Do RSUs Vest If Laid Off? Here’s What Happens Next

When an employee faces a layoff, questions often arise about their Restricted Stock Units (RSUs), a common form of equity compensation. These awards can represent a significant portion of an employee’s total compensation, making their treatment during a job termination an important financial consideration. Understanding whether RSUs vest, are forfeited, or are subject to special provisions after a layoff is essential. This article clarifies the typical outcomes for RSUs when employment ends due to a layoff, providing insight into what an affected individual can expect and what steps they should take.

Understanding Restricted Stock Units and Vesting

Restricted Stock Units (RSUs) are a form of equity compensation where an employer promises to grant company stock to an employee once certain conditions are met. These conditions typically include continued employment over a specified period, known as a vesting schedule, or the achievement of performance milestones. Until these conditions are satisfied, the employee does not own the shares; they only have a right to receive them in the future.

The process by which an employee gains full ownership of RSUs is known as vesting. For example, an RSU grant might vest over four years, with a quarter of the total shares vesting each year. Once RSUs vest, they become shares of company stock the employee owns outright.

Impact of Layoff on RSU Vesting

Generally, when an employee is laid off, any unvested Restricted Stock Units are immediately forfeited. This means the employee loses the right to receive those shares because the condition of continued employment is no longer met. Unvested RSUs typically revert to the company’s stock pool.

The primary reason for this forfeiture is that RSUs are designed as a retention tool, incentivizing employees to remain with the company. Therefore, only RSUs that have already vested by the official layoff date are retained by the employee. These vested shares are fully owned by the employee, and their ownership is unaffected by the subsequent layoff.

Factors Influencing RSU Treatment During Layoff

While forfeiture of unvested RSUs is the general rule, specific provisions within an employee’s RSU grant agreement, employment contract, or a severance package can introduce exceptions. Some company RSU plans may include clauses for accelerated vesting, allowing all or a portion of unvested RSUs to vest immediately upon certain events, such as a layoff.

Accelerated vesting can occur under a “single-trigger” event, like termination without cause, or a “double-trigger” scenario, which typically requires both a change in company control (e.g., a merger or acquisition) and an involuntary termination. Some agreements might feature “good leaver” clauses, which can provide more favorable treatment for equity compensation when an employee leaves under specific circumstances, such as an involuntary termination not for cause. Severance agreements can also play a significant role, as companies may negotiate accelerated vesting or continued vesting for a limited post-layoff period as part of a separation package.

Actions to Take Regarding RSUs After Layoff

After a layoff, the first step regarding RSUs is to thoroughly review all relevant documentation. This includes the RSU grant agreements, the company’s equity plan document, and any employment or severance agreements. These documents outline the specific terms and conditions governing the RSUs, including what happens upon various types of employment termination. Understanding these clauses is crucial for determining the fate of any unvested RSUs and the process for managing vested ones.

Next, individuals should contact their former employer’s Human Resources department or the RSU plan administrator for clarification. They can provide precise details on which RSUs, if any, have vested, which have been forfeited, and any applicable deadlines for managing vested shares. For any RSUs that vested before or at the time of layoff, understand the tax implications. Vested RSUs are generally taxed as ordinary income at their fair market value on the vesting date, and this income is typically reported on an employee’s W-2 form. Consulting a tax professional is advisable to understand the specific tax liabilities and planning opportunities.

If any RSUs have vested and have not been automatically converted into shares, understand the process for receiving or selling those shares. This may involve working with the company’s designated brokerage or plan administrator to access and manage the shares. Ensuring timely action on vested RSUs, including potential sale or transfer, can be important for financial planning following a layoff.