Forfeiture of Deferred Compensation on Resignation from Employment: Not a Restraint of Trade

It is a customary term in many deferred compensation plans to require an employee to serve until the vesting date to be eligible for payment of the award. Such a term was recently challenged in Levinsky v. The Toronto-Dominion Bank¹. In this case, a former employee argued that a term providing for the forfeiture of unvested deferred compensation on resignation from employment was an unreasonable restraint on trade and therefore unenforceable. The Ontario Superior Court of Justice disagreed. On September 12, 2013, the Court released its decision, confirming that such a term does not constitute a restraint of trade and is indeed enforceable, affirming the incentive compensation practices of many employers in Ontario.

Background

The plaintiff, Levinsky, a former employee of TD Bank, was a participant in the Bank’s Long Term Compensation Plan (the Plan). Levinsky was granted a certain number of restricted share units (RSUs) annually under the Plan. The units vested and became payable in cash, based on the fair market value of the shares at the time of payment, three years after their grant. The terms of the Plan provided that an employee’s entitlement to an award would be forfeited if the employee resigned from service prior to the vesting date of the award.

Levinsky resigned prior to the vesting dates and thereby lost his entitlement to RSUs allocated to him under the Plan. He sued TD Bank for payment of the cash equivalent, arguing that the forfeiture-on-resignation provision restrains competition as well as employee choice and mobility.

The Decision

The court found that a deferred compensation arrangement that depends on the continued service of an employee is not a restraint of trade, but is rather a reasonable condition of entitlement designed to secure the employee’s loyalty. If forfeiture is tied to the employee’s conduct or competitive activity following termination—as opposed to being tied to continuation of service—a compensation arrangement might be regarded as a restraint of trade, but the Plan in this case made no such link. The court found that the forfeiture in this case resulted simply from employee resignation and did not fetter Levinsky’s ability to choose where he would work next. As a result, the Plan was not found to be a restraint on trade.

The court noted that the forfeiture of vested compensation would require an inquiry into whether the forfeiture constitutes a penalty for engaging in competitive activity or is simply a disgorgement for not having met a condition for granting a benefit.

Implications

The court’s decision in Levinsky affirms current market practice, confirming that customary incentive compensation terms requiring continued service for deferred compensation to vest and be payable are enforceable.

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¹ 2013 ONSC 4657

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