Important lessons from Wigdor v. Facebook
Employers in the know understand the importance of a well-drafted employment agreement — it sets the terms of the relationship and effectively limits an employee’s entitlements on dismissal. Unfortunately, many employers make the mistake of investing in strong agreements only to wing it when it comes to other important documents like incentive plans.
You can have the strongest employment agreement out there, but if your incentive plan breaches the Employment Standards Act, 2000 (ESA), or contains other defects, that agreement will fail to properly limit an employee’s entitlement to incentive compensation during the common law notice period.
As the Ontario Court of Appeal (ONCA) recently made clear in Wigdor v. Facebook Canada Ltd., breaching the ESA in your incentive plans is a mistake that can cost you a fortune.
The split: working notice vs. pay in lieu
The key facts arose after Meta Platforms, Inc. (formerly Facebook) acquired Chatham Inc., a consulting firm founded by Daniel Wigdor. After the purchase, Meta retained him as director, research science of Facebook Canada Inc, granting him 43,380 restricted stock units (RSUs) valued at US$7.5 million, vesting quarterly over four years.
Three years later, Facebook terminated his employment without cause. The company paid him his ESA severance, but cut off his RSU vesting immediately on dismissal as per the terms of the applicable plan. Wigdor sued for common law notice damages, including the RSUs that would have vested during his notice period.
At trial, Facebook successfully defended the RSU issue. While the court voided the termination clause for failing to recognize prior service pursuant to the ESA, and awarded 10 months of notice, it denied the RSU claim.
The court agreed with Facebook that section 60 of the ESA, which prohibits altering any “term or condition of employment” during the ESA notice period, only applied to working notice. Since Wigdor received pay in lieu of notice under section 61, the court concluded that Facebook was free to cut off his RSU vesting upon dismissal.
Reality check
The ONCA reversed the court’s decision and clarified that providing an employee’s ESA entitlements as pay in lieu of notice does not let an employer off the hook with respect to altering terms and conditions of employment during the statutory notice period. This applies regardless of how notice is provided.
The ONCA unanimously ruled that sections 60 and 61 of the ESA must be read together, not disjunctively. The very purpose of pay in lieu is to place the employee in the exact same financial position they would have been in had they worked through their notice period. Consequently, pay in lieu must be calculated on the basis that no terms or conditions of employment, including RSU vesting, are altered.
Consequently, as Wigdor's RSUs were an integral "term or condition" of his compensation, the terms of the RSU plan providing for forfeiture upon dismissal violated the ESA and was void. Wigdor was awarded US$4,711,647 as compensation for the loss of the RSUs.
Looking ahead
Not to scare anyone, but the implications of Wigdor may stretch further. The 2022 Ontario Superior Court decision of Henderson v. Slavkin et al. held that offside language in the employment agreement’s confidentiality clause breached the ESA’s termination provisions, striking an otherwise enforceable termination clause. Henderson opened the door to scrutinizing sections of an agreement outside of the termination clause for problematic language, and arguably to supplemental documents such as incentive plans, though that was not at issue in the decision.
As the ONCA held in Waksdale, if any part of your termination clause violates the ESA, the entire termination clause falls. Thanks to Henderson and Wigdor, it is reasonable to argue that breaches of the ESA in an RSU plan, such as cutting off vesting during the statutory notice period, should invalidate the termination clause because the RSU plan should be “read into” the employment agreement.
Although this was not an issue in Wigdor, an incentive plan that is incorporated into an employment agreement, and used to limit an employee’s termination entitlements during their ESA notice period, risks infecting the entire termination scheme.
Pith and substance
Wigdor confirms that compliance with the ESA is critical in incentive compensation plans, such as RSU agreements and bonus policies. It is not sufficient for employers to ensure that their termination clauses do not breach the ESA, as termination clauses may be challenged on other grounds. ensuring that incentive compensation documents are enforceable works as a failsafe in case the termination clause in your contracts is vulnerable to challenge, and limits an employee’s incentive compensation entitlements to their statutory minimums.
As we saw in Wigdor, failure to limit these entitlements is costly. With a complaint RSU clause, Facebook may have still been liable for common law notice, but would not have had to pay millions of dollars on account of the RSUs.
To maximize your rights and minimize your liability, we strongly encourage you to review and update all employment agreements and incentive plan templates to ensure your business is effectively protected.
