Executive compensation plans are often designed to both reward
past performance and offer a meaningful retention incentive. In the
recent decision in Levinsky v. Toronto Dominion Bank et
al., (2013) 117 OR 3d 106, the Ontario Superior Court
reinforced the accepted rule that forfeiture provisions in
compensation plans are not likely to be an unenforceable restraint
In Levinsky, a dispute arose after a senior executive
left TD Bank to start up a hedge fund. Under the provisions of the
bank's Restricted Share Unit ("RSU") Plan,
participants were awarded RSUs which did not vest until three years
following the initial allocation. The RSU Plan rules provided that
should a participant resign from the Bank before the RSUs vested,
all unvested RSUs would be forfeited. The TD Plan rule relied-upon
provided as follows:
A Participant's entitlement to a Particular Award will be
Forfeited without notice by the Bank, if the Participant resigns
from Service prior to the Maturity Date of such Particular
Legal Framework: What Triggers Forfeiture?
TD Bank successfully claimed that the forfeiture rule was
enforceable. The Court held that when reviewing these types of
clauses, the key feature will be what event or conduct triggers the
forfeiture provision. Clauses that tie eligibility for compensation
to continuation of service are acceptable, whereas clauses which
tie forfeiture to post-termination activity are subject to
challenge as restraints on trade. The key for employers is to
ensure that the contract clause does not fetter the employee's
ability to choose where the employee wants to work next.
In Levinsky, the Court held that the specific Plan rule
triggered forfeiture based solely on the end to employment. The
Court therefore dismissed the employee's argument that the rule
constituted a restraint on trade. Instead, the Court found that the
forfeiture of RSUs upon resignation was an appropriate form of
In holding that the Plan rule was "agnostic as to the
participant-employee's post-resignation conduct", the
Court also stressed that the employee was fully advised of the RSU
Plan when he accepted his latest position, noting that Levinsky was
a sophisticated individual who understood the terms of his
employment. Finally, the Court added that the evidence that
Levinsky set up his own business after leaving the bank could
hardly indicate that the contractual provision restricted his
post-resignation commercial activities.
Key Points for Employers
Levinsky reinforces the fact that employers can, with
appropriately drafted documents, make incentives contingent upon
conditions such as continued employment. This will be the case so
long as the compensation plan does not improperly restrict the
employee's subsequent activity. This case is helpful for
employers since it confirms that a resignation does not necessarily
trigger an immediate, or perhaps any, entitlement to unvested
The foregoing provides only an overview. Readers are
cautioned against making any decisions based on this material
alone. Rather, a qualified lawyer should be consulted.
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