Over the years, we have advised many companies on the considerations related to suspending vesting of equity awards and/or suspending participation in an employee stock purchase plan while an employee is on a leave of absence. This seems like a relatively straightforward concept. In practice, however, it can be difficult to get right and a challenge to administer. When determining whether to adopt a leave policy, companies will want to consider: If your company has…
It is not uncommon for an equity plan or a leave of absence policy to provide that vesting of awards will be suspended during any unpaid leave of absence. The intent is clear: companies do not want their employees to continue to vest in and earn awards if they are not rendering services (e.g., because they are on a sabbatical). However, these types of provisions can be problematic.
Is Suspension Legal and Administratively Feasible?
First, by suspending vesting during an unpaid leave of absence, companies are assuming that such leaves are not protected by law. (Often, the provision goes on to provide that vesting during paid leaves will also be suspended, but only to the extent such leaves are not protected by law or by contract.) However, there may also be unpaid leaves outside the U.S. during which suspension will not be permissible. The provision also raises the question of what is considered an unpaid leave. Is it a leave during which the company does not pay the employee, even if the employee is paid by a government agency (for at least a portion of his/her regular salary)? If the employee is paid by the government (as may be the case in some countries for employees on maternity or parental leaves), it will be quite common for the leave to be protected under local law.