Wondering if anyone has any expertise on vesting, as I’ve come across a strange situation I haven’t seen before:
An employer structured as an LLC has set up a phantom unit plan (RPUs) for its employees (LLCs can’t issue shares), and each employee has signed an agreement that includes a vesting schedule. The wrinkle in the plan is the following clause:
Effect of Separation from Service. If a Participant Separates from Service before a Liquidity Event (change in control or IPO) for any reason other than death, Disability, Retirement, or termination of his employment by the Company without Cause, all Vested and non-Vested RPUs shall immediately upon such Separation from Service terminate and be forfeited and neither the Participant nor his heirs, personal representatives, successors, or assigns shall have any future right with respect to those forefeited RPUs. No payment or consideration shall be made to the Employee on account of such forfeiture.
Is this legal? One side says that this a contract and you can draw up terms however you wish, but the other side says you can’t say someone’s vested if they lose the shares upon resigning/being terminated - there’s no distinction or benefit to being vested, which directly contradicts the definition of the word.
Vested = “fully and unconditionally guaranteed as a legal right, benefit, or privilege.”
It is highly unusual for a company to force forfeiture of an equity award that is already fully vested - looks like a lawsuit waiting to happen and I don’t think the courts will be sympathetic to the employer.
Of course, but those conditions typically make the incentives more difficult to vest, they don’t render vesting meaningless. i.e. extending the vesting period, creating a cliff vest, etc., but once you reach the vest date the ‘title’ transfers to the employee.
The typical conditions would that you forfeit unvested shares, regardless of whether you are terminated for cause or without cause. If they start taking away vested shares which is technically earned comp, they might as well ask you to repay back cash bonuses, earned wages or benefits, or deny accrued vacation.
Therein lies the grey area - it’s a phantom unit agreement within an LLC that is governed by an operating agreement, so ERISA would likely not apply. But does that give them the right to deceptively re-define a word, effectively stripping it of it’s core meaning?
It looks like the language is designed to let them claim vested provisions if you are terminated with cause. i.e. if you make a major screw-up, they can take away everything, but if they just lay you off, they can’t.
Hopefully that can’t be interpreted as “giving two weeks (or 24 hours) notice is cause for termination,” though I have no doubt that that someone would try enforce it that way.
Whether it’s a violation of the law or not, it’s still pretty crappy, because the only way you can get your vested benefits would be to sue the company in court. That is, if you have a hundred thousand dollars vested, and they just say, “You’re laid off and we’re reclaiming your hundred thousand dollars”, then you have to go to court and sue them and pay lawyer fees and court fees and what not just to get your money back.