Many companies provide stock options as part of their employment remuneration packages. While individual plans may vary in detail, certain traits are common. Stock options aren’t usually granted all at once; they’re issued in batches that vest and become exercisable over time; usually over a period of years. For example: an employee can be granted 1000 shares in total, but the shares may be issued in batches of 250 per year, for a four year period. If a dismissal occurs before the end of that four year period, does the employee lose any of those stock options?
That depends. Companies usually provide separate documentation detailing the specific elements of the options plan. These elements can include: grants, vesting schedules, and how the options will be dealt with in the event of an employee dismissal. It’s not uncommon for the clock to start ticking as most contracts require the employee to exercise their vested options within a certain time period (usually 90 days) after their dismissal. Employees may also lose their rights to further options upon dismissal. As mentioned before, individual plans and contracts vary and much is determined by the wording in the contract.
Your Options Plan Might not End on the Date of Dismissal
If a dismissal occurs without cause, the employee is entitled to notice. This is part of the compensation package that the employer must provide to the employee upon termination. Another part of that compensation package is the options plan which includes the continued vesting of options and the time the employee has to exercise vested options. However, dismissals often occur immediately, and instead of notice, the employer will offer a release payment for a period of time that may or may not equate to a full notice amount. There are many reasons to be wary of such an offer, as was mentioned in the previous article Dismissal & Release Forms: Be Careful What You Sign.
In regards to stock options, the employer may claim that the because the employee’s duties and employment was terminated at the date of dismissal, their stock option rights should be terminated or determined on that date also. The employer will refer to the options plan to prove their case, and the employee may be left with a limited amount of time to exercise their vested options and nothing more.
Does that really make sense? This suggests that an employee may be compensated for their wages during the notice period, but not for their options plan. If notice or payment in lieu of notice is part of a compensation package, and stock options are also part of the compensation package, shouldn’t the employee’s rights to stock options continue during the notice period as well?
Employee Dismissal & Options Plans - How the Courts Rule
Your employer may try to tell you otherwise, but you may be entitled to those stock options scheduled to vest in your notice period. You may also be entitled to extend the stock option time limit to cover the notice period. So, instead of having the typical 90 day count-down beginning on the date of dismissal, the time frame to exercise vested options would begin at the end of the notice period instead.
The courts do have guidelines to help determine a dismissed employee’s entitlement to stock options where an options plan is in place. The wording of the document is closely examined as it determines the rights and obligations of the employer and employee. If the wording clearly states that an employee’s stock option rights end at the date of dismissal, that’s how the courts will rule. However, if there is any ambiguous language or difficulty in interpreting the document in regards to dismissal, the court will interpret in favor of the employee.
Many employees accept far less than what they are legally entitled to at the time of dismissal. Don’t let this happen to you. Before signing away your rights or accepting any “deal” offered by your employer, please contact Employment Contract Lawyer, Bob Yeager.