Contract forces employer to pay deferred equity compensation

© andiafaith - Fotolia.com

During negotiations around the employment contract, the employee indicated that he had deferred equity compensation from his previous employer in the form of share options as part of a retention strategy. The employee indicated that he stood to lose his shares if he were to resign. A contract of employment was concluded between the parties and incorporated a clause which made provision for the payment, in cash value, equivalent to the deferred equity compensation.

Resignation was irrelevant

The employee resigned from the employ of the employer before the whole amount of the deferred equity compensation was paid to him. In the Labour Court the employee's case was that the right to receive the payment vested before the termination of the contract and therefore his dismissal or resignation or cancellation of the contract was irrelevant.

The employer, on the other hand, argued that the right of the employee to claim the amount in question was guaranteed as an incentive for him to leave his erstwhile employer and thereafter remain in the employ of the respondent. In other words, the employee was not entitled to receive any payment in terms of the contract of employment once the contract was terminated by resignation.

The court held that the purpose of the clause was to attract the employee to join the employ of the employer and this was done with the incentive of offering the employee the value of the shares he would have acquired had he remained with his previous employer.

Enforceable obligation

The provisions of the clause in the employment contract gave rise to an enforceable obligation on the part of the employer to pay the employee the amount claimed. The obligation on the employer arose from a proper interpretation of the clause which created an unconditional and enforceable obligation surviving the cancellation and rescission of the contract by the employee.

What was apparent from the reading of the clause was that the parties addressed the risk consequent to the employee resigning from his previous employer. What the contract failed to address was the risk of the new employer in the event that the employee also resigned from it.

Employers are cautioned to ensure that they are adequately protected in these circumstances when mitigating the risk of employees. If not, they could end up having to discharge an obligation to an employee without having the full benefit of such obligation.