Navigating Restricted Stock Units After Termination: A Comprehensive Guide

If you've been granted restricted stock units (RSUs) and your employment has been terminated, you're likely wondering what happens next. RSUs are a type of equity compensation that vests over time, and upon termination, the employer's policies and relevant laws determine the outcome.

In general, the employer's RSU plan will dictate the treatment of RSUs upon termination. Some plans may allow for continued vesting and payout, while others may terminate immediately.

Termination can be a complex and emotional experience, but understanding your RSU plan and the relevant laws can help you navigate this challenging time.

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RSU termination rules can be complex, but understanding them is crucial for making informed decisions about your restricted stock units.

Usually, job termination results in losing all unvested RSUs.

You should review all documentation with your financial advisor, legal professionals, and tax consultants to ensure that you understand the ramifications of what's being offered.

The date of termination is often the key date for measuring the post-termination exercise period.

Most companies' stock plans start the clock on the date of termination, meaning the actual end of employment status, not the date you give notice.

Make sure to review the provisions for what would happen if you took a leave of absence, became disabled, or died while holding RSUs.

If your RSUs would transfer to your next of kin, ensure that you have a beneficiary established.

Companies withhold taxes upon exercises of nonqualified stock options (NQSOs) and the vesting of restricted stock/RSUs, even for terminated employees.

You'll typically receive a Form W-2, but not always, especially if you no longer work at the company.

It's essential to keep a contact at the employer in the accounting or HR department to ensure you receive your W-2 on time.

Companies may not withhold taxes on NQSO exercises by former employees, leading to a 1099-NEC, which can cause tax concerns.

You'll need to decide whether to pay estimated taxes for that quarter or wait until your tax return for the year to pay what you owe.

After 90 days from termination, ISOs become nonqualified stock options, which have a different tax treatment.

If your company allows more than 90 days to exercise ISOs after your termination date, be aware that your type of option—and thus your tax treatment—will change if you wait beyond the 90-day point to exercise.

Be sure you are well-versed on the tax consequences, as the rules can be complex and easy to misunderstand.

For your interest: Restricted Stock Units Tax Withholding

Being laid off can have a big impact on your restricted stock units (RSUs).

If you're laid off with vested RSUs, you're in luck. The good news is that the vested portion of your RSUs remains yours.

Losing a job can be tough, but being laid off with unvested RSUs is a different story. Any unvested RSUs will likely be returned to your employer.

It's essential to carefully read any severance agreement you're given, as sometimes companies will accelerate the vesting of some or all RSUs as a gesture of goodwill.

You should also review the provisions for what happens to your RSUs in case of a leave of absence, disability, or death while holding RSUs.

If you've been laid off from a company, the good news is that the vested portion of your RSUs remains yours.

If you end up being laid off, the vested portion of your RSUs remains yours. Since shares of company stock are released to you upon a vesting date, any RSUs that vested are now shares that you own outright.

Being laid off has no bearing on what happens to those shares. You can keep them as part of your investment portfolio.

If your company is offering severance packages, check to see if accelerated vesting or partial accelerated vesting is on the table. This can be a great opportunity to receive some of the value of your RSUs early.

Check this out: Restricted Stock Vesting

If you've had RSUs vest over the years, now might be a good time to reevaluate your stance on holding shares of your soon-to-be ex-employer. It might finally be time to diversify into other investments.

Consider filing for unemployment. Every employer you've ever worked for has been paying something called FUTA taxes and it's likely a benefit for which you are now eligible.

It may seem counterintuitive, but at your new job, it may be worth negotiating for more RSUs due to the fact that so many tech companies are at their low point stock-wise in years.

You'll almost always forfeit unvested restricted stock or RSUs if you leave your job, except in special cases like disability, retirement, or an acquisition.

Exceptions to this rule can occur if your employment agreement or stock plan has specific provisions.

If you're planning to leave your job, you might want to stick around long enough to get any valuable chunk of restricted stock/RSUs that may vest in the near future.

You own any shares that vested before your termination date, which is great news if you're planning to leave your job. But be aware that you'll likely forfeit any shares that haven't vested yet, unless your employment agreement or stock plan has special provisions for disability, retirement, or an acquisition.

Restricted stock and RSUs typically follow a vesting schedule, and if you leave before vesting, you'll forfeit the entire grant. This is especially true if you have a cliff vesting schedule, where all shares vest at once rather than incrementally.

If you're planning to leave your job, you may want to stick around long enough to get any valuable chunk of restricted stock/RSUs that may vest in the near future.

Employee Stock Purchase Plans are a type of benefit that some companies offer to their employees.

You continue to own stock purchased under an ESPP during your employment, but your eligibility for participation in the plan ends at job termination.

Any funds withheld from your salary but not used to purchase shares before the end of your employment will be returned to you, normally without interest, within a reasonable period.

Most ESPPs do not permit the company to keep pre-termination payroll deductions in the plan to purchase shares on a pro rata basis after you leave your job.

This means that if your employment ends before the purchase date, under most plans shares are not purchased for you.

You have rights only to stock options that have already vested by your termination date. With a graded vesting schedule, you're allowed to exercise the vested portion of the option grant, but most commonly you forfeit the remainder.

If you have a cliff vesting schedule, you'll forfeit the entire grant if you leave before vesting. This means you'll lose all your stock options if you don't meet the vesting requirements.

You can exercise the vested portion of your option grant, but it's essential to check your company's policies and deadlines to avoid any issues. Be sure to review your stock option agreement to understand the specifics of your grant.

For another approach, see: Restricted Stock Units vs Stock Options

Companies take stock compensation very seriously, and courts have reinforced this by emphasizing that employees are responsible for keeping track of their stock options when they leave their job.

Companies strictly follow rules, procedures, and deadlines, and court cases have consistently upheld this. For example, the Porkert v. Chevron Corporation case and the Mariasch v. Gillette case both highlight the importance of adhering to these rules.

You can't rely on spoken information about your post-termination exercise period, so it's essential to refer to your stock plan documents and related statements. These are the only reliable and binding sources that determine how long you have to exercise options after termination.

If you miss a deadline, even by a narrow margin, it's unlikely that you'll be able to appeal the decision. The court cases mentioned, including Sheils v. Pfizer, demonstrate that companies and courts take these deadlines very seriously.

Here are some notable court cases that illustrate the importance of following rules and deadlines when it comes to stock compensation:

Understanding your employment contract is crucial when it comes to restricted stock units (RSUs) and termination. Haynes Law Firm in Toronto can assist you with issues that arise from employment contracts or termination.

If you're an employee, it's essential to understand your rights and how they relate to RSUs. Our goal is to ensure that you receive maximum compensation upon termination.

In the Maynard case, the court ruled that an employee is entitled to stock as forfeiture terms were lacking. The employee in question had never received a copy of the plan that regulated his RSUs, and the employer had the discretion to waive the automatic forfeiture, but did not provide notice.

The employee's termination package was based on his base salary, not the value of the RSUs, which made up 37% of his total compensation. The release he was asked to sign waived rights to compensation for any bonuses, profit-sharing, or other entitlements, including the RSUs.

The court found that the facts differed from the case of Battiston v. Microsoft Canada Inc., where the employee received notice of the terms each year when he accepted his stock award. In contrast, the employee in Maynard never received notice of the plan.

The court's decision in Maynard was upheld in the Court of Appeal, indicating that employers must provide notice of forfeiture terms to employees.

In Toronto, employment contracts can be complex, especially when it comes to stock options and termination packages. RSUs, or restricted stock units, are becoming increasingly popular in employment contracts, particularly for tech workers.

Haynes Law Firm in Toronto can provide valuable advice on RSUs in employment contracts, helping employees understand their rights and receive maximum compensation upon termination.

Termination packages must be in line with legislation and case law to avoid liabilities for employers.