An Ontario Superior Court judge has ruled a former TD Bank executive who worked under a deferred-compensation model can’t have $1.6 million in deferred bonuses he says the bank owes him.
Levinsky, who trained as a lawyer, worked in the investment-banking group at TD Securities Inc. for 11 years. In January 2010, he resigned to start his own hedge fund. Since 2003, when he was promoted to vice president, Levinsky was part of the bank’s long-term compensation plan. Each year, he was granted a certain number of restricted share units, which matured and became payable in cash three years after they were granted.
The intention of the bank’s LTCP was to help retain highly qualified executives who “contribute to the long-term success of the business, and to align the interests of those executives with TD shareholders.”
Levinsky took the position that notwithstanding s. 6.5 of the LTCP, “the RSUs I was given annually were for past services provided in the prior fiscal year and therefore cannot be forfeited by resignation.”
The bank held that according to the terms of the LTCP, upon his resignation Levinsky forfeited his entitlement to the cash benefit of the RSUs awarded in 2007, 2008, and 2009, the cash equivalent of which the parties agreed was $1.6 million, not including interest.
For example, in 2009, Levinsky’s base salary was $125,000, his cash bonus under the bank’s performance compensation program was $1,362,000 and the LTCP amount was $637,565 for a total compensation of $2,125,065, if the LTCPs had not been forfeited.
As Brown pointed out in his decision, the compensation allocated to Levinsky in 2009 “placed him amongst the top 0.25 per cent of the bank’s employees globally.”
Levinsky sued the bank for $1,600,766 arguing the forfeiture-on-resignation provision was in the nature of a restrictive covenant and unreasonable, therefore unenforceable for three reasons:
• Restraint of trade — the suggestion it stopped him from leaving the bank and joining another competitor;
• It was unconscionable;
• He was “constructively dismissed” when the plan was imposed upon him.
“Restraint of trade” is one of the few areas where courts will refuse to enforce a contract even if someone is knowledgeable and signs off on the employment contract.
Levinsky’s lawyer, David S. Steinberg of Pape Barristers Professional Corp., argued the law on restraint of trade isn’t just about what happens when an employee leaves and goes to a competitor, it is far broader.
“Can an employer restrain or stop an employee from leaving if that’s what the employee wants to do by effectively creating a penalty that is so financially significant that the employee won’t leave? That’s how we framed the case,” says Steinberg. “On the one hand the bank is saying to its employee: ‘Great job this year, here is your bonus, we’re going to hold some of it and not pay it until three years' time but if you leave you are going to give it up.’ We’re saying that is a restraint on trade.”
Even though Levinsky signed a contract each year acknowledging the terms, Steinberg says he did so feeling he didn’t have much of a choice if he wanted to continuing working.
“Is it not contrary to public policy to have employers giving with one hand, taking away with the other, dressing it up in the language of the formal plan? When you strip it down, it’s not fair,” says Steinberg. “There’s a lot of money at stake here.”
The judge held it wasn’t restraint of trade because the forfeiture provision was neutral about what Levinsky did after he left his employment, says Stephen Gleave, a partner with Hicks Morley Hamilton Stewart Storie LLP who argued the case on behalf of The Toronto-Dominion Bank and TD Securities Inc. “The judge said [Levinsky] was a sophisticated business person and the clause was common in the financial sector,” says Gleave.
The constructive dismissal allegation was also rejected because Levinsky participated in the plan for six years.
“It belies common sense; he got a promotion and got more money because of it,” says Gleave.
Brown pointed out there was no restriction under the plan on what Levinsky did after he left the bank. In fact, not only did he set up his hedge fund, Waratah Advisors, but TD Bank became one of his clients.
The court said the compensation plan Levinsky was paid under was a valid objective and not a restraint on trade.
“They [TD] are saying ‘We want to tie the compensation to the fortunes of the organization’,” says John Prezioso, a partner with Hicks Morley’s pensions, benefits, and executive compensation group, who says the decision is an endorsement of what the financial services industry is doing with compensation.
Employment lawyer and executive compensation consultant Nadine Côté, of CSuite Law, says deferred plans like the one Levinsky worked under tend to be about a prior year of performance.
“They were trying to make that comment that the compensation has already been earned and in some respect it has, but the entitlement to those amounts are still subject to vesting,” says Côté.
Vesting is used as a retention mechanism so employees don’t walk out the door.
“If we look at the cases where an employee resigned, they tend to lose their right to that compensation, which absolutely makes sense. TD didn’t officially talk about retention but their evidence was that it was also in part about retention and not just aligning the executive’s interest with the shareholder’s interest, which was the stated purpose. If part of the goal of deferring compensation is to increase an element of retention it absolutely makes sense that if the executive walks out the door they lose the benefit of what would have otherwise flowed to them and lose all of it.”
Hicks Morley associate Richelle Pollard, who argued the case with Gleave, says there are five best practices employers can follow to try and positions themselves well in these types of compensation agreements.
• Make sure the recipient of the deferred compensation or share units signs off each year acknowledging he or she is bound by the terms and conditions of whatever the applicable plan will be. (In this case Levinsky signed off every year.)
• Ensure the participation agreement states the individual has read and understood the terms of the plan.
• Draw specific attention in the agreement to the forfeiture provisions found in the plan.
• Make sure the plan clearly makes payment of the shares or units conditional upon being actively employed at the time they mature and when the payment is made.
• Try and limit any references in the plan to the person having a proprietary interest in the units or the awards.
“Employers should quote from the applicable section citing the forfeiture and then have the individual acknowledge they have read the section and understand the terms,” says Pollard. “You ultimately want to be clear the units only represent future compensation which is dependent on them remaining employed at the time those units mature.”
TD had actually made specific reference to the forfeiture and reduction of award provisions and Levinsky had initialed his award agreement each time.
Steinberg would not comment on whether his client plans to file a notice of appeal.