A recent Ontario decision demonstrates the importance of reviewing and understanding the terms of an employment agreement, after an employee lost his stock options by leaving his employment before the agreed-upon term with the employer.
Plaintiff Agrees to Compensation in the Form of Stock Options
The plaintiff founded a business in 1995 which developed real estate information services for both the commercial and new homes markets. By 2014, the business had approximately 40 employees and annual recurring revenues of over $7 million.
In early 2014, the plaintiff sold his business to another company, which provided real estate consulting and advisory services, software, and data solutions. The plaintiff negotiated a deal in principle with the company’s CEO and the transaction closed on July 23, 2014.
As part of the transaction, the plaintiff agreed to stay on as President of the business under the new company. The parties also agreed that the plaintiff would become eligible to receive stock options in the company as long as he stayed for three years or if the company terminated his position without cause prior to the end of three years.
This agreement came to be because the company did not want to pay the plaintiff his previous salary of over $600,000 per year. Therefore, the plaintiff agreed to a lower base salary of $300,000 per year plus a grant of 50,000 stock options in the company. The stock options were to give the plaintiff the entitlement to purchase shares of the company at a pre-established price at a future date.
However, the plaintiff claimed that the company terminated his employment after one year and offered him no new role. This, he submitted, amounted to constructive dismissal without cause and entitled him to receive the stock options.
In response, the company claimed that the plaintiff had worked for it for two years, transitioning from an employment position into a consulting position by mutual agreement after the first year. The company stated that the plaintiff voluntarily left at the end of the second year. Therefore, the company denied that the plaintiff ever became entitled to receive stock options.
The Employment Agreement
The relevant clause of the employment agreement between the plaintiff and the company read as follows:
“During the first year of the Term of employment, your primary responsibilities will be to continue to manage the […] business in accordance with the business plan for [the business] as may be amended by future determination. In the remaining two (2) years of the Term, the Company is amenable to having discussions with you about redefining your ongoing role and accountabilities with the Company and, if mutual agreement is reached, amending the terms of this Agreement.”
Additionally, the parties agreed that the plaintiff would not become entitled to receive the stock options until the end of the last day of the three-year term. The relevant clause in the agreement provided:
“Except as otherwise provided herein, you must be actively employed with the Company on the last day of the Term or you must have entered into and be providing services to the Company under a consulting agreement on the day that would have been the last day of the Term.”
Finally, the agreement contemplated two conditions under which the plaintiff would become entitled to receive stock options. He could either be actively employed with the company on the last day of the three-year term, or he could be providing services under a consulting agreement on that day.
Plaintiff Not Entitled to Stock Options
The court found that the plaintiff’s employment was not terminated without cause by the company. The court stated:
“I find that [the plaintiff] was not constructively dismissed from his employment. After one year, by mutual agreement, [the plaintiff] became an independent contractor or consultant. This change in status had been contemplated throughout and was not a dismissal by [the company]. At the end of the second year, [the plaintiff] decided to move on to greener pastures. He left by mutual agreement. [The plaintiff] therefore never became entitled to receive the options.”
Because the court concluded that the plaintiff did not work for three years and his employment was not terminated without cause prior to the three-year period expiring, the court found that he did not qualify for stock options under his agreement with the company.
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Employment contracts are fundamentally important elements of every employment relationship, providing the terms and conditions that govern that arrangement. Whether you are an employer or an employee, it is important to have an employment contract reviewed by a knowledgeable employment lawyer before finalizing and signing it. A lawyer can ensure your rights are protected and help you mitigate any potential risk or liability.
For more than 30 years, the Toronto employment lawyers at Baker & Company have been reviewing, drafting, and negotiating employment contracts for employees and employers across all industries and sectors. We advise on the language and terms included, make changes where required, and negotiate with the other party to ensure that our client is always in the best position possible.
At Baker & Company we take the time to meet with you and understand your unique needs when it comes to drafting the terms of an employment relationship. Call us at 416-777-0100 or contact us online for a consultation.