Mandatory ESOPs

Ensure employees have sufficient knowledge about a mandatory Employee Stock Option Plans (ESOP). If the ESOP becomes mandatory, ensure that employees are given sufficient notice and are well aware of this change.

In Carabine v. Daam Galvanizing Inc., 2000 ABPC 56 (CanLII), employees had been subject to a bonus plan during their employment in addition to their wages. The company had discussions to change the bonus plan from a cash payment plan to a share issuance plan (an ESOP).

However, there was reluctance from the employees about this change. The employer distributed documents to the employees about these changes. The first guideline document made reference to the mandatory participation in the ESOP. But, the second guideline document, distributed later, did not make this reference. The court said that this left employees under the impression that the cash plan would or could still be in effect.

It was not until seven months later did the company clearly communicate to all employees that the ESOP was now mandatory. Subsequently, many employees left the company. The change was considered a material change in the employment contract and required sufficient notice.

The court stated that although the employees had reason to believe that the bonus cash plan was being changed, this did not constitute notice to the employees. Therefore, the company was liable to pay the employees their shares of profits and damages.

Written by Rajah. Rajah Lehal is Founder and CEO of Rajah is a legal technologist and technology lawyer who is, together with the Clausehound team, capturing and sharing lawyer expertise, building deal negotiation libraries, teaching negotiation in classrooms, and automating negotiation with software.