Suppose you offer employees an incentive compensation plan that
allows them to use a portion of their annual earnings to buy stock in your
company at a below-market price. The plan also provides that if an employee
resigns or is discharged for cause within a two-year vesting period, his or her
purchased stock is forfeited. Does the forfeiture provision violate California Labor
Code provisions requiring employers to pay all earned but unpaid compensation
at the time of termination or resignation? A new case answers this question.
Incentive Plan Allows for Stock Purchase
David Schachter sold securities in
for Salomon Smith Barney, a Citigroup, Inc., subsidiary. Schachter elected to
participate in Salomon Smith Barney’s incentive compensation plan, under which
the company would pay 5 percent of his annual compensation in the form of
stock. The company stock was purchased at a 25 percent discount below the
current market price, and Schachter had the immediate right to receive
dividends.
The plan provided that the stock couldn’t be sold or transferred
for two years from the date the stock was acquired. If Schachter remained
employed beyond that two-year period, title in the stock would be transferred to
him, free and clear. On the other hand, if he resigned or was terminated for
cause during those two years, he would forfeit the shares and the money used to
purchase them. (Employees who retired or were terminated without cause weren’t
subject to this forfeiture provision.)
Employee Forfeits Stock, Sues
Schachter voluntarily resigned within a year, forfeiting 82 shares
of stock he had purchased under the plan. He filed a class action lawsuit,
charging that the forfeiture provision really required the forfeiture of unpaid
wages, in violation of Labor Code Sections 201 and 202, which require prompt
payment of unpaid wages on discharge or resignation.
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Court Sides with Employer
A
appeals court rejected Schachter’s suit.1 The court zeroed in on language in the plan specifying that the
stock was purchased “out of all cash compensation paid to” Schachter. What this
meant, said the court, was that Schachter was fully paid under the incentive
plan’s terms, and then a portion of that money was used with Schachter’s
authorization to purchase stock. Thus, all wages were paid at the time they were
earned, and no wages were forfeited on discharge or resignation. At most, the
transaction was an employee-authorized deduction from wages, which Labor Code
Section 224 permits.
Schachter had a choice, said the court: he could either be paid
and receive all his wages in cash, or he could use part of his cash compensation
to buy discounted stock. By electing the latter option, he had the
but the option carried a risk—one that didn’t violate the wage and hour laws—that
he’d lose money if he didn’t make it to the two-year mark.
The court further explained that even if it accepted Schachter’s
argument that he was never paid his wages, the illegal forfeiture theory would
still fail. That’s because the stock purchase plan operated as a bonus plan,
under which the bonus isn’t earned until specified conditions are fulfilled.
Schachter didn’t meet the plan conditions—remaining employed for two years—so
he never earned the bonus.
The option Schachter chose had the potential for a return more valuable than the funds he invested, but the option carried a risk—one that didn’t violate the wage and hour laws—that he’d lose money if he didn’t make it to the two-year mark
Guidance for Employers
Incentive compensation and bonus plans come in all shapes and
forms, but a few key compliance guidelines apply to all of them. Be sure to put
all plans in writing and get the employee’s signed acknowledgment. Spell out
the plan terms, taking special care to describe when the compensation/bonus is
earned and any conditions that must be fulfilled. Because a plan gone awry can
add up to a hefty financial liability for an employer, particularly if a class
action is filed, it’s a good idea to have an attorney review your plan’s terms
before they’re implemented.
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1 Schachter v. Citigroup, Inc.,
B193713, 2008