprudence involving contracts with unreasonable restraints on trade and noted the following principles:
- First, employment contracts with clauses that forfeit future entitlements can be characterized as a contingency to the entitlement designed to obtain employee loyalty rather than a restraint on trade restricting commercial activity post termination;
- Second, a clause will not constitute a restraint on trade where it does not preclude the employee “from going anywhere and doing anything he choses to do.”
The judge concluded that in assessing a clause that is alleged to restrain trade, the court must consider whether the forfeiture, on its face or in practice, is tied to the end of employment, or whether it is tied to an employee’s conduct following termination. If it is tied only to the termination of employment, the clause will not act as a restraint on trade, and therefore will be enforceable.
In the Plaintiff’s case, the clause did not reference post-termination conduct and therefore was not a restraint on trade. The Plan did not create vested rights for the Plaintiff – in other words, it did not relate to compensation that was already earned or “accrued” to the Plaintiff, but rather compensation that still depended on a future contingency. Instead, the clause in question disentitled the Plaintiff from future benefits where the employee did not continue working for the bank. If he were not at work, he would not satisfy one of the pre-conditions for entitlement and therefore not be entitled.
This case will be helpful for employers seeking to enforce contractual language that end accrual at the time employment terminates. This type of contractual limitation is often challenged in terminations in the financial industry and in relation to executive compnesation, where incentive payments can be an important component of compensation.
The key learning from this decision is that there is a difference between a contractual provision that ends an unvested entitlement at termination from one that restricts an employees conduct post-termination. Where a contract is tied to post-termination conduct or events, rather than the termination itself, it risks being found a restraint on trade (as non-competition provisions have been where they are not sufficiently narrow in scope). A restraint on trade will not be found simply because entitlements end upon termination. In other words, contractual terms removing incentive compensation at termination can be enforceable where they are implemented to to secure the employee’s loyalty through continued service, are not removing vested compensation, and do not restricts commercial activity post-termination.