Dismissed employees: look closely at options plan

Date of dismissal is not necessarily the date your options plan comes to an end

Many employment arrangements these days provide stock options to the employee as part of the overall employment remuneration package. While plans vary from employer to employer, they share some general traits, one of which is that options are issued or vested over time.

Generally, options are not granted all at once, but rather, are granted in batches that vest and become exercisable over time, usually over years. For instance, the employer may grant 1,000 share options to the employee, with 250 of that total vesting each year, over four years. Because the options are granted or vested over time, they become interesting should the employment come to an end before the stock options are all issued.

Generally, any employer sophisticated enough to grant stock options will probably also have a separate stock option plan that governs the circumstances related to stock options. The plan is usually a sophisticated document, dealing with things such as grants, vesting schedules, and the time frame available to dismissed employees to exercise vested options after the ending of employment.

Where there is a dismissal from employment, the most important issue related to stock options is how the plan deals with the termination of employment. Most plans attempt to deal with the ending of employment such that all rights to further options cease upon the ending of employment, and any options that have vested must be exercised within a set time, usually 90 days, after termination of employment.

So two things turn on the ending of employment. The continued vesting of options, and the time one has to exercise vested options. Obviously, a lot turns on how the ending of employment is defined in the plan.

As I have mentioned in prior columns, an employee dismissed without cause is entitled to notice. Notice has been characterized by the courts as a period of time in which the employment contract remains alive for the purpose of assessing the compensation to be paid by the employer to the employee. One part of that compensation relates to stock options.

However, often at dismissal, the employer relieves the employee of duties effective immediately, and offers to make payment of money for a period of time that may or may not equate to the notice period. Where stock options are involved, the employer may then assert that the employee’s employment ended on the date the employee was relieved of duties, so that stock option rights are cut off or determined on that date.

The employer will refer to the wording of the plan for support on this point. The employee then has limited time to exercise the options that have vested.

If notice is a period where the employment contract remains alive for the purpose of assessing compensation, and stock options are part of the employee’s compensation, then why should stock option rights not continue during this period? Can the employer just issue a cheque equating to the salary the employee would have earned during the notice period and deny the employee any further stock option rights during the notice period?

Maybe not. The dismissed employee may be entitled to those stock options scheduled to vest in the notice period. Also, the employee may be entitled to stretch out the entire stock option time frame to cover the notice period, meaning that the exercise period triggered by the ending of employment is pushed forward to start at the end of the notice period.

Typically, the courts of Canada have used basic guidelines to help them determine stock option entitlements of dismissed employees where there is a stock option plan in place. Some of the guidelines are:

The wording of the plan generally governs the rights and obligations of the employer and employee in relation to stock options;
If the plan attempts to define the termination of employment but does so ambiguously, the wording will be interpreted in favour of the employee, not the employer; and
Where the plan defines termination clearly to mean that the stock option rights end on the very date that the employee is relieved of duties, the wording of the plan will govern.
In employment law, because it is a subset of contract law, the rule of contra proferentem applies. This means that any vagueness or ambiguity in the wording or interpretation of a document, such as an options plan, will be interpreted against the interest of the drafter of that document, and in favour of the other non-drafting party. Usually, the employer is the drafter. Therefore, just as in baseball, where the tie always goes to the base-runner, the employee is at an immediate advantage.

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