The Brussels Labour Court of Appeal gives guidance on equity compensation and severance pay

Bizar Male

Under Belgian law, an employee whose contract is terminated with immediate effect is entitled to severance pay which is computed on the basis of current annual compensation, including all benefits to which an employee is entitled under the employment relationship. Particularly in the context of equity compensation Belgian case-law has been unsettled and quite unclear as to which benefits, if any, need to be included for these purposes. Key concepts of equity compensation, especially those types that carry successive transactions over a certain period of time, have sometimes not been properly applied, and basic concepts of civil contract law (timing clauses, conditions subsequent or precedent) also tend to create problems.

A recent decision of the Brussels Labour Court of Appeals [1] sheds some light on these issues with respect to restricted stock units (RSUs) granted by the employer’s parent company. The RSUs vested over a three-year period, and one-third vested within the 12 months prior to termination of the eligible employee. A dispute arose on the questions of (i) whether benefits granted by affiliated third parties (other than the employing company) must be included in the current annual compensation, (ii) whether the granting or vesting date of the RSUs is the decisive moment for the benefit to be considered as having been attributed, and (iii) whether for variable compensation (like equity) this decisive moment occurs within the 12-month deadline prior to termination.

In line with well-established case-law the Court sets out that the fact that the RSUs were granted by the parent company does not affect its characterisation as a benefit for these purposes, all the more so if the benefit must be seen to have been awarded in consideration for the labour performed.

In light of the particular features of the incentives plan, with a pure timing clause (RSUs vesting over a three-year period) combined with a condition subsequent (unvested RSUs forfeited in case of dismissal), the court also rightly held that the decisive moment of attribution of the benefit (i.e. the moment at which the employee’s estate is enriched) is the moment of vesting of the RSUs and not of granting. The employer unsuccessfully maintained an analogy between the vesting of the RSU and the vesting and subsequent exercise of stock options. It had argued in vain that since the exercise of stock options (linked to its vesting) is under prevailing case-law not considered to constitute the benefit in an equity plan for purposes of assessing termination entitlements, the vesting of the RSUs could not either. However, the vesting and subsequent exercise of stock options is not a transaction comparable to the vesting of an RSU. Under the plan terms, the RSU is effectively acquired by the beneficiary at the time of its vesting. Its value is the stock market value at that time; its cause is solidly rooted in the employment contract itself. The (vesting and) exercise of a stock option, on the other hand, ultimately yields a market generated capital gain, the benefit of which is dependent on the evolution of the stock market at the time of exercise.

Finally, in line with prevailing statutory provisions, and for benefits plans (like an equity plan) which are ongoing at the time of termination, any variable benefit which becomes claimable within 12 months prior to termination, is part of the current annual compensation. The employee’s claim was therefore rightfully upheld.

In order to assess the impact of this ruling for the corporate community [2], it appears to be key to properly assess the legal characterisation of the equity grants (with pure timing clauses or conditions attached to them) in order to accurately determine the exact moment of attribution of the benefit. Also, it remains important to appropriately distinguish the various types of equity-related compensation (stock options, RSUs, stock grants, stock appreciation rights, etc.) and their key features in order to correctly assess their potential impact on overall termination cost of eligible employees. Finally, these questions are obviously unrelated to the issue of whether RSUs granted to Belgian resident participants are subject to Belgian social security tax, since the legal definition of ‘remuneration’ for such purposes requires for the benefit to be borne by the employer. That is clearly not the same test as the one applied in the case at hand.

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