Facebook Canada’s Equity Forfeiture Provision Receives a “Like” From an Ontario Court

In a recent decision that will resonate with employers using equity-based compensation, the Ontario Superior Court in Wigdor v Facebook Canada Ltd. upheld the enforceability of a restricted stock unit (RSU) forfeiture provision – even as it struck down Facebook Canada’s termination clause for violating Ontario’s Employment Standards Act, 2000 (ESA).

This case involved the dismissal of a senior employee and focused on his entitlement to the millions in unvested RSUs after the termination of his employment. The Court found that, while the employment contract’s termination provision was unenforceable, the RSU agreements were valid and binding.

Background

Daniel Wigdor (Wigdor), a tenured professor at the University of Toronto who specializes in human-computer interaction, founded Chatham Inc. (Chatham Labs) in 2011. By 2018, Wigdor was managing significant projects for certain subsidiaries of Meta (Facebook Canada’s parent corporation). In 2020, Meta acquired Wigdor’s consulting operation and hired Wigdor as the Director, Research Science with Facebook Canada.

Wigdor’s compensation package included a salary of more than $253,000 as well as benefits and regular grants of RSUs. His employment agreement recognized his service with Chatham Labs for ESA purposes, dating back to July 2011.

Wigdor continued his employment with Facebook Canada until his employment was terminated in December of 2023. On termination of employment, Facebook Canada offered Wigdor payments in excess of his minimum statutory termination and severance entitlements in exchange for a release of claims. However, when Wigdor refused to sign the release because it would have precluded him from disputing the forfeiture of his unvested RSUs (valued in the millions of dollars), Facebook Canada withheld his termination payments for almost ten months – eventually paying them only after litigation commenced.

The Termination Clause

Wigdor’s employment agreement allowed Facebook Canada to terminate his employment within the first three months with just two weeks’ notice or base pay in lieu of notice, stating:

12. Termination. Your employment with the Company is on an indefinite basis. You understand and agree that this Section 12 will apply throughout your employment with the Company, even if your role, duties and responsibilities or compensation change significantly over time. 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.

a. Termination without Cause. During the first three (3) months of your employment, including any prior service with Chatham Labs Inc. 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. (emphasis added)

Based on Wigdor’s nine years of service with Chatham Labs, two weeks’ notice or pay in lieu of notice was insufficient. Although the Court recognized that the employment agreement contained a “saving” clause (which promised compliance with the ESA), the Court found the clause to be in violation of the ESA by improperly limiting his notice, severance, and benefits continuation.

The Court referenced Rossman v. Canadian Solar Inc., by which the Court of Appeal emphasized that allowing employers to include unenforceable terms while relying on general saving language “exploits vulnerable employees who hold unequal bargaining power in contract negotiations” and “flouts the purpose of the ESA – to protect employees and to ensure that employers treat them fairly upon termination.”

As a result, Wigdor was awarded damages equal to ten months of reasonable notice, subject to mitigation (which the Court found he had partially achieved by returning to his tenured academic role).

The Equity Forfeiture Clause

The real heart of the dispute – and the key issue for employers – was whether Wigdor was entitled to the continued vesting of RSUs during the ten-month notice period.

Wigdor received grants of RSUs under Meta’s 2012 Equity Incentive Plan under two differently structured agreements. As the unvested RSUs granted were asserted to be worth millions of dollars, Wigdor challenged both forms of agreement. Wigdor argued that the RSU agreements violated Section 61 of the ESA, which requires employers to maintain all “terms and conditions of employment” during the statutory notice period. Justice Leiper distinguished between Section 60, which applies during periods of “working notice” and Section 61, which applies during periods of pay in lieu of notice.

Justice Leiper found no violation of either Sections 60 or 61 of the ESA because RSUs do not constitute “wages” or “benefits” within the meaning of the ESA. The Court aptly noted that, if the legislature had intended RSUs to be considered “wages” (or, for that matter, “benefits”), it could have adopted a more expansive definition.

Wigdor also argued that the later RSU agreements contained “deliberately misleading language” that suggested employment standards legislation might require continued vesting during statutory notice periods. More specifically, the agreements stated that the unvested RSUs would be forfeited, unless “applicable employment standards legislation explicitly requires continued entitlement to vesting during a statutory notice period.” Wigdor contended that, since the ESA does not expressly require RSU vesting during the statutory notice period, that language imported ambiguous terms. Wigdor also challenged provisions in both forms of RSU agreement that provided for forfeiture even if the termination was later found to be “invalid or unlawful” or “in breach of employment laws”.

Justice Leiper reflected on both arguments and, in rejecting both, emphasized the independent nature of the equity compensation arrangements. Regarding the asserted misleading language, the Court found that the provisions did not purport to identify specific legislation (and simply acknowledged that legislation may be amended). On the broader argument, Justice Leiper distinguished employment contract termination provisions from separate compensation agreements, finding that the RSU agreements with Meta were governed independently and did not themselves contain any attempts to contract out of the ESA. The Court emphasized that Wigdor’s contractual entitlements under the RSU agreements were independent of any relief he might be entitled to receive under his employment agreement, the ESA, or the common law.

In short, the RSU forfeiture provisions passed legal scrutiny because they were clearly drafted, independently structured, and compliant with statutory rules.

Punitive Damages Denied – But Actions Not Endorsed

Wigdor also sought $75,000 in punitive damages, arguing that the ten-month delay in paying his ESA entitlements was egregious. Facebook Canada acknowledged making “mistakes” post-termination, including the premature termination of benefits coverage and delayed statutory payments. However, the company characterized these failures as “administrative errors”.

While the Court believed that the delay was more than a mere “administrative error”, the Court declined to award any punitive damages. The Court noted that the hearsay evidence explaining the delay was “inadequate and vague,” and the timing of payment after legal proceedings commenced suggested that Meta was “prepared to let [Wigdor’s] entitlements languish.” The Court noted that Facebook’s conduct – while “inadequate” and “dilatory” – did not meet the threshold for “harsh, vindictive, reprehensible, or malicious” behaviour.

Key Takeaways for Employers

Employers should note the following key takeaways:

Review Employment-Related Agreements Early and Often

Given the rapidly changing landscape, employers should consider reviewing employment agreements, grant agreements, compensation plans and other employment-related documents on a regular basis (and before any significant hires or grants). Precise, unambiguous, and consistent documentation is imperative to successfully restricting employees to their intended contractual entitlements.

Delaying in Paying Statutory Entitlements is Risky Business

While Facebook Canada avoided punitive damages in this case, the Court noted that the delay raised red flags. Timely payment is critical – even if litigation is anticipated (or ongoing) or a severance package is being negotiated.

Savings Clauses May Not Save You

While a clause promising compliance with the ESA is a helpful part of any employment agreement, a general clause promising compliance cannot “cure” a termination clause that violates the ESA on its face. Organizations must ensure their termination language strictly complies with statutory requirements, as courts will not hesitate to void entire termination clauses where specific provisions contravene the ESA.

For guidance on structuring, drafting and implementing compliant termination provisions in employment agreements and equity compensation agreements, please reach out to your regular Hicks Morley lawyer.

The article in this client update provides general information and should not be relied on as legal advice or opinion. This publication is copyrighted by Hicks Morley Hamilton Stewart Storie LLP and may not be photocopied or reproduced in any form, in whole or in part, without the express permission of Hicks Morley Hamilton Stewart Storie LLP. ©

FTR Now