Last Updated on 11/03/2026 by Damin Murdock

What happens to an Employee Share Scheme (ESS) when an employee is terminated before their grants vest? While many contracts state that unvested options lapse upon cessation of employment, Australian case law has established that such terms can be deemed “unfair”, particularly when the termination is for causes beyond the employee’s control, such as redundancy.

The “Proportionality” Approach: GIO and Helprin

Historically, courts have found that share schemes are unfair if they fail to distinguish between the reasons for an employee’s departure.

  • Case Study: GIO Australia Ltd v O’Donnell (1996) The court decided that a share plan was unfair because it did not distinguish different types of cessation. The remedy was to vary the plan to allow the employee to exercise options within a shorter window than the contract originally allowed.

  • Case Study: Westfield Ltd v Helprin (1997) In this matter, the court found it unfair that a scheme provided no benefit to an employee who had completed 73% of the required service period. The court varied the plan so the employee could exercise 73% of the options, proportionately reflecting their completed service.

The “Sophisticated Employee” Trap: Westfield v Adams

A critical factor in these disputes is the employee’s own conduct and their capacity to understand the contract.

In Westfield Holdings v Adams (2001), an employee claimed he was misled because he wasn’t told about a 5-year “hand-cuff” period before options vested. However, the court rejected his claim of being misled. Because the employee was “commercially sophisticated” and had participated in schemes before, the court held that his failure to take reasonable steps to inform himself was a significant factor.

Legal Outcome: While the Trial Judge initially awarded the full benefit, the Appeal court stuck to the “proportionality” approach because the employee had not performed due diligence on his own contract.

Resignation vs. Termination

It is important to note that the court’s willingness to vary a contract for “unfairness” generally does not apply if an employee resigns voluntarily. As seen in Bell v Macquarie Bank Ltd (2002), if an employee resigns and unvested options lapse, they are typically unable to claim the scheme was unfair.

Applied Lessons for Employers and Employees

  1. For Employers: Review your ESS “Good Leaver/Bad Leaver” clauses. If your scheme automatically cancels all options for a redundancy without a “pro-rata” vesting provision, you risk a court varying the contract for unfairness.

  2. For Employees: Do not assume “standard” terms apply. You have a duty to request a copy of the Incentive Scheme and investigate the conditions. If you are a sophisticated professional, the court will expect you to have done your homework.

  3. Causes Beyond Control: If your employment ends due to redundancy, illness, or disability, you may be entitled to more than just a proportional share of your options, but this depends heavily on the specific drafting and your conduct.

Square minimalist infographic titled “Applied Lessons for Employers and Employees” in navy and gold. The left column advises employers to review ESS “Good Leaver/Bad Leaver” clauses to ensure fair treatment on redundancy. The right column advises employees to investigate ESS terms and request a copy of the scheme. A highlighted bar at the bottom notes that unfairness claims may arise where termination is due to redundancy, illness, or disability.

Feel free to contact Damin Murdock at Leo Lawyers via our website, on (02) 8201 0051 or at office@leolawyers.com.au. Further, if you liked this article, please subscribe to our newsletter via our Website, and subscribe to our YouTube, LinkedIn, Facebook and Instagram. If you liked this article or video, please also give us a favourable Google Review.

DISCLAIMER: This is not legal advice and is general information only. You should not rely upon the information contained in this article, and if you require specific legal advice, please contact us.

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Damin Murdock (J.D | LL.M | BACS - Finance) is a seasoned commercial lawyer with over 17 years of experience, recognised as a trusted legal advisor and courtroom advocate who has built a formidable reputation for delivering strategic legal solutions across corporate, commercial, construction, and technology law. He has held senior leadership positions, including director of a national Australian law firm, principal lawyer of MurdockCheng Legal Practice, and Chief Legal Officer of Lawpath, Australia's largest legal technology platform. Throughout his career, Damin has personally advised more than 2,000 startups and SMEs, earning over 300 five-star reviews from satisfied clients who value his clear communication, commercial pragmatism, and in-depth legal knowledge. As an established legal thought leader, he has hosted over 100 webinars and legal videos that have attracted tens of thousands of views, reinforcing his trusted authority in both legal and business communities."