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In a recent case, Levinsky v. The Toronto-Dominion Bank 2013 ONSC 5657, an Ontario court confirmed that it is possible to draft contracts that allow employers to “claw back” compensation owed or paid to employees if an employee resigns from their employment. The court also provided guidance on how to prevent such clauses from being rendered void for unduly restraining trade.
Mr. Levinsky was a highly paid vice-president of TD Bank who resigned to start his own hedge fund in 2010. The Long Term Compensation Plan (LTCP) established by TD Bank provided Mr. Levinsky with Restricted Share Units (RSUs) in addition to his base compensation. These RSUs however only became payable once they had matured over a period of three years. The LTCP also provided that if an employee resigned before the end of these three years they would forfeit any of the RSU compensation that had not already been paid.
When Mr. Levinsky resigned his employment he argued that the contractual clause allowing TD Bank to withhold compensation was void as it “restrained trade” by preventing him from leaving TD Bank to set up his own business.
Determining whether the terms of an employment contract unduly restrict trade is a common issue in employment law disputes. Restraint of trade arguments are most commonly advanced against non-competition clauses that may prevent a departing employee from competing against the employer they have departed. In the Levinsky case the court determined that the clause forfeiting Mr. Levinsky of his RSU compensation did not restrain trade, it was merely an element of the agreement between Mr. Levinsky and TD Bank.
In its decision the court emphasized the fact that although the compensation forfeited by Mr. Levinsky was significant it was only a portion of the total compensation he received for his service. To determine whether a particular contractual clause constitutes a restraint of trade the court held that each clause had to be analyzed on the basis of whether the forfeiture of compensation resulted just from an employee’s resignation, or whether it also somehow prevented departing employees from certain courses of business conduct following their departure. In Mr. Levinsky’s case the court found the clause in question did not restrict Mr. Levinsky’s activities following his resignation.