Entitlement to Stock Options as Damages for Wrongful Dismissal
In a recent lawsuit against Shopify (Egan Cheung v Shopify Inc.), a former employee claims damages for wrongful dismissal, alleging damages for lost salary-earning opportunities during his reasonable notice period of 12 months, along with additional damages for lost employee benefits and unused vacation pay during that same period. Notably, the Plaintiff is also claiming that he is entitled to damages based on Registered Share Units (“RSU”) and stock options in the course of his alleged wrongful dismissal.
Stock options may complicate a wrongful dismissal case as they are compensation that may be awarded but can have a variable value depending on their vesting date. When determining whether a wrongfully dismissed employee is entitled to damages for stock options, the Courts will review the express wording of the employment contract or relevant auxiliary contracts.
What makes Cheung v Shopify a special case is that back in 2022, Shopify amended its compensation structure to allow employees to designate what percentage of their compensation was to be paid in money and what was to be compensated for by way of stock options. The choice to take a higher percentage of one’s pay in RSUs or stock options is specifically stated as an example in Shopify’s announcement.
One of the central questions in Shopify is therefore whether the employee is entitled to compensation for the value of the RSUs or stock options he would have received over the course of the notice period.
Courts May Allow Long-Term Bonuses Based on Vesting Period and Clear Intentions
Past cases provide a template for how a court might decide Cheung v Shopify. One leading case is the 2020 Supreme Court decision, Matthews v Ocean Nutrition Canada Ltd (“Matthews”), in which the plaintiff Matthews was a senior company executive who entered into a long-term incentive plan (“LTIP”). If certain circumstances were triggered, employees under this plan would receive a massive payout. Following a change in management, Matthews eventually left the company, which a court later found was a constructive dismissal that warranted damages. Matthews was awarded the equivalent of 15 months’ salary, as this would have been his reasonable notice period. However, issues arose around the LTIP: the company was sold 13 months after Matthews left, triggering the LTIP payment. Though Matthews was no longer an employee at this time, the Supreme Court determined that Matthews was entitled to receive the money as part of his damages.
Key to their decision was that entitlement to incentive bonuses such as the LTIP were based on what Matthews would have earned had he still been employed at the time of vesting. An earlier case that provides insight on this issue is 2016’s Paquette v TeraGo Networks Inc., in which an ex-employee (Paquette) had participated in his company’s bonus plan, which gave additional payouts based on annual performance. While a motion judge declined to award Paquette damages for bonuses he would have earned during his notice period – reasoning that the plan specified that the employee needed to be “actively employed” at the time – this decision was overturned on appeal, entitling Paquette to his lost bonuses.
Paquette was distinguished from a 2004, stock option decision (Kieran v. Ingram Micro Inc.) in which the plaintiff, while otherwise awarded wrongful dismissal damages, was not entitled to exercise his stock option rights. This was because the plans gave a strict 60-day deadline for the rights to vest and be exercised after termination. However, in Paquette, the plan’s wording was “not sufficient to deprive an employee terminated without reasonable notice” of their bonuses. Even with an “active employment” requirement, the main deciding factor is what the employee would have received, had his employment continued throughout the notice period.
When an employee is entitled to receive stock options as damages, the award will likely be limited to whatever vests during the notice period. In a more recent 2023 decision, Milwid v IBM Canada Ltd., the plaintiff ex-employee had equity in the form of RSUs under a long-term plan, half of which vested 3 months after he left the company. While the RSUs were found to be an integral part of the plaintiff’s compensation, the remaining half of his RSUs – which would have vested beyond his notice period – cannot be included in those damages. To reiterate, an employee’s damages include what they would have received during the notice period, which includes bonuses such as stocks – but not those which would have only vested afterward.
Too Early to Say if the Shopify Lawsuit Will Reach Similar Conclusions
According to Mr. Cheung’s statement of claim, his RSUs and stock options were included in his base remuneration, which could suggest, if past precedents hold, that he will be entitled to them as damages based on the amount that vested during his reasonable notice period. However, Shopify’s unique format for calculating pay might affect the decision, as the Employee Agreement will not be the only document whose precise wording will be analyzed by the courts.
Regardless, it is clear that an employee’s entitlement to certain damages upon wrongful termination will largely depend on both the contracts themselves and whether the employee would have earned said compensation had their employment continued. For any employees who are currently unsure what benefits they may be owed, our experienced litigation team and our employment lawyers at Walker Law would be happy to meet with you for a consultation.
Tags: Employment Litigation Law, Civil Litigation Law, Contract Disputes